Chinese M&A to slow in 2017, says top banker, but the Japanese will pick up the slack
Tighter regulations on Chinese outbound M&A are having an effect, but on overseas sellers, not Chinese buyers
As the scale of Chinese outbound merger and acquisition activity declines this year, Japanese companies are likely to take up the slack, Hernan Cristerna, JP Morgan’s global co-head of M&A, told the South China Morning Post.
Cristerna said tighter restrictions brought in at the end of last year were seen as slowing outbound M&A from China in the short term, but more because of concerns from the selling parties.
“We do not see any decline in appetite from Chinese companies to do deals in Europe or North America, but a lot of boards in the west are hesitant about what it means to engage with a Chinese company. They need to assess how long it will take [for the Chinese side to get regulatory approval],” Cristerna said.
2016 was a record breaking year for Chinese M&As with deals worth a combined total of US$222 billion announced, according to Reuters data.
At the end of last year, however, Chinese regulators announced a string of new regulations, tightening the rules on both Chinese companies acquiring firms overseas, and also tightening the rules about moving money out of China.
“Deals where a company is looking to make a strategic acquisition in an area that is core to its business are likely to be less affected by the new measures. What is likely to become harder is making an acquisition in a non core area or purely for financial reasons,” said Alastair Mordaunt, who heads the competition practice for Freshfields in Hong Kong.
The new regulations have added uncertainty to the whole process, and Cristerna said it was also not unusual for sellers to take a lower offer from a non Chinese firm rather than take the risk on a Chinese buyer.
“We are in an environment where there is real value in getting deals done. If you are trying to get a deal closed, you don’t care about a small difference in value. Even though you have the promise of a Chinese buyer, the risk that it does not occur, or that there’s undue delay is just too costly,” Cristerna said.
“We view the regulatory uncertainty in China as something temporary, but because of it, I do not expect Chinese outbound activity to grow this year. However, in 2017 I could see how activity from Japan could make up for a short term decline in China outbound M&A.”
In January and February this year, the value of total Chinese outbound M&A was 83 per cent lower than for the same period in 2016, according to Reuters data.
In contrast the value of Japanese outbound M&A in January and February this year was 69 per cent higher, according to Reuters.
The data provider did note that the Chem China-Syngenta deal announced last February did skew the numbers somewhat.
Cristerna said the fundamentals were such that it would encourage outbound deals from Japan.
“In Japan you have world class companies with outstanding capabilities that are heavily exposed to Japan. On top of that, there is slow growth in Japan, the lowest cost of funding [at zero] and the potential of yen appreciation. It makes sense for Japanese companies to go on the prowl,” he said.
The same factors are true to a lesser extent of many other regions, and so Cristerna is optimistic for a solid 2017 when it comes to deal activity.
“My thesis is that the shape of the deals will be different in 2017, and we will see fewer of the very large transformational deals, because of tighter scrutiny from regulators,” he said.
“People have been trying some big deals, and that might have magnified the attention from regulators, particularly those resulting in significant market consolidation,” said Freshfields’ Mordaunt.
Big mergers like those between Chem China and Syngenta or DuPont and Dow Chemical, both announced last year, have proceeded slowly due to regulatory attention.
For Cristerna, this greater scrutiny is a global trend.
“Even the UK which has been historically the most open market when it comes to industrial policy is being stricter,” he said.
The recent collapse of the Kraft-Heinz Unilever deal is a reflection of this.
Cristerna believes that this year medium sized deals are less likely to run into difficulties.
“Regulators are less concerned about deals that are unlikely to make an industry dramatically more consolidated, and so it is in this segment of US$3-$5 billion space where I see a lot of deals happening this year,” he said.