Chinese cool on overseas acquisitions

Survey shows that euro debt crisis and valuation concerns prove big hurdles

PUBLISHED : Friday, 19 October, 2012, 12:00am
UPDATED : Friday, 19 October, 2012, 4:09am

The appeal of pursuing outbound mergers and acquisitions for Chinese executives dropped to a two-year low, due to a grim outlook over the lingering euro-zone debt crisis and a large valuation discrepancy between listed and non-listed assets.

The likelihood of a Chinese company investing in overseas M&A over the next 12 months dropped to only 11 per cent this month, from 51 per cent two years earlier, according to a survey conducted by professional services firm Ernst & Young and the Economist Intelligence Unit.

The valuation of potential acquisition targets posted the biggest hurdles to Chinese companies, which also pointed to problems with stringent regulatory environments.

"Valuations of listed and non-listed assets often reflect huge differences when doing an acquisition," said Ben Kwan, managing director of Ernst & Young's transaction advisory service. "Some high quality non-listed assets are being priced at very demanding valuations because of rarity."

The survey, which questioned 1,500 global executives, showed that the overall chance of companies making M&A deals fell to 25 per cent this month, down from 51 per cent in the same period in 2010, weighed down by a low level of confidence in the operating environment and legal hurdles.

Kwan said Chinese executives also remain sceptical of buying overseas assets because of their poor integration with existing management teams and unfamiliarity with the cultures.

Interestingly, the United States is the top investment destination for Chinese executives, probably because of a range of technology-smart firms that hold advanced technology.

Emerging countries, including iron-ore rich Brazil and Indonesia are also Chinese targets.