The economic volatility that has accompanied the global financial crisis has had an effect on mergers and acquisitions. Companies keen to divest need to be more creative, prepare carefully and act decisively. A recent global survey on divesting by accounting firm Ernst & Young revealed that these deals were expected to be more sophisticated in process and structure, with complex demands. While almost a quarter of the executives surveyed were looking for cash - to bolster the balance sheet, fund acquisitions or pay down debt - almost half were more likely to consider a range of innovative structures at a time when divesting 100 per cent for cash may be difficult to achieve. 'Globally, we have seen the return of seller financing,' said Robert Partridge, Ernst & Young's transaction advisory services leader for the Far East. Instead of an all-cash deal, seller financing sees the buyer pay the seller a proportion in cash and the remainder in instalments. In the absence of bank debt to finance an acquisition or investment, it offers an innovative alternative. 'We haven't seen much of this on the mainland, where [mergers and acquisitions] laws dictate the consideration that has to be paid at closing. But we're seeing it in some offshore deals involving Chinese businesses, particularly where there are creditworthy buyers that are unlikely to default on paying seller financing but just can't raise the bank debt in the market,' Mr Partridge added. On the mainland, mergers and acquisitions are being seen in the form of minority and majority stake investments, rather than full acquisitions. Estimates of when the mergers and acquisitions market will truly recover varied across the survey interviewees, but close to a quarter of respondents anticipated that emerging market buyers would be the main acquirers of assets in the next two years, double the level of activity in the previous two years. 'We are seeing activity. March started to see a pick-up and the initial indicators have been positive for April so far. Activity has not returned to pre-downturn levels but some positive indicators are starting to come back,' Mr Partridge said. For investors seeking mainland company assets, it is important to first carry out legal and tax due diligence and examine the company's financial and operational aspects, according to Danny Choi, a partner with Baker Tilly Hong Kong. He said that mainland companies' internal reporting systems and compliance with local statutory requirements were generally not as strong as those of their international counterparts. 'Overseas investors seeking to invest in mainland companies should look closely at the legal issues, potential hidden liabilities and tax issues of the companies being acquired or invested in,' Mr Choi said. 'Companies will often try to minimise their tax payments to local tax authorities, so the acquirer or investor needs to examine the details. It's also worth noting that although listed mainland companies comply with accounting standards that are substantially converged with international accounting standards, private companies still rely on cash-based accounting rather than accrual accounting.' Cash-based accounting recognises income when money is received. Accrual-based accounting recognises income when goods are shipped or services are rendered. Under the cash method, an expense is recognised when it is paid. Under the accrual method, an expense is recognised when the business is obligated to pay it. Accrual-based accounting does not recognise whether bills have been collected or paid. Income (received or not) is matched to an expense (paid or not), resulting in a match of revenue, with the expense generated to produce the revenue. This provides a truer picture of operations. The Ernst & Young survey noted that for mainland companies preparing to divest to local or overseas investors, it was crucial to understand that in today's market holding out for a higher price was not necessarily going to result in a sale. This point was acknowledged by Roy Lo, deputy managing partner of Shinewing Hong Kong. 'The valuations, including tangible and intangible assets, are very important. Before the financial crisis hit, valuations for intangible assets, such as branding, were very high, but we are now seeing a roughly 30 per cent discount,' he said. 'A lot of companies have started to accept this lower pricing and that's why we're expecting [mergers and acquisitions] to increase in the second half of 2009.' He said that mergers and acquisitions funds were still major buyers and were looking particularly for retail industry options. The retail sector is popular because of the mainland's huge population and consumer demand. Historically, the retail industry has had good growth and the price-to-equity ratios are much higher for companies in this sector. Mr Choi noted that foreign investors remained in the majority but major domestic players were taking the opportunity to acquire peer groups in order to strengthen their market share. He said that companies in infrastructure and property development were also popular targets.