Mergers & Acquisitions

Mergers & Acquisitions

Chinese outbound M&A activity set to cool this year after record 2016

Chinese companies are expected to cool their purchases of overseas assets this year, following a record US$219.3 billion worth of deals in 2016

PUBLISHED : Wednesday, 07 June, 2017, 8:32am
UPDATED : Wednesday, 07 June, 2017, 7:06pm

Overseas asset purchases by Chinese companies are set to cool this year, reflecting a sharp change from 2016 when they overtook American companies as the world’s No 1 buyer of global assets by value.

But the cooling is likely a soft patch, with analysts saying Chinese companies are likely to return in force once conditions are more favourable.

“Chinese companies’ activity in the global M&A [mergers and acquisitions] market will continue to grow over time. But the growth will not be linear,” Carlos M. Hernandez, head of global banking with J.P. Morgan told the Post in an interview in Beijing on Tuesday.

The value of outbound M&A deals by mainland Chinese companies totalled US$12.5 billion in the first quarter, a drop of 85 per cent from the US$82 billion a year earlier, according to Mergermarket.

Regulators have introduced tightened scrutiny into outbound investment amid heightened capital outflows and yuan depreciation since the second half of 2016.

“It will keep growing as Chinese companies have become a major global force, based on their significant presence in the international market, and their world-leading positions in some sectors like tech,” Hernandez said.

China’s administrative curbs on capital remittances and what amounts to a seller’s market for global assets all point to a cooling in M&A activity for Chinese companies this year. The government began clamping down on capital outflows last year, as individuals and companies were seeking to take their currency offshore to get ahead of further depreciation amid a 7 per cent slump in the currency’s value.

“The stock markets have been doing well -- and the dynamic is that seller’s have the desire to fetch a higher premium, while buyer’s tend to hold back when prices hike,” he said.

Nevertheless, Chinese companies remain alert for global business opportunities, not to mention they have developed a solid track record as sophisticated buyers.

“Those needs require banks to make sure they cover Chinese corporates with a global perspective -- not only to understand the Chinese market, but also the global industrial environment in which these companies operate,” he added.

Hernandez said Europe would continue to be an important M&A market despite rising geopolitical risks.

Record year for China’s outbound M&A as it overtakes US for the first time

One of the biggest challenges facing Europe is the risk that it will become a more fragmented market, he said.

Hernandez said he was favourable towards companies in Europe, such as large industrial firms in the UK, as well as manufacturing and consumer firms in Germany.

“For them, if the once common market in EU becomes fragmented, they will have to go to other markets such as the US or China to seek efficiency and growth opportunities,” he added.

Brock Silvers, managing director of Kaiyuan Capital, a Shanghai-based financial advisory firm, said the Euro-zone ambitions of Chinese companies shouldn’t be deterred by recent geopolitical uncertainties and terrorism.

“The highly publicised EU-US split on the Paris Agreement is unlikely to have any real effect, and Islamic terrorism in the EU, while tragic, is also unlikely to impact the value to China of the operating businesses it hopes to acquire,” he said.

China overtook the US for outbound M&A volume in 2016 for the first time, with US$219.3 billion worth of deals announced, according to data compiled by Dealogic.

Meanwhile, ChemChina’s US$44 billion acquisition of Syngenta, expected to close this summer, would mark the largest single outbound M&A deal in Chinese history.

Adam Tan, chief executive of China’s most high-profile outbound acquirer HNA Group told Reuters in an interview last week that the company would “slow down”the pace of acquisitions this year , citing tensions between China and the United States as a concern.

HNA Group made headlines in the financial press in May after it acquired a nearly 10 per cent stake in Deutsche Bank AG. In April it announced a US$1 billion takeover of Singapore logistics provider CWT, with both acquisitions coming during a period when other mainland buyers suspended their overseas ambitions amid tighter regulations.