Mergers & Acquisitions

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

Cross-border deals by Chinese companies may have peaked as Beijing tightens capital controls to ease depreciation pressure on the yuan, analysts say

PUBLISHED : Wednesday, 21 December, 2016, 7:01am
UPDATED : Wednesday, 21 December, 2016, 7:01am

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

The record-high deal volume came as overseas takeover activity climbed for a seventh consecutive year, according to a full review of 2016 released by Dealogic on Tuesday.

It put China slightly ahead of the US on US$217.69 billion, down from $237.99 billion in 2015, although Dealogic said the figures are based on preliminary annual data.

A total of 745 cross-border deals by China were announced in 2016, accounting for more than half of Asia Pacific’s outbound volume, which hit a record US$445.1 billion, according to the report.

But some analysts believe it might mark a near-term plateau, as the Chinese authorities strengthen their scrutiny of outbound M&A activity and tighten checks on capital outflows in a bid to curb yuan depreciation and a draining of foreign reserves pool.

Outbound mergers and acquisition activity will slow sharply over the first quarter of 2017
Shaun Rein, China Market Research Group

Shaun Rein, managing director of China Market Research Group, said: “Outbound M&A activity will slow sharply over the first quarter of 2017, as the Chinese government is making it very difficult to get approval to convert currency, even for legitimate business transactions, because they are very concerned about capital outflow pressure.”

In an attempt to counter the yuan’s steep devaluation, the Chinese central bank has introduced stricter rules on overseas payments and lending, and guided commercial banks to scrutinise reasons for large overseas payments.

Brett McGonegal, chairman at Capital Link International, said: “There is certainly a strong headwind pushing back on overseas M&A of late, driven directly by the new policy and indirectly from evolving soft capital controls.

“Capital flight under the guise of M&A at any expense will not be tolerated and will be heavily scrutinised. The inexperienced corporates and investors are sidelined for now until the new rules are finalised and clearly articulated.”

He does not expect to a new record set in 2017 but believes larger, more strategic deals may be executed.

“The trend over the next five years will continue higher after a plateau in 2017. I would think 2018 will set new records as we enter a new global cycle led by China growing at 7 per cent and the US growing at 4 per cent,” said McGonegal.

ChemChina announced the largest outbound M&A deal in Chinese history in February. The US$46.7 billion acquisition of Syngenta, a Swiss seed and pesticide maker, is still pending approval from the authorities in the European Union.

Other eye-catching deals this year include Chinese home appliance maker Midea’s US$5 billion acquisition of Kuka, the German robot maker, and insurance giant Anbang’s US$14 billion approach for Starwood Hotels & Resorts Worldwide, although this second deal fell apart when Anbang aborted its bid.

The Dealogic report showed that, globally, M&A activity was down this year after three consecutive years of gains. Total volume of US$3.69 trillion represented a drop from the 2015 record high of US$4.66 trillion.

While global volume fell 21 per cent year-on-year, M&A revenue was down only 6 per cent by mid-December, the Dealogic report said.

Cross-border M&A was down 10 per cent globally year‐on‐year, despite China achieving record outbound volume and the US hitting a record US$476.1 billion of inbound volume, the report said.

AT&T’s US$85.4 billion cash-and-stock takeover of Time Warner in October was the year’s largest M&A deal, as the telecommunications giant looked to bolster its content offerings.

For only the second time on record, technology led global M&A with US$605.8 billion, closing on last year’s record high of $691.6bn. The energy and real estate sectors followed, with US$378 billion and US$363.1 billion in deal volume, respectively.

For the first time since 2012, health care M&A fell outside the top three, ranking fourth for volume with US$296.3 billion, the lowest level since 2012 when it was US$170.4 billion.

Private M&A activity increased 25 per cent to 132 transactions in 2016, from 106 deals in 2015, its most active year since 2007 when there were 182 deals. Volume was down 11 per cent year‐on‐year, however, to US$91.7 billion in 2016.

Withdrawn M&A volume of US$839.4 billion in 2016 was the highest since 2008 when it was US$948.5 billion, the report said.