Mergers & Acquisitions

Chinese enterprises scale back mergers and acquisitions in face of Beijing’s tighter scrutiny, survey finds

PUBLISHED : Thursday, 08 June, 2017, 3:50pm
UPDATED : Thursday, 08 June, 2017, 10:54pm

The merger and acquisition (M&A) frenzy among Chinese enterprises is cooling off in the face of Beijing’s tightened scrutiny of outbound investment, a new survey has found.

About 44 per cent of Chinese respondents said they have more than five M&A deals in progress, sharply down from 90 per cent in a similar survey half a year ago, professional services firm EY said on Wednesday.

China’s tighter scrutiny on outbound mergers and acquisitions and capital outflows since late last year has made enterprises more rational when it comes to making deals, leading to a sharp drop that bucks the global trend, said Shanghai-based Erica Su, EY’s managing partner, transaction advisory services for Greater China.

The findings were based on replies from 154 executives from mainland China, who were among a total of 2,300 executives from 43 countries who participated in the survey between March and April.

Though cooling off, the M&A intentions of Chinese enterprises were still at an elevated level, EY said.

Still, 89 per cent of Chinese firms said they have on average more than three deals in process, compared with 98 per cent saying the same six months ago.

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

Since the second half of last year Chinese regulators have tightened scrutiny on outbound investments amid heightened capital outflows and yuan depreciation.

The yuan lost nearly 7 per cent against the US dollar last year, its biggest annual loss since 1994, making it the worst performing major Asian currency.

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 US$82 billion a year earlier, according to MergerMarket.

Su also noted more Chinese enterprises have teamed up with private equity investors with offshore US dollar denominated funds in order to pursue outbound deals given Beijing’s tighter scrutiny on capital outflows.

The EY survey found that the top five investment destinations for Chinese enterprises are the home market in China, the United States, Japan, India and Singapore. The domestic market remains the preferred destination for M&As.

Innovation-driven transformation is expected to push companies to keep conducting acquisition activities.

Acquisition activities could provide the fastest route to future-proof the businesses
Erica Su, EY managing partner

“Acquisition activities could provide the fastest route to future-proof the businesses to survive in the current environment of technological innovation and digitalisation,” Su said. “The emergence of new business models and continued transformation of the market may impel companies to look for acquisitions to survive in this disruptive environment.”

Among the respondents, 46 per cent said they make strategic acquisitions to gain access to start-ups, talent and new technologies.

The survey found that the top five acquisition drivers for respondents are growing market share, moving into new geographies, acquiring innovative start-ups, acquiring talent, and acquiring technology or new production capabilities.

The top six sectors with the highest acquisition potential in the next 12 months for Chinese enterprises are automotive and transportation, mining and metals, telecommunications, technology, diversified industrial products, and financial services.