Hong Kong M&A activity jumps fivefold in 20 years as Chinese firms use city to go global
Growth also fuelled by western multinationals buying into Hong Kong companies to deepen their penetration in the region
Mergers and acquisitions activity in Hong Kong has increased by a factor of almost five in the past 20 years as international firms use the city as a gateway to expand in Asia and mainland companies use it as a platform to fulfil their global ambitions.
The value of deals involving Hong Kong companies climbed 387 per cent from US$31.06 billion in 1997 to US$151.59 billion in 2016, according to Thomson Reuters.
In total, there have been 7,699 M&A deals worth US$368.15 billion in Hong Kong since its handover from Britain to China. By sector, telecommunications took the top spot with 25.6 per cent of all transactions, ahead of real estate with 22.6 per cent and the financial industry on 20.1 per cent, the Thomson Reuters data shows.
Hong Kong is a popular destination for takeover and merger activity because locally listed firms like to acquire overseas companies to diversify their business, while many mainland firms use the city as a stepping stone to buy into overseas companies, according to Joseph Gallagher, managing director and head of Asia Pacific M&A, Credit Suisse.
“Many Chinese state-owned and private sector corporates frequently use Hong Kong as the domicile for establishing their international platform,” Gallagher said. “The well developed capital markets and strong legal, regulatory and financial regimes in Hong Kong provide an ideal backdrop for establishing and supporting international activities and expansion of Chinese entities.”
China overtook the US for outbound M&A volume for the first time, with US$219.3 billion of deals announced in 2016, according to data compiled by Dealogic. Hong Kong has played a significant role in this takeover activity as mainland companies use their subsidiaries in the city to conduct overseas acquisitions, or acquire Hong Kong banks and property developers as they strive to expand their business.
Most of the deals in Hong Kong were related to companies expanding their business by way of acquisitions or internal restructuring.
Hostile takeovers have rarely been seen here. Gallagher said this was because most companies listed in Hong Kong have a controlling shareholder which is either the founder’s family or the Chinese state.
“As such, contested and hostile situations are rare as the controlling shareholder can control the decision to pursue a sale or merger,” he said.
China still has capital controls in place, which ban the free flow of funds into and out of the country.
“China’s outbound capital restriction is another fundamental cause of why Chinese companies are using their Hong Kong entities to raise capital for overseas expansion,” said Christopher Laskowski, managing director of Citi Hong Kong.
Chinese companies usually use their Hong Kong entities as intermediaries for international expansion, and the funds raised from capital markets such as initial public offerings and bond sales to finance their overseas takeovers.
“For Hong Kong conglomerates, we have seen a strong appetite for outbound acquisitions, particularly in real estate in gateway cities, as well as trophy assets such as brands, football clubs or media companies,” Laskowski said.
Group restructurings – which technically qualify as M&A transactions – have contributed to the total value of deals in Hong Kong.
Indeed, the largest M&A deal of the past two decades in Hong Kong was the US$45.41 billion restructuring by tycoon Li Ka-shing of his business empire in 2015. Li, the richest man in Hong Kong, put all the non-property assets of his Cheung Kong (Holdings) and its subsidiary Hutchison Whampoa, including ports, telecoms and retail entities, into a new company called CK Hutchison Holdings. All his property interests were brought under the umbrella of Cheung Kong Property Holdings.
Law firm Baker McKenzie’s M&A partner, Tracy Wut, said Hong Kong will continue to grow as a centre of takeover and merger activity.
“Chinese outbound M&A is set to grow as Chinese companies continue to go global to expand their footprint. At the same time, multinationals from the west are buying into Asian and Hong Kong companies to deepen their penetration in the region,” Wut said.