Number of mergers and acquisitions expected to rise in mainland China and Hong Kong
High-quality mergers and acquisitions are expected to increase in the coming years, with the development of technology and infrastructure being the key drivers
More mergers and acquisition (M&A) activities are expected to take place on the mainland and in Hong Kong. Despite uncertainties in terms of regulatory risk and regional political tension, the stock market and investors in mainland China have become more sophisticated over the past decade, and the hedge-fund industry is also booming.
According to Barry Tong, an advisory partner at Grant Thornton Hong Kong, there will be more value creation and high quality M&A activities in the coming years.
“Key drivers for faster future growth in M&A activities are the development of technology and infrastructure,” Tong says. “China’s undertaking to transform its economy from export-driven manufacturing to one driven by technology has been mirrored in the way Chinese buyers have evolved. As global markets become more attractive to mainland companies, Chinese companies are increasingly positioned to become international market leaders. The rapid development of big data, cloud computing, games and entertainment and internet technology reflect the major areas of growth ...”
Other major initiatives and policies introduced by the government to support strategic investment, such as Beijing’s global trade strategy, the “Belt and Road Initiative”, have also been welcomed by the business community, Tong says. “Another area of potential M&A growth comes from the slowdown of China’s organic GDP growth, switching to M&A for business expansion or higher valuation. Previous consolidation among small and medium-sized companies in China has also resulted in a relative scarcity of appropriate domestic assets, which encourages mainland buyers to look to outbound M&A and Hong Kong.”
Tong notes, however, that there is the prospect of controls being imposed by China’s authorities to cool private Chinese companies’ international investing reach. As Chinese regulatory authorities tighten rules on capital outflow, this may have a chilling effect on M&A activity to some degree.
Eugene Liu, managing partner at RSM Hong Kong, says Hong Kong will continue to be a centre of fund raising for acquisitions by Chinese companies; and investments in real estate, entertainment, media and sports will remain popular M&A targets globally.
Although these investments have recently been classified as restricted projects in the State Council’s Notice 74 in August, which require the government’s prior approval, other potential buyers in the world may continue pursuits. Notice 74 reiterates the government’s support for outbound investments in areas such as energy, technology and infrastructure projects.
Liu says: “As the world’s second-largest economy, mainland China should be able to maintain its momentum in inbound investments, but the West will look for more sophisticated and promising domestic companies in mainland China. Hong Kong, however, needs to strengthen its competitiveness in its development of new economy industries ... which are becoming increasingly important in the world’s economy as well as activities in M&A.”
He adds that if the Hong Kong tax environment could be enhanced, that would facilitate growth of M&A activities.