M&A: Up & Out

Related entries: Business Issues, Corporate News, General, Investment

Last year, according to Dealogic, there were 1,747 mergers and acquisitions (M&A) reported in China, with a total value of US$66 billion (up from 1,202 deals worth US$58.9 billion in 2004). The report notes that the increase in deal value was largely driven by investments in financial services, including banks and insurance companies.

Another report, “The great buy-out: M&A in China”, from the Economist Intelligence Unit, noted that 65 percent of surveyed respondents believed M&A by foreign companies in China will rise over the next five years. Half also expected a rise in Chinese M&A at home and abroad. However, the report also notes that failure rates are relatively high. Reasons for this failure include:

    • Lack of understanding about the business environment
    • Cultural issues
    • Failure to achieve financial targets
    • Lack of due diligence
    • Intellectual property (IP) problems
    • Retention of key staff

While there has been much focus on the domestic M&A scene, there has also been offshore action. China’s overseas direct investment was reporterd to be US$7 billion in 2005, up 25 percent on 2004, and it is thought that Chinese companies could invest US$60 billion overseas in the next 5 years – largely through mergers and acquisition. (See our previous post on this topic here).

The Chinese government is promoting this activity by setting up bilateral investment agreements, easing regulation and approval procedures, as well as improving access to such essentials as foreign exchange, credit and insurance.

But how successful will these investments be? The Boston Consulting Group (BCG) has issued a new report looking at the challenges (Xinhua notes):

    “although China takes up 30 percent of the total GDP of global fast-growing economies, its enterprises only took part in 82 overseas M&A cases, constituting only 11 percent of these 13 countries’ overall offshore M&A. China’s M&A strength far lags behind that of India and South Africa.

    At the same time, 62 percent of Chinese companies’ M&A cases targeted Asia, with Kazakhstan, Hong Kong, Indonesia and South Korea being the largest destinations. The remaining nations were the US, Australia and other nations in South America, North America and Oceania. To date, Chinese enterprises were involved in few big M&A cases abroad, with the average transaction volume reaching between 180 million and 280 million US dollars. Only four M&A transactions had a value of more than 1 billion US dollars each.”

BCG identified four waves of Chinese investment abroad:

    1. 1986-1996: Focus on offshore investment
    2. 1996-1999: Focus on overseas expansion inspired by the return of Hong Kong
    3. 2000-2001: Domestic expansion and restructuring of joint ventures
    4. Late 2001- present: Adapting to WTO membership. Key sectors include mining, energy, technology and communications

As with foreign companies going in to China, Chinese companies going out also face problems, but they also have to deal with the politics of protectionism. Nevertheless, the number of deals is set to rise.

See news sources:

    Merger-and-acquisition sizzling in China
    Xinhua – China
    HONG KONG, April 26 (Xinhua) — The pace of merger-and-acquisition (M&A) in China is sizzling, though the rate of failure in the field is relatively high …

    China to invest 60 bln usd overseas in next five years – report
    Forbes – USA
    Li Yongjun, an official with the Ministry of Commerce, was quoted as saying that China’s overseas direct investment is projected to hit 60 bln usd between 2006 …

    China sees fourth wave of overseas M&A
    Xinhua – China
    BEIJING, May 10 — The Boston Consulting Group (BCG) published the latest research report and pointed out that China is starting an overseas merger and …

    China International Business
    March 2006

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