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As China’s economic influence continues to grow, inbound M&A activity has surged over the past 12 months with signs indicating deal flow will remain strong, reports the inaugural issue of Spotlight Asia, Kroll’s quarterly newsletter for M&A practitioners.

However, international bidders and Chinese companies are both increasingly aware of the importance of in-depth due diligence.

In 2010, China’s inbound M&A volume was up by a 20 percent compared to 2009. In the 12 months ending 30 September 2011, total inbound deal volume and value surged by 5 percent and 50 percent, respectively, compared to the same period in the previous year. December 2010, March and July 2011 were the most active months.

According to mergermarket data, Hong Kong and U.S. bidders were most active in acquiring Chinese companies, accounting for 41 percent and 20 percent of China’s total inbound deal volume, respectively, in the 12 months ending 30 September 2011.

Apart from Asian bidders in Singapore, Japan and South Korea, European companies have also been seeking opportunities in China and the trend is expected to continue.

“The data clearly points to sustained interest from international investors for M&A targets in China,” says Violet Ho, managing director, Kroll Greater China.

“We always urge potential investors to take a step back and carefully examine a target company and its key people. Experience shows that dishonest or corrupt individuals can be a cancer that spreads through an organisation, and bidders must vet the relationships of these individuals with key government officials because today’s ‘political assets’ can quickly become tomorrow’s ‘political liabilities’.”

“Recent Chinese government measures to curb fraudulent activity appear to be having good effect, but for M&A bidders, it comes down to finding ways of adapting in the changing environment,” says Ho.

While China’s M&A market has been dominated by corporate bidders, private equity investors have taken a more active approach in the market over the 12 month period. More recently, volatility in global financial markets and fraud scandals involving Chinese companies have caused many private equity firms to revisit their investment strategies in the Mainland.

“Chinese entrepreneurs are looking for more than just capital, and going forward, we are expecting to see more corporate M&A activity in China,” says Ho.

Although the Industrials & Chemicals sector recorded the highest M&A transactions volume and value, emerging sectors including Pharmaceutical, Medical & Biotech and Leisure experienced an increase in deal activity with a number of high profile transactions including Biosensors Interventional Technologies’ purchase of 50 percent stake in JW Medical Systems.

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