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The overall level of merger and acquisition (M&A) deals in China has reached an all time high, both in the number and value of domestic, inbound and outbound deals, according to PwC analysis.

A record 4,251 announced transactions valued more than US$200 billion were recorded in the 2010 calendar year, representing a 16% increase in the number of deals and a 27% increase in the value of deals over 2009.  The consistent pace of strong economic growth in China and the valuable inorganic growth opportunities created from consolidating industries are some of the important drivers behind this burgeoning M&A trend.

The trend is loud and clear for outbound M&A by China buyers, with M&A deal activity overseas growing by more than 30%, to a record 188 transactions with a combined value of about US$38 billion in 2010, up from 144 deals in 2009 valued at US$30 billion.  PwC Greater China Private Equity Group Leader David Brown says there was no denying the strong trend of China's growing interest in quality assets overseas, and despite a relatively slower final quarter of outbound activity in 2010 in terms of volume, there were no signs of the strong outbound trend waning during 2011 and beyond.

"China's appetite for overseas assets is insatiable, with natural resources remaining a key industry target, as the country aims to secure the resources it needs to fuel its engine of economic growth," says Brown.  Apart from continued strong interest in natural resources, there has been an increasing number of acquisitions of high technology companies, as Chinese buyers look to bring know-how back to China to foster a developing economy.  There is also strong interest in machinery and equipment manufacturers, and the automotive sector.

China's interest in M&A targets overseas remain widespread globally, however the US is identified as a growing strategic target with 32 deals in 2010 compared to 21 in 2009.  The European Union, Australia and Africa remain important locations of interest, as well as countries in Asia.  Outbound M&A deal activity is expected to continue to grow strongly in 2011 driven by the continued demand for natural resources as well as the search for technologies and know-how to bring back to the China market.

The Rise of Private Equity

Private equity (PE) is emerging as an important source of capital for private enterprises in China, with nearly 580 transactions involving PE activity with China targets announced in 2010, an increase of 66% over 2009.  More than two thirds of these were initiated by domestic PEs, demonstrating the trend of localisation of the PE industry within China.

"There are rapid developments in the private equity industry in China.  All indications are that private equity will prove to be an important provider of growth capital for Chinese private enterprises in the future, and this is underpinned by the support of the Chinese government," says Brown. "Nearly all of the major PE houses are gearing up to meet the growing competition from a burgeoning domestic PE industry, and while some of the new funds will fail, others will emerge as important players.  The growth and localization of the PE industry in China is unstoppable."

Strategic Deals Make a Comeback

Foreign strategic buyers (corporates) are marching to the beat of a new drum, now showing signs of returning to China with inbound M&A activity growing by 32% to approach levels reached before the global financial crisis.

However, PwC Southern China M&A Tax Leader Danny Po notes M&A activity in China is still dominated by domestic transactions, which grew at a steady pace of 6% to 2,947 announced deals in 2010, and an announced value of US$131 billion, up 41% over 2009. 

"The policies and direction set by China's new five year plan are likely to support continued M&A activity, as the government aims to continue domestic consolidation and restructuring of industries, while ensuring foreign investment is optimised and ‘going abroad' is accelerated," says Po. "We expect overall strategic buyer activity both domestic and foreign to continue to grow steadily in 2011 and to exceed the peak levels seen in 2010."

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