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An increasing number of Hong Kong and Mainland Chinese businesses are planning to grow through mergers and acquisitions (M&A), according to the latest Grant Thornton International Business Report (IBR). A significant increase was recorded in the proportion of Mainland companies considering cross-border M&A.

The IBR surveyed privately held businesses (PHBs) from 39 economies. Twenty-two percent of Hong Kong respondents plan to grow their businesses through acquisitions in the next three years, an increase of only one percentage point compared to twelve months ago. In contrast, the percentage of Mainland companies planning to grow through M&A has surged from 26% last year, to 45% this year, moving Mainland China’s global ranking from 21st to 9th. Of those Mainland companies planning acquisitions, the proportion of cross-border acquisition plans increased from 17% in 2010 to 26% in 2011, indicating a stronger intention to “go global.”

The key drivers for Mainland companies planning acquisitions are building scale (85%); gaining access to new geographic markets (79%); acquiring new technology or established brands (75%); and gaining access to lower cost operations (70%).

“The global economy has been buffeted by a number of major crises in the last few years, leading to economic slowdowns in many regions. The subsequent lower corporate valuation of companies in these regions provides greater acquisition opportunities for Hong Kong and Mainland companies. This, combined with the sustained growth of China’s economy and the continued consolidation of many of its industries, means it is not surprising that Mainland companies are more aggressive in carrying out their M&A plans,” explains Barry Tong, partner for transaction advisory services at Grant Thornton Jingdu Tianhua.

Funding for Business Growth

Results of the IBR show Hong Kong businesses have clear preferences in how to fund their business growth, with more than 70% choosing to use their retained earnings as their first preference. Other preferences included financing with bank loans (52%) and private equity funds (23%).

The number of Hong Kong PHBs planning to raise funds through public listing has increased only slightly from 5% to 7%, which remains far below the 2008 figure of 22%, before the global financial crisis.

“Hong Kong is a very mature market and most companies would rely mainly on retained earnings and bank loans to meet the financial costs of business expansion,” says Daniel Lin, managing partner at Grant Thornton Jingdu Tianhua.

Lin adds that with the recent robust performance of the Hong Kong stock market, IPOs receive a keen response from investors. However, not many PHBs planning for IPO can meet the regulatory requirements for listing, due to the complicated and stringent listing processes. In addition, some qualified companies may be wary of listing due to concerns about possible increases in costs. "Companies considering listing as a way of financing should therefore seek analyses and opinions from professional consultants, before selecting the appropriate route for their company,” says Lin.

More Companies Seek Public Listing

The proportion of Mainland companies planning to list has increased sharply from 11% last year to 24% this year. They are second only to Poland. The result reflects that the confidence of the companies in the overall economy and the stock markets. Also, only 42% of Mainland companies choose to use bank loans as a way of financing their growth, ranked 35th globally. It is noteworthy that almost a quarter of Mainland PHBs (23%) do not know which channels they should raise funds through.

According to Tong, the increases in bank deposit reserve ratios and interest rates have led to a tightened money supply and an increase in the cost of loans, making more businesses turning to other means of financing. "We believe that in 2011 we will see more Mainland businesses undertaking M&A activities and seeking to list in Hong Kong,” says Tong.

"In the current climate, businesses need to ask which financing channel is most suitable for them and how to seize the best opportunity to get the maximum returns,” adds Lin. “Many businesses overlook the importance of post-deal integration, which is critical for acquirers to realise the value from the acquisition. Businesses should start preparing for integration during the pre-acquisition stage to avoid potential risks.”

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