Global economic uncertainties and domestic issues in China have combined to reduce domestic and foreign-inbound deal activity in China to a five-year low in 2012, with a greater decline than was seen after the global financial crisis in 2009.
Overall 2012 China M&A decreased by 26 percent by volume and 9 percent by value in 2012, with only outbound deals showing growth in value terms.
Excluding financial and private equity transactions, there were 2,953 domestic and foreign-inbound deals in China in 2012, compared to 3,744 deals in 2011, a 21 percent drop. In value terms, these deals in 2012 totalled US$97.1 billion, down 28 percent from US$134.9 billion in 2011.
Although China outbound deal volumes showed a small decline from 206 deals in 2011 to 191 deals in 2012, the value of these deals reached a record high, up 54 percent from US$42.4 billion in 2011 to US$65.2 billion in 2012.
"The overall trends in these results are not surprising given the factors at play in 2012," says David Brown, PricewaterhouseCoopers China and Hong Kong Transaction Services Leader.
Brown explains that the slow pace of recovery in western economies along with the on-going instability out of the Euro zone, China’s leadership transition, and a slowing Chinese economy put many domestic and inbound deals on the sideline.
However, Brown adds, this does not mean the appetite for deal-making in China is falling. On the contrary, there is great pent-up demand as witnessed by the record growth in the value of outbound deals, spurred on by companies in China taking advantage of favourable buying conditions overseas.
"As the direction of the Chinese economy becomes clearer, industry consolidation accelerates, domestic leadership changes take effect, and foreign economies start to emerge from their stressed positions, this should result in a strong rebound in China domestic and foreign-inbound strategic deals in 2013 and beyond, barring any unforeseen circumstances," notes Brown.
Japan remains the most active foreign-inbound M&A investor in China for the second consecutive year despite a decline of 30 percent which was exacerbated by the Diaoyu Islands issue. However, the biggest deals are still coming from the United States and Europe.
Outbound deals soaring ahead
The 54 percent increase in outbound deals in 2012 comprises more than a third of the overall M&A activity measured by value, by far the highest proportion ever. "We see many more deals in the pipeline and expect this growth trend to continue strongly with another record year in 2013," says Brown.
An important trend is the growth in private owned enterprises (POEs) taking on larger deal sizes, signalling that the private sector will be key drivers of future China outbound M&A. The value of POE deal activity increased a staggering 171 percent in 2012.
"This shows the ambition of privately owned enterprises in China," says Brown. "There is indeed a great desire to use overseas M&A as a strategy to go global, to build international brands and to bring technologies and know how back for use in the domestic market."
Private equity in China - growth and growing pains
Private equity (PE) has emerged as a key provider of growth capital to the liquidity starved private sector of the economy in China with real Government policy support. However 2012 was a poor year for PE deal numbers in China, though deal sizes are trending upwards.
Although there are exceptionally strong tailwinds for the PE industry in China over the medium term, the industry is facing growing pains which have already resulted in consolidation across the sector and a flight to better quality and sophisticated PEs Furthermore, there is a huge overhang of Chinese PE and venture capital-backed enterprises waiting to come to market either by IPO or by M&A exit.
"The industry as a whole is moving into an "exit phase" and the backlog of exits represents a real challenge," says Brown. "It is more than IPO markets can absorb, and trade and secondary sales by M&A will become more frequent."
New deal activity looks set to accelerate strongly from the second quarter of 2013, while overall activity (new investments and exits by both IPO and M&A) will reach new record highs in 2013 or 2014.