New research from the Grant Thornton International Business Report (IBR) reveals that just 18% of Hong Kong businesses plan to grow through acquisition in the next three years, down from 26% this time last year.
As many as 80% of local businesses confirm that they have no plan to execute an acquisition, significantly higher than their counterparts in mainland China (60%) and the global average of 63%.
“With the economic outlook so uncertain, Hong Kong business leaders have understandably seen 2013 as a ‘wait and see year’ with regard to deal activity," explains Eugene Ha, advisory partner at Grant Thornton Hong Kong. "Sluggish business optimism, which reached just 27% in Q1-2013 and 28% in Q4-2012, is a further proof of their cautious attitude.”
However, despite a lack of confidence in the macroeconomic environment and merger & acquisition activities, there has been a strong recovery in revenue (increased to 65% in Q1-2013 from 32% in Q4-2012) and profitability (increased to 29% in Q1-2013 from 8% in Q4-2012) expectations.
"Clearly business leaders are more optimistic about growing their own operations over the next few months,” notes Ha.
Room for business consolidation
The latest IBR also indicates that most Hong Kong businesses (88%) are looking to finance their growth in the next three years through retained earnings, up from 70% last year; while 29% of businesses looking to invest more on research & development, rising for the fourth consecutive quarter – up from 12% in Q2-2012.
“In light of the overall outlook for businesses remains cautious due to the recent tension of the proposed bailout of the Cypriot banks, the ongoing eurozone crisis, and the military instability around North Korea, these IBR figures show that Hong Kong businesses are looking to consolidate their resources and competitiveness for now, after some years of economic downturn,” Ha remarked.
Rising interest of China businesses in sourcing growth internationally With appetite for acquisitions looks weak in Hong Kong, businesses in the Mainland are in a
somewhat different frame of mind.
China continues to place significant importance on making acquisitions within their own border (90%), top of the BRIC economies. The year on year increase in appetite for cross-border acquisitions in China, from 26% in 2012 to 47% in 2013, emphasises the development and growing financial strength of mid-market businesses that now have the ability and interest in sourcing growth internationally.
Ha notes that natural resources are very attractive to Chinese businesses, as over half of its oil demand depended on imports. "So it is not difficult to imagine that resource-rich developing economies would be the most popular acquisition targets," adds Ha.
Interestingly, the IBR also reveals that economies with rich natural resources have higher intention to sell their businesses.
When asked if they anticipate a change in business ownership, economies such as New Zealand (24%), Brazil (19%), Vietnam (15%) and South Africa (15%) reported a plan to be executed in the next three years. This perfect attitude match between Chinese buyers and foreign vendors foretell a possible increasing deal activity starting from 2014, after businesses have more thorough understandings of the approach of the new leadership of the Chinese government.
The eurozone is another target focus of Chinese cross border acquisitions. After the long struggling crisis, many European assets are undervalued and look relatively cheap to Chinese buyers.
Coincidentally, Chinese businesses pointed out that acquiring established brands (58%) is the second most important driver behind their plans to grow through acquisition, where Europe is well recognised as a region of renowned luxury brands.
This provides plenty of choices to potential buyers in mainland China.