China Businesses More Cautious on M&A Activities

Only 10% China businesses have merger and acquisition plans in the next three years, dropping by 18 percentage points over last year, suggesting a more cautious attitude in business expansion, according to the latest Grant Thornton International Business Report 2014 (IBR).

 

Due to uncertain economic and policy conditions, the M&A activity in China market saw a weaker performance in the first quarter of 2014. Statistics reveal that1, 372 acquisitions have happened in China market in Q1, falling by 45.13% over previous quarter and dropping by 43.81% over last year. It is reported the disclosed transaction volume is 20.34 billion dollars, falling by 57.85% over previous quarter and dropping by 61.81% over last year.

 

Financing Concern Constrains Businesses’ M&A Plans

According to the result of the survey, 46% of China businesses believe retained earnings remains the primary financing source for M&A in the next three years, rising by 10 per cent from last year. In the meantime, China businesses’ expectation for financial channels including bank finance (22%), IPO (15%) and private equity (8%) is lower than last year.

 

Financing difficulties and rising cost are still considered as the most important factors constraining businesses’ M&A plan, particularly to small and middle-sized enterprises (SME).

 

“Despite of the steady economic development this year, the potential pressure of economic downturn in China should not be neglected," says Xu Hua, CEO of Grant Thornton. "The production and operation of China businesses are still troubled by lack of orders, rising costs of labour and capital shortage, which result in a more conservative planning in M&A activities. However, the government has indicated that relative measures will be implemented to reduce financing costs for businesses. We suggest businesses especially the SMEs strengthen their credit ability construction and improve the credibility.”

 

The survey reveals that among the Chinese businesses with acquisition plans, only 29% of businesses show interest in cross-border transactions, declining from 47% of last year.

 

The developed economies in Europe and America have stronger growth momentum and the requirements for investors are stricter, which affected China businesses’ willingness for cross border M&A activities.

 

The exit activity of businesses through M&A increases globally, with 11% of business owners expect to sell their business in the next three years, higher than last year by 3 percentage points. Businesses from Australia (20%) are much more upbeat about the potential to sell their business than last year, rising by 10 percentage points. Australian businesses are more inclined to sell to management (42%), 25% expect to exit via private equity, and 22% would like to transact with trade buyer.

 

“As global markets recovers from the downturn, Chinese businesses are more rational in cross border transactions compared with the last two years when they were rushing out to buy on the dips," says Xu. "In the meantime, the recovering economy and more fluidity in the debt and equity markets will lead to increasing appetites for exit for those who have been holding assets through the economic downturn."

 

Xu pointed out that current policies in China encourage Chinese businesses to ‘go out’. The maturity of the financial environment such as Shanghai Free Trade Zone’s launch and development will facilitate the outbound investment.

 

"Many overseas institutions welcome China businesses to invest in their local markets. It’s better for Chinese businesses to wait for opportunities and select suitable projects to invest overseas," adds Xu.

 

Global Businesses’ Desire for Cross-Border Acquisitions Increases
The IBR data shows that 31% of businesses globally expect to grow through M&A over the next three years, up from 28% last year, suggesting the recovery is on a firmer footing and the focus of businesses is moving away from simply staying afloat towards a growth agenda.

 

As the developed economies slowly recover from the financial crisis, it boosts an evident increase in M&A expectations. The M&A expectation of businesses across G7 climbs to 36% from 29% of last year. While the emerging economies see a weaker M&A expectation given the slowing down of economy growth. The M&A prospect of BRIC drops by 8 percentage points from last year, to 19%.

 

Looking at business sector numbers, professional services sector is most likely to grow through acquisition in the next three years with 47% of businesses have such plan. Other sectors including mining & quarrying (45%), financial services (43%), agriculture, hunting, forestry and fishing (42%), technology (40%) also boasted relatively high M&A expectations.

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