Ernst & Young’s bi-annual Capital confidence barometer (CCB) reveals that Chinese companies possess the means, motivation and opportunities to speed up the hunt for acquisitions in 2011; with increased corporate confidence and economic recovery, domestic and outbound M&A activities are poised to accelerate during 2H 2011.
According to the CCB, 82% of China respondents feel more confident about prospects for the domestic economy than six months ago, while 71% of China respondents said credit/capital conditions were better now than 6 months ago.
The result further reveals that 51% of China respondents are likely or highly likely to make an acquisition in the next 12 months, far above the global and other BRIC country averages of 44% and lower. When presented with the prospect of making an acquisition at short notice, half of Chinese and global executives say they are financially and strategically well-positioned to act quickly.
“Conditions that facilitate mergers and acquisitions are changing positively. 2010 was a year of recovery worldwide, but Chinese corporate deal-making could really roar back into the headlines in 2011. Chinese companies clearly have a stronger appetite for transactions than their global counterparts," says Bob Partridge, Ernst & Young’s Greater China Leader, Transaction Advisory Services.
Cai Lin, Ernst & Young’s China North Leader, Transaction Advisory Services says that conditions are ripe for an M&A boom in 2011. "If corporate confidence and economic recovery are sustained, we are likely to see M&A activities to reach its highest levels since 2008."
Ernst & Young’s findings from the survey continue to underline one critical fact: companies’ capital agenda is critical in today’s challenging and uncertain times. How organizations manage their capital, i.e., preserve, optimize, raise, and invest capital, today will define their competitive position tomorrow.
“Chinese companies will aim to flex their capital structures to the best of their abilities over the next six months. The number 1 priority is organic growth,” notes Partridge.
Chinese respondents expect to narrow their focus on their cash position over the next 12 months. The bulk of executives, 79%, say they will concentrate on cash flow liquidity over the next year, with 61% saying operational and cost efficiencies will receive increased attention.
The global survey response priorities are reversed. 67% say they will pay most attention to operational and cost efficiencies and 58% highlight cash flow/liquidity over the next year, a ranking that is broadly reflected in the US survey.
Chinese executives are comfortable with their debt positions, reflecting improving sentiment about credit conditions worldwide. Forty-four percent say they don’t need to refinance debt obligations.
A majority (85%) of Chinese respondents are now focused on organic growth as their capital allocation priority, and research and development is cited as the second highest priority (44%). While Chinese have downgraded M&A in favor of organic growth they remain more willing than many to take advantage of M&A opportunities within the next year.
A third (31%) of Chinese say they are actively looking to take advantage of M&A opportunities for growth over the next six months in comparison with 29% of global participants.
The Chinese are more bullish than their global counterparts’ further out in the timeline. 51% say they are likely or highly likely to make an acquisition in the next 12 months compared to global respondents, 41% for the same period.
When presented with the prospect of making an acquisition at short notice, half of Chinese and global executives say they are financially and strategically well-positioned to act quickly.
Outbound transactions are a growing force in the Chinese M&A landscape. Chinese companies are increasingly competitive with more established international companies. 35% of Chinese companies expect to make emerging market acquisitions in the next six months, compared to 31% of global companies.
“Recent data shows that China was the fifth largest global outbound investor in 2009, up seven places from a year earlier. It is clear Chinese companies are unwilling to rule out opportunities to grow through strategic transactions. They will continue to be an active player over the next 12 months,” notes Partridge.
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