Corporate Desire to Diversify Operations Drive China's Outbound M&A

Chinese quarterly outbound M&A activity surged in the first half of 2010 over the second half of 2009, with an average of 36 transactions per quarter over the period. This compares to the mean quarterly deal volumes of 16 transactions over the period from 2003 to the first half of 2009, according to Deloitte's latest report "Emerging From the Twilight: The Next Chapter of Chinese Outbound M&A."


From the beginning of the third quarter of 2009 to the end of the second quarter of 2010, there were 143 Chinese outbound M&A transactions with an aggregate value of US$34.2 billion. Almost one-quarter (24%) of all the outbound acquisitions were valued at US$250 million or above for the first half of 2010, against 21% from 2003-2008.


"What we have seen over the first half of 2010 is a steady rise in the number of Chinese bidders looking abroad. Strong Chinese economy is behind the rise in outbound deal flows, which are also increasing in value. We have reasons to believe that the second wave of outbound M&A is about to occur as Chinese businesses seek to diversify their operations from the mainland," says Lawrence Chia, Head of Deloitte China M&A Services & Chinese Services Group Co-Chairman.


According to the report, one of the recent trends is the surge in the number of overseas buyouts undertaken by private equity firms and exits of foreign private equity firms from portfolio companies ultimately bought by Chinese corporate. In the first half of 2009, just eight outbound private equity transactions were completed compared with 13 over the first half of 2010.


However, this recent surge is unlikely to continue as local investors understand the Chinese markets much better than their foreign counterparts and will focus their attention on domestic instead of foreign acquisitions.


In terms of sector, the report revealed that energy; mining and utilities; industrials and chemicals; and telecommunications, media and technology continued to be the three largest sectors in which Chinese outbound investors were buying into. The three sectors have taken up a total of 372 deals since the beginning of 2003, equivalent to 67% share of the overall market.


Within the automotive sector, Chinese companies have undertaken some 19 deals worth US$4.9 billion abroad since 2004, with Western Europe representing the largest target market for acquisition and with 16% of these outbound transactions being worth more than US$500 million. For the financial services sector, outbound activity peaked at the height of the dealmaking boom in 2007 when there were 11 announced deals with an aggregate value of US$12.2 billion.


Overall, there have been 42 outbound M&A transactions in the financial sector with a total value of US$19.6 billion since 2004. It is worth noting that Chinese investors have been particularly active in their pursuit of Vietnamese financial institutions with five deals announced between 2003 and the first half of 2010.


According to Chia, there are a number of reasons driving Chinese outbound M&A activities. First, there is the need for China to acquire raw inputs and diversify foreign exchange reserves. Many Chinese state-owned enterprises (SOEs) have been instructed by the Chinese government to buy mining and oil & gas firms overseas. Many Chinese companies are now seeking to expand their market share and avoid home competition by outbound acquisitions. "More importantly, Chinese companies are trying to move up the value chain by acquiring reputable brand names overseas and the rights to world-class technology know-how," says Chia.


Geographically, there is a resurging trend for Chinese companies to acquire assets in Brazil, India and Russia, with a transaction value of approximately US$3 billion in seven announced deals over the first half of 2010, the highest levels since 2006. Chinese outbound deal flow to its BRIC counterparts eased over 2008 and 2009, falling to eight and then seven deals respectively over the two years. This compared to ten deals a year when activity peaked in 2006 and 2007. Overall, Chinese M&A acquisitions in Brazil, India and Russia have totaled some 52 transactions, valued at US$15.3 billion, over the past seven and a half year.


However, the report highlighted the fading dominance of India as the major traditional outbound M&A destination for Chinese bidders. Deal flows into India over 2009 and first half of 2010 accounted for less than 50% of the total transaction in the three regions, against 79% between 2003 and 2008. In terms of sector, Chinese bidders are seemingly focused on acquisitions in the energy, mining and utilities sectors of Brazil, India and Russia, with such purchases accounting for around one quarter of all deal volumes by sector from 2003 to 2010.


Despite the growing trend for Chinese companies to purchase overseas, the report discussed the persistent obstacles during outbound acquisitions. On the regulatory front, there are recent instances where Chinese SOEs are restricted by foreign governments from acquiring assets in their countries. Many commentators believe that the motivation of foreign regulators is down to political machinations or simply the desire to protect local jobs and businesses. Besides, Chinese companies are relatively youthful, lacking the ability to resist their "window shopper" mentality and having problems ensuring that any prospective deals would be value-enhancing.


"When it comes to buying overseas, Chinese companies also need to take into account the cultural differences, especially with regard to national labor laws and legal frameworks. Last but not least, tax issues are always a major hurdle for prospective acquirers and if necessary, they should engage specialists to handle local taxation policies and regulations," adds Chia.





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