Digital Transformation Drives Chinese M&A Appetite to Two-Year High

Chinese companies remain confident about economic and market conditions, and are gradually increasing their appetite for M&A with a strong focus on digital transformation, according to Ernst & Young’s tenth semi-annual Capital Confidence Barometer, a global survey of more than 1,600 senior executives in 54 countries.


Two-thirds of Chinese respondents are upbeat about the global economy and 61% express a similar view of the local economy; while this represents a small decline in sentiment from last October, Chinese executives are nevertheless among the most positive nations in the April survey. Comfortable majorities, meanwhile, were bullish about short-term market stability and corporate earnings, a sharp rise from six months earlier.


Chinese investors also apparently view asset prices as more realistic than they were in the autumn, and this has helped boost local transaction activity in recent months.


Continuing faith in the economic and market climate has contributed to a steady rise in the number of Chinese companies planning to pursue transactions within the next year, which is now higher than the number of global companies planning to do so. Chinese companies’ top three investment destinations are India, US and Russia.  The unfreezing of local IPO markets has also boosted domestic deals.


“The major development since the autumn is that, after 15 to 16 months of no IPOs, regulators turned the valves on in the local IPO market at the beginning of December last year,” said Bob Partridge, Greater China Leader, Transaction Advisory Services for EY.  “That has definitely contributed to improved confidence levels.”


For the first time Barometer respondents have indicated what their actual deal pipeline looks like, with a third (30%) expecting it to increase over the next 12 months which could point to increased volume longer term. However, in the near-term, executives have to balance their growth priorities and make selective M&A choices. They are increasingly being encouraged to focus on cost reduction by activist shareholders, with 88% saying the boardroom agenda is heavily influenced by shareholder pressure 51% expect to pursue cost reductions as a result.


Digital transformation at center of acquisitions strategy
Chinese executives identified digital transformation as the most important catalyst for acquisitions, with 47% saying so, above the 41% of global executives who said this would have an impact on the shape of deals.


China has strong digital fundamentals, it is the world’s largest digital consumer economy, including over 700 million internet users, has the largest online presence and most active social media population.


“Chinese online retailers and service companies have been among the most active in both the M&A and IPO markets in recent months,” Partridge noted, citing Alibaba’s US$1.5 billion acquisition of digital mapping company AutoNavi Holdings Ltd, messaging service Sina Weibo’s prospective US$500 million flotation and e-commerce firm JD’s planned US$1.5 billion IPO among recent examples.


This evolving change in approach is reflected in other responses to the April survey, with 22% of Chinese respondents saying that access to technology and intellectual property would be one of the main drivers for acquisitions in their chosen markets, up significantly from 8% six months ago and well above the 15% of global respondents who cited technology and IP as a factor driving deals.


Growth and cost issues compete for boardroom attention
At the same time, while Chinese companies are positioning themselves as active competitors for assets both at home and abroad, they are also making a greater effort to balance the competing priorities of growth and operational efficiencies.  More than half of respondents say cost reduction is now at the top of their boardroom agenda due to pressure from shareholder activists.


Consequently, the number saying their companies will focus on growth over the next year slid to 49% from 77% in last October. By comparison, the number saying they would be concentrating on cost reduction and efficiencies rose to 36% from 20%.


Chinese companies’ economic and market outlook remains strong and their willingness to engage in M&A continues to increase, with many focusing on strategic areas such as digitalization and related technology sectors as areas where they can add value to their companies.


“The digital transformation of the retail and media sectors in China continues apace and Chinese companies remain well positioned to be dominant players in this area,” Partridge concluded.


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