Chinese enterprises continued their active performance in the outbound M&A market in the first three quarters of 2014, wrapping up a record 176 M&A transactions, up 31% from the same period last year, according to the latest data analysis by PwC.
Private enterprises completed 120 M&A transactions, more than double the number of transactions completed by state-owned enterprises, making them the major force in the M&A market.
In terms of industries, M&A destinations and financing channels, Chinese enterprises were seeking diversification in overseas M&A transactions.
In the first three quarters of 2014, the total value of overseas M&A transactions completed by Chinese enterprises reached US$40.8 billion. There were 14 transactions valued at more than US$1 billion each, but no mega-sized M&A deals occurred.
The total outbound M&A deals value completed by private companies was up more than 120% year-on-year, while the deal value completed by state-owned enterprises dropped for the first time, with a decline of 37%.
“With private firms becoming the major force, it is becoming clear that Chinese enterprises are seeking diversification in outbound M&A,” says Andrew Li, PwC China Advisory Services Leader in Central China.
Seeking quality M&A targets
Li says that Chinese companies, especially private enterprises, are actively seeking quality M&A targets in North America and Europe, aiming to introduce advanced technology, IP and strong brands to China.
"In the meantime, they are transferring manufacturing bases from China to other countries in Asia and developing emerging markets," adds Li.
Unlike state-owned enterprises who are mainly targeting resource related deals, private enterprises focus on industries such as high technology, telecommunications and retail to seek more diversified investment opportunities.
In the first three quarters of 2014, Chinese enterprises completed 43 M&A transactions with targets in other Asian countries, up nearly 180% year-on-year and meaning Asia trailed only North America and Europe in terms of deal volume.
In addition, North America, Asia and Europe ranked the top three destinations, respectively, in terms of the total transaction value of Chinese enterprises’ overseas M&A.
According to data analysis, in the first three quarters of 2014, the number of outbound M&A deals completed by listed companies accounted for 56% of the total transactions.
Among the transactions involving listed enterprises, 77% of them were completed by companies listed in Hong Kong and the major exchanges in mainland China.
Listed companies have more diversified financing channels, especially with the Hong Kong stock market adopting more transparent and efficient financing methods.
Private equity funds also showed an increasing interest in outbound deals in order to support listed corporate buyers’ outbound acquisitions with capital, knowledge and experience.
“As Chinese companies become more experienced in handling international M&A deals, they are now using different financing channels such as secondary placement in stock markets, issuing bonds, or introducing strategic PE investors, ” says Jenny Chong, PwC China International Tax Services Partner.
Chong notes that while obtaining cost-efficient financing continues to be a major obstacle, Chinese companies are glad to see the simplification of the outbound approval process issued by Chinese policy makers which promotes Chinese outbound M&A activities and increases Chinese companies’ competitiveness in bidding for international projects.
“However, Chinese companies are encouraged to closely monitor the new development of international tax rules and pay attention to tax compliance in different countries with regards to their outbound investments,” emphasizes Chong.
Due to the weakness of the global economy and the slowdown in China’s economy, Chinese enterprises’ overseas M&A are under the spotlight from the global M&A markets.
“Chinese enterprises will generally remain active in overseas M&A activities in 2015. Meanwhile, ‘a heedless rush’ in pursuing overseas M&A will be gone forever while Chinese companies will become more ‘rational’ in overseas M&A. In the next few years, we will see a clearer trend under which companies will seek diversification in M&A purposes, industries, locations and financing channels,” adds Li.