MANAGEMENT

EY: Chinese Enterprises’ Surging Dealmaking Intentions Will Boost M&A Activities in 2017

Global mergers and acquisitions (M&A) activity continues to gain strength following heightened dealmaking in the first quarter of 2017, according to the EY 16th Global Capital Confidence Barometer (CCB).

Responses from Greater China mainly indicate that, while 2017 may not reach the record levels of 2016, Chinese dealmakers are signaling continued appetite for M&As. Chinese companies are pursuing a dual-track of rigorous management of their core business alongside disciplined dealmaking to spur new growth.

The Barometer interviewed more than 2,300 executives across 43 countries, including 154 executives from China. Respondents represented 14 sectors, with 1,168 of them being CEOs, CFOs and other C-level executives.

Chinese enterprises’ M&A intensions remain at elevated levels in 2017

The survey finds that 43% of enterprises in Greater China plan to pursue deals in the next 12 months. The vast majority (97%) of enterprises expect the M&A market in China to improve or remain stable over the same period.

“The strong performance of 2016 and the solid start to 2017 further fuel executives’ intentions to engage in M&As,” says Erica Su, Managing Partner, Transaction Advisory Services, Greater China, EY.

“As the survey indicates, 89% of Chinese enterprises have on average more than three deals in process. Therein, 37% of them expect to pursue cross border acquisitions to grow market share. We believe that the continuous improvement of economic positions will support the growth to some extent. At the same time, the investors’ rising expectations on performance will underpin near-record dealmaking.”

The survey shows that the top six sectors with the highest acquisition appetite potential in the next 12 months for Chinese enterprises are automotive & transportation, mining & metals, telecommunications, technology, diversified industrial products and financial services.

The top five investment destinations for Chinese enterprises are China, US, Japan, India and Singapore. The domestic market remains the preferred destination for M&As.

Innovation drives transformative dealmaking at home and internationally

The Barometer finds that the top five acquisition drivers for the respondents are growing market share (20%), moving into new geographies (17%), acquiring innovative start-ups (17%), acquiring talent (15%) and acquiring technology or new production capabilities (14%). Forty-six percent will make strategic acquisitions to gain access to startups, talent and new technologies.

Erica Su, who believes that innovation-driven transformation is pushing companies to conduct more acquisition activities, says: “M&As could provide the fastest route to future-proof the businesses to survive in the current environment of technological innovation and digitalization.”

Su further said that the emergence of new business models and continued transformation of the market may impel companies to look for acquisitions to survive in this disruptive environment.

“In the next year, we expect to see more acquisitions aimed at enhancing and reorganizing current business models and platforms to counter increasing competition, to gain new customers and to extend product offerings.”

The new US administration will have a positive impact on M&A activities

“Global survey findings show that, 56% respondents expect to actively pursue acquisitions in the next 12 months despite the constantly changing market, up six percentage points as compared with last year’s figure,” says Jackson Wei, Capital Transformation Leader for APAC, Transaction Advisory Services, EY.

“The vast majority (96%) of executives expect the M&A market to improve or remain stable over the same period. Globally, the US remains the most attractive deal destination, followed by China, UK, Germany and Canada.”

The survey shows that the new US government will have a positive impact on dealmaking. 46% say the new US administration will create more M&A opportunities. Executives believe recent policy announcements by Washington will also create more M&A opportunities.

The repatriation of trapped cash by US companies could add a potential US$1 trillion of firepower that may be used in dealmaking. This would provide greater competition for US-based assets, especially in life sciences, technology and consumer goods.

“What will probably determine the actions of companies in the near term is understanding the longer-term reforms for corporate tax in the US,” Wei says. “There have been long-held concerns about the competitiveness of the complex and high-rate US corporate income tax. The US corporate tax rate is one of the highest in the world, and it has remained unchanged, while other nations have made dramatic cuts. In addition, US companies are expected to pursue overseas M&As in the new tax environment.”

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