Chinese outbound M&A flow remains resilient despite the financial crisis

Published: 5 November 2009

Chinese outbound M&A flows have remained relatively resilient despite the global credit crisis, with quarterly deal values expanding from US$1.3 billion (10 announced transactions) in Q1 this year to US$8.9 billion (26 announced transactions) in Q3, according to the latest "The emergence of China: New frontiers in outbound M&A" report from Deloitte. There were 61 Chinese outbound acquisitions with an aggregate value of US$21.2 billion during the first three quarters.

The report outlines the trend for outbound M&A deals initiated from China. It also studies the key factors that are driving Chinese outbound M&A transactions and potential hurdles that Chinese firms are likely to encounter in the future.

Mr. Lawrence Chia, Head of Deloitte China M&A Services & Global Chinese Services Group Co-Chairman, said: "On the back of the government stimulus package, the Chinese economy has remained somewhat insulated to the fallout from the financial crisis. This has contributed to the relative robustness of outbound M&A activity from China. The desire of Chinese companies to expand through acquisitions and support from the Chinese government are also driving outbound cross-border deals."

Transactions in the Energy, Mining & Utilities sector continue to dominate Chinese M&A purchases abroad. Since the beginning of 2003, acquisitions in this sector have accounted for 29% of the total outbound deal flow by volume and a massive 65% of the total deal valuations. Over Q1-Q3 2009, these proportions have increased to 40% and 93% respectively.

Mr. Karl Baker, Mining Sector M&A Partner for Deloitte China, said, "The Chinese economy is truly on the path to recovery and I am confident that it will hit its 8% GDP growth target for 2009. As a result, Chinese demand for raw commodities has continued to grow throughout the credit crisis, resulting in an explosion of deal flow in recent years. It is clear that Chinese bidders are increasingly concentrating their efforts to acquire mining assets in either North America or Australasia –with an obvious preference for the latter."

"Looking forward, the dominance of Energy, Mining & Utilities transactions is likely to continue into 2010. However, Chinese bidders are likely to encounter increasing resistance in this space and they should understand the importance of separating any political undertones from their offer, if they want their bids to succeed," Mr. Chia noted, adding that Chinese bidders may start returning to bid for assets in the Financial Services sector, where investment opportunities will arise from the imminent swathe of reforms in Europe and North America.

Mr. Tony Ng, Financial Services Sector M&A Partner for Deloitte China, said "few Financial Services outbound deals were announced in China over the past six months; however, the level of outbound activity is expected to increase in 2010. Yet, Chinese Financial Services players now act with greater awareness of the issues when engaging in an M&A transaction, with national security concerns, along with the potential challenges in integrating acquired assets as well as differing business cultures posing the largest obstacles to such bidders looking to acquire abroad."

From a country-based perspective, North America-based businesses have been the preferred target of Chinese acquirers over the 2003-Q3 2009 period, with some 106 acquisitions, accounting for 24% of the total being announced, according to the report. In terms of value, M&A investments by China companies in North America totaled US$32.2 billion for the same period, accounting for 28% of the total outbound M&A investment.

"China's love affair with U.S. businesses will continue over the next 12 months with buyers eyeing assets in a bid to boost their technological prowess. At the same time, Chinese bidders will be encouraged by state support as the authorities look to diversify China's massive U.S. dollar reserves from currency holdings into less volatile assets," Mr. Chia said.

Separately, the report viewed the recent regulatory development in China as conducive to outbound M&A transactions. Comprehensive revisions to China's regulatory regime, implemented in the summer of 2008 and 2009, have made Chinese antitrust and M&A policies more comparable to those in the EU or North America. With regard to regulatory reciprocity, the report rebuffed concerns that China's rejection of Coca-cola's bid for Huiyuan Juice and the recent trade spat between China and the U.S. might lead to increased protectionism.

"Local drivers influencing Chinese acquisitions abroad are, in themselves compelling reasons for Chinese firms to buy foreign assets, regardless of the regulatory regimes in place overseas. In fact, issues of regulatory reciprocity are unlikely to arise in the near future as the major antitrust regimes are aware of the huge adverse impact such a change would have on future M&A flow," Mr. Chia added.

About Deloitte's Global Chinese Services Group

The Global Chinese Services Group (GCSG) of Deloitte Touche Tohmatsu assists companies investing and operating in China as well as works closely with Chinese companies seeking overseas expansion opportunities.

Whether Chinese companies are entering the China market for the first time or seeking to optimise existing operations, the GCSG, in collaboration with the China firm, can help identify an expanding range of opportunities to manufacture, source, and/or sell in China and navigate the associated risks.

The GCSG also assists Chinese companies seeking to access overseas markets - expanding operations, raising capital from public or private sources and/or acquiring overseas assets. Our global network of bilingual professionals works with colleagues in China to deliver seamless service to globalising Chinese companies.

Simply put, the GCSG network positions its practitioners in the local market to allow seamless and effective service to our clients on all China-related issues. For more information about GCSG, please click on the following link: www.deloitte.com/cn/gcsg.