Chinese outbound mergers and acquisitions (M&A) activity will pick up pace this year in tandem with the initial public offerings (IPO) market as the government reopens the financing tap, according to industry consultants and observers.
“M&A deals usually go hand in hand with the IPO market situation,” said Zhang Decai, engagement partner at BDO China Shu Lun Pan Certified Public Accountants LLP, a member of the global accountancy network BDO International Ltd. “Companies can use funds raised from the IPO market to make acquisitions.”
“Taking the flurry of IPOs in Hong Kong over the past two months as a proxy, given that most of them are Chinese companies, it is likely that some of the companies raising capital from the equity markets will make outbound acquisitions over the next 12 months,” said Kenneth Yeo, director and head of specialist advisory at BDO Financial Services Ltd., another member of BDO International.
The China Securities Regulatory Commission on Tuesday gave six more companies the go-ahead to sell shares publicly in Shanghai and Shenzhen, after granting approval to five candidates a day earlier.
Once the IPO floodgate is reopened in China, more companies can build the financial muscle to make overseas investments, Yeo told the Hong Kong Economic Journal’s EJ Insight in an interview.
“Outbound M&A deals of the scale of US$300 million and above are likely to increase this year. After the IPO market reopens in China, both volumes and value of the deals should increase in the second half of 2014,” he said. Activity in the first-half might be a little less or similar to last year’s level of almost 100 deals, Yeo added.
New deals are mostly expected to come from privately-owned enterprises (POEs) in the coming years. “More POE deals are seen because state-owned enterprises (SOEs) make less but individually more significant deals in industries such as energy and agriculture,” Zhang said.
Small deals from POEs, meanwhile, are often “below the radar”, he said, pointing to less government intervention in deals of those firms.
Outbound deals from China, excluding financial investment, in the first eleven months in 2013 were worth US$80 billion, up nearly 30 percent from the same period in the previous year and compared to US$70 billion for the full-year 2012, according to China’s Ministry of Commerce.
Zhang expects to see more Chinese firms, particularly from the manufacturing industries, to buy assets in advanced economies for technology know-how to upgrade their businesses. Developed economies in Europe will be the among the places where firms will look for acquisition targets.
In September 2013, Shanghai-based Fosun International (00656.HK) agreed to buy 35 percent stake in Italian menswear manufacturer Raffaele Caruso SpA. This came after the company bought 10 percent of Greek jeweler Folli Follie Group in 2012 and invested in upscale American apparel maker St. John Knits International Inc. in June.
In terms of large ticket deals in the private sector, they are likely to come from the retail sector as Chinese firms seek to buy brand names in the United States and United Kingdom. The automobile industry may also see significant deals as companies seek to buy into overseas components makers, according to Michael Fosh, a partner at law firm Reed Smith.
Deal flow could get an additional boost as some firms shift their focus to services from manufacturing in keeping with China’s broad policy objective, he told EJ Insight in a phone interview.
The establishment of the Shanghai free trade zone will facilitate greater capital movement in and out of the country, Fosh said.
“We certainly see greater interest in greenfield investments, from multinational companies,” Fosh added. Greenfield investments occur when multinational corporations enter developing countries to build new factories or stores. Developing countries often offer prospective companies tax-breaks, subsidies and other types of incentives to set up new ventures.
Authorities believe corporate tax revenue loss is a small price to pay if jobs are created and knowledge and technology is gained to boost the local human capital.
“For deals involving the acquisitions of existing businesses, we may see high level of response in the [Shanghai trade] zone in three years time, after more guidelines and policies are announced in the next six months,” Fosh said.
Overall, the Shanghai free trade zone will definitely see more significant deals compared to other parts of the country, he added.
– Contact the reporter at [email protected]