China’s mergers and acquisitions (M&A) market is expected to grow up to 30 percent annually as the government continues to remove regulatory shackles, an industry group said Friday.
By 2016, it is expected to take off on the back of reform in the capital market, the Chinese Mergers and Acquisitions Association (CMAA) told EJ Insight.
Reform in state-owned enterprises (SOEs) will help boost the development of the M&A market, with SOE assets ultimately worth 60 trillion yuan (US$9.64 trillion), some of which will be available to investors when these behemoths are opened to diversified ownership, CMAA president Wang Ping said.
These include China Petroleum and Chemical Corp. (00386.HK, 600028.CN) which will complete restructuring by the end of the third quarter, chairman Fu Chengyu said on March 24.
Wang expects the Chinese market to catch up with those in mature economies in the next 10 years.
“Big and strong enterprises will opt for vertical acquisitions so that they can be more focused on what they have already done well,” Wang said.
“Some strong but small companies will make horizontal acquisitions, buying firms from other sectors for diversification.”
One example is Evergrande Real Estate Group (03333.HK) which has increased its stake in Hua Xia Bank Co. Ltd. (600015.CN).
Also, companies grappling with excess capacity could be acquisition targets, enabling them to upgrade their production facilities under a new owner.
Reform in the capital market will benefit M&As when the initial public offering (IPO) process shifts to a registration model from an approval-based system, possibly next year.
And a more developed bond market will provide easier access to financing for M&A activities, Wang said.
“In the future, growth in the capital market will come mainly from M&A activities rather than IPOs. Asset securitization will create more room for M&As.”
Last year, 1,062 deals worth of US$185.7 billion were made in China and Hong Kong, including a US$6.9 billion acquisition of Smithfield Foods, the largest meat processor in the United States, by WH Group, formerly Shuanghui International Holdings Ltd., according Mergermarket.
Outbound deals were US$69.1 billion, up 15.2 percent from US$60 billion in 2012, it said.
“After many of the rules are de-regulated, the M&A market should take off in 2016, with 20 percent to 30 percent growth annually,” Wang said.
“In mature economies, M&As take up 6 percent of gross domestic product but in China, it accounts for just 2 percent.”
Wang expects China to catch up with mature markets in the next 10 years, by which time it would be the world’s biggest economy at US$20 trillion. M&As will account for 6 percent of it.
Since 2013, tech giants including Tencent Holdings Ltd. (00700.HK) and Alibaba Group have made significant acquisitions, from logistics to mobile browsers.
Wang expects the trend to continue but the larger deals will come in the energy and food processing sectors as the country works to become self-sufficient in these industries.
Meanwhile, the medical industry will undergo consolidation, along with certain inefficient sectors.
Outgoing Chinese companies will prefer firms in mature Asian economies such as Korea and Singapore but there is an “upward trend in acquiring US firms as the economy is growing again”, he said.
Canada and Australia will be popular due to their large resources base.
Wang dismissed concern over a rise in US interest rates adding to the cost of Chinese acquisitions of American companies, saying any such increase will be offset by a stronger dollar.
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