19 October 2019
CRRC Corp. (01766.HK) was formed through the merger of China CNR Corp. and CSR Corp. Photo: Xinhua
CRRC Corp. (01766.HK) was formed through the merger of China CNR Corp. and CSR Corp. Photo: Xinhua

Why M&A is a rising sector in China

Merger and acquisition (M&A) is the main business of investment banks. On top of the consulting fee, the demand for financing and foreign exchange arrangement involved in the M&A process also generate revenue for investment banks.

Compared with general financing businesses, M&A has higher uncertainty – the buyer may fail to identify a proper target even after hard research, while the seller may change their mind depending on the environment. If several companies are bidding for the same target, the chance of success is even less.

Revenue from M&A business accounts for a smaller part of the income of Asian investment banks than in the case of their European and American counterparts, reflecting the difference in stages of economic development and corporate structures.

Generally speaking, Asian economies are in the growth stage. Family businesses and state-owned companies account for a large percentage of Asian companies.

Their view of M&A is quite different from that of a western enterprise which, most likely, is under the management of professional executives. Patience and luck are both necessary.

I was once a consultant for a family-owned company in the sale of certain assets.

The family members always hold different ideas. Some wanted the cash back as soon as possible, some had more ambitious development plans, while others were satisfied with the current situation.

It took them six or seven years to reach a consensus. Fortunately, in the end, a deal was completed at an opportune time with a good price.

In the autumn of 2006, I attended a board meeting of Bank of China (BOC, 03988.HK) to discuss a potential overseas M&A deal.

But the time was not ripe as the bank was focused on restructuring and an initial public offering.

After its successful listing in Hong Kong, I introduced some potential targets to the bank. Among the target companies was Singapore Aircraft Leasing Enterprise.

Everyone was very cautious and raised a lot questions — from management issues to valuation level. The deal finally got the board’s approval.

In December 2006, BOC acquired the entire stake of Singapore Aircraft Leasing Enterprise for US$3.2 billion, then renamed it BOC Aviation in the next year.

In the years after the acquisition, the firm performed well and became one of the largest aircraft leasing companies. Each case of M&A is unique, and time has proved it’s a successful one.

In the transition of the Chinese economy, I believe the reform of state-owned enterprises (SOE) is a most significant step.

It will generate a lot of M&A and restructuring activities. For example, China CNR Corp. announced it would merge with its peer CSR Corp. Ltd. to form CRRC Corp. Ltd. (01766.HK) only a few months after it listed shares in Hong Kong in May 2014. 

Some commentators might find that confusing, but those who are familiar with SOE operations wouldn’t.

Investment bankers welcome such projects: the more the better.

I believe M&A can bring economic benefits. However, if China wants to achieve its goals of economic restructuring, it must deepen the reform of SOEs.

Measures may include encouraging competition, allowing more flexible and market-led management methods, and improving the incentive mechanism for executives.

We will wait and see the effects of the ungoing SOE reforms.

This article appeared in the Hong Kong Economic Journal on Sept. 16.

Translation by Myssie You

[Chinese version中文版]

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Former head of investment banking division at Credit Suisse