China's Growing Appetite for Foreign Technology and Market Access Spurs Continued Outbound M&A

October 23, 2013

Beijing (October 23, 2013) – The next wave of Chinese outbound M&A will be dominated by private companies rather than state-owned enterprises and will be driven by new priorities. Those priorities include a shift away from natural resources and an increasing focus on gaining foreign market access and acquiring technology, according to a survey of M&A practitioners based in Greater China, “China Outbound M&A Outlook: Opportunities and Challenges,” published by leading global law firm Paul Hastings in association with Mergermarket. The report identifies target regions and sector trends, as well as the challenges commonly experienced by Chinese bidders.

The report projects an improving financing environment, with 80% of respondents expecting “easy” access to capital over the next 12 months. This positive view of the financing situation supports Mergermarket’s data that Chinese outbound M&A deal activity is on track for another record year with companies in Greater China completing 164 transactions as of Q3 2013, compared to 181 in 2012.

Even though the Chinese government is encouraging domestic companies to expand overseas and financing has become more readily available, there are still significant regulatory challenges for both foreign and domestic companies. Regulatory approval was of particular concern for outbound investment to the United States (25%), Japan (25%), and India (27%), according to the report.

“While government support has been strong, Chinese companies must still overcome considerable structural and regulatory issues before raising financing,” says Vivian Lam, a partner at Paul Hastings. The approval process in China is lengthy and requires the consent of numerous government offices.

“Chinese approvals could become hurdles before a deal can be signed. This leaves Chinese companies at a competitive disadvantage, especially in heated bidding situations against domestic buyers in foreign markets,” says Lam.

When companies are able to surmount the regulatory hurdles, the investments will likely be in new markets and be driven by a new set of priorities, according to the report. “The common perception is that China’s international expansion is dominated by its need to secure natural resources, but our respondents are much more focused on gaining entry points to new markets and securing access to technological know-how as key strategic objectives,” says David Wang, a partner at Paul Hastings. “While transactions in the natural resources sector are still a significant portion of outbound acquisitions, the volume is decreasing compared to other areas, including consumer goods and TMT.”

In terms of investment destinations, respondents say countries within Asia would see the most Chinese investment going forward, as Chinese companies and investment firms see potential in the economic growth and development of emerging markets in Asia. Looking to capitalize on rapid urbanization in Thailand and increasing demand in Singapore, Chinese acquirers are considering opportunities in technology and resources. Western Europe and the United States rounded out the top three investment regions.

Additional findings from the report include:

While 45% of respondents expect private companies to be the primary players in cross-border M&A, Chinese state-owned enterprises and private equity firms will also be active.
Chinese sovereign wealth funds and insurance companies are projected to become more active in cross-border real estate investment over the next year.
Telecommunications, media and technology (TMT), and industrials and chemicals are clear sector targets for Chinese companies; noticeable interest is also shown toward the resources and consumer goods sectors.
The most significant deals are expected to be majority stake transactions driven by the desire to achieve global expansion in non-resource industries.
Over 60% of respondents agree that barriers to entry and current cash flow projected earnings have the greatest impact on valuing an asset.
45% of respondents believe the financial services sector is the most difficult sector to gain domestic regulatory approval for outbound M&A, followed by 39% in energy, resources, and mining.
67% of respondents say post-merger legal/regulatory compliance and 63% say cultural integration are the most common issues that lead to post-merger value loss.
Legal issues surrounding the transfer and licensing of intellectual property in foreign countries has surfaced as an area of difficulty for technology-hungry Chinese acquirers.

The report launch event, held today in Beijing, also included a panel discussion with partners from Paul Hastings, as well as leading industry figures such as Fanglu Wang, Senior Managing Director of CITIC Capital; Shiguang Zuo, Managing Director, Investment Banking Division of The Hina Group; Jeff Tao, Partner, Transaction Services of Deloitte & Touche Financial Advisory Services Limited and Weijian Guo, M&A Manager of ABB China.

The full report is available for download here:
http://www.mergermarket.com/pdf/China_Outbound_M&A_Outlook_2013_Eng.pdf
http://www.mergermarket.com/pdf/China_Outbound_M&A_Outlook_2013_Chi.pdf

Paul Hastings is a leading global law firm with offices in Asia, Europe, and the United States. We provide innovative legal solutions to financial institutions and Fortune 500 companies. Please visit www.paulhastings.com for more information.