Prospects for outbound Asian M&A


Financier Worldwide Magazine

November 2016 Issue

November 2016 Issue

Mergers and acquisitions have enjoyed a remarkable turnaround in recent years; from the ashes of the financial crisis has emerged an active M&A market across the spectrum. Though 2014 saw considerable dealmaking activity, 2015 was a record breaking year, with the total value of announced deals exceeding $5 trillion for the first time, according to Dealogic. 2016 has not been able to match last year’s breakneck dealmaking speed, but there have still been a considerable number of transactions, and many notable mega mergers.

One catalyst for the boom in dealmaking has been the Asia region, particularly for outbound M&A. That said, China, Japan and India remain attractive investment destinations. According to a report by Kroll, India drew 6 percent of all US outbound M&A transactions in 2015, surpassing the 2 percent directed at China. Japan, too, is a blossoming inbound M&A destination. Data from Thomson One Banker shows that in 2015 there were 162 inbound Japanese deals worth $25.4bn – the highest total for a decade.

However, though these figures are undoubtedly impressive, it is in outbound M&A where Asia has risen to prominence in 2016. In the first eight months of the year, outbound activity surpassed previous full-year records. Deals like SoftBank’s $31.6bn offer for Arm Holdings helped to push the total to $201.4bn to date. This compares to last year’s $187bn full-year record and is almost double the $104.4bn worth of US-led acquisitions this year. The last time Asian firms were ahead of the US in terms of cross-border dealmaking was in 2012, when they finished the year with $182bn worth of deals compared to $168.5bn for US companies.

According to data from Mergermarket released in September, outbound M&A by Asian companies is set to reach the highest annual deal value on record. At the beginning of September, a total of 479 deals worth $200bn have been announced – a figure which already outstrips 2015’s total year value of $199.6bn. So what is driving outbound Asian M&A, and is this level of activity likely to continue?


A number of factors have helped to drive M&A activity, despite economic and geopolitical challenges lurking in many regions. Though the first half of 2016 was something of a disappointment (particularly when viewed alongside the startling level of dealmaking recorded over the past two years) for acquiring companies there have been plenty of opportunities. In this slightly depressed dealmaking landscape, Chinese companies have emerged as one of the most prolific and important drivers of M&A activity globally.

Historically, the US has dominated the outbound M&A market, but China cross-border activity surged in 2015 and 2016. A wide spectrum of Chinese acquirers completed deals, many of which were significant in size.

Previously, Chinese acquirers were unable or unwilling to complete overseas deals, partly due to their relative lack of transactional experience and expertise, and partly for political reasons. However, the Chinese political and economic situation is staring to change. The Chinese government, as part of the 13th five year plan adopted in October 2015, has set about the mammoth task of retooling the national economy and has encouraged Chinese firms to look overseas for dealmaking opportunities. Historically, Chinese state-owned enterprises (SOEs) spearheaded dealmaking, pursuing deals primarily in the energy and natural resources space with countries like Australia benefitting. But times are changing; privately-owned enterprises (POEs) are now leading the way, in search of new markets, R&D and technology assets to strengthen their position at home and fuel expansion abroad.

Outbound M&A by Asian companies is set to reach the highest annual deal value on record.

The rush of dealmaking among Chinese businesses, both state- and privately-owned, has been necessitated by the state of the Chinese economy; where once double digit GDP growth was the norm, growth of that magnitude was not sustainable and expansion has fallen considerably in recent years. Though many countries, particularly those in the West, would love to see the levels of growth recorded in the Chinese economy of late, growth rates seen over the last two to three years have paled in comparison to some of the astronomical levels recorded in the previous decade. To that end, the Chinese economy grew by ‘just’ 6.9 percent in 2015, according to official statistics, down from 7.3 percent a year earlier and the country’s slowest period of growth in a quarter of a century. Though in conventional terms this number is certainly no disaster, it must be viewed in the context of wider Chinese domestic growth, and unfortunately the country’s slowdown is unlikely to end until the fundamentals of the national economy have altered further. Market forces and government policies are shifting the country’s reliance on inward investment and exports toward a service based economy. Furthermore, Chinese companies are looking elsewhere for high-yield assets as they hedge against slowing domestic growth.

In light of this changing domestic economic landscape, China has turned to overseas acquisitions. The introduction of the so called ‘Go Out policy’ in 2009 encouraged and facilitated the movement of domestic companies into new foreign markets, notably energy and natural resources. However, under the leadership of president Xi Jinping and premier Li Keqiang, the policy has undergone something of an overhaul. Revisions have given a new mandate to Chinese companies, allowing them to make investments abroad in a variety of industries. As a result, Chinese firms can now utilise their foreign cash reserves and establish consumer bases outside of the country for the first time. For China, there are plenty of advantages to the adoption of the revised policy. Chiefly, it not only allows China to spread its wings economically, it also increases the country’s political and cultural influence overseas.

Chinese companies have fully embraced this policy change. Chinese dealmaking has been one of the biggest catalysts for Asia’s outbound M&A boom this year. Chinese companies announced 173 deals worth $128.7bn, accounting for 64.3 percent of total deal value – the country’s highest share on record – according to Mergermarket. Furthermore, Chinese dealmaking has been boosted by the government’s artificial weakening of the Chinese currency, which caused considerable volatility in the markets in the early part of 2016. “The weakening renminbi also pushes Chinese deep pocket acquirers to speed up splashing billions of dollars overseas before their currency further depreciates,” says Yiqing Wang, Mergermarket’s China editor. The possibility of cash reserves atrophying as the valuation of the yuan continues to tumble should be sufficient motivation for companies to do their deals quickly. Ms Wang also notes that Chinese firms have begun to expand their horizons in their search for growth. “Chinese acquirers expanded their reach, especially to high tech industrial, and new areas such as gaming, sports and travel and leisure, far beyond their traditional interest in mining resources and energy,” she says.

Chinese acquirers have also been completing bigger deals that ever before. ChemChina, for example, announced in February that it had agreed a deal to acquire Swiss pesticide and seed producer Syngenta AG for $43bn – the largest overseas acquisition by a Chinese company to date. HNA Group acquired Ingram Micro Inc for $6.3bn. General Electric’s home appliance division was sold to Haier Group for $5.4bn. Tencent acquired the Finnish mobile game developer Supercell for $8.6bn, and US aluminium producer Aleris was sold to Zhongwang International for $2.3bn.

As evidenced by these considerable deals, Chinese acquirers have been particularly active in Europe. In the first eight months of 2016 they acquired 101 European companies worth a combined total of $76.5bn – a new record. They are seeking brands and industry expertise which can be transferred to their domestic markets, with premium assets becoming increasingly popular. The ‘Made in China 2025’ initiative, introduced in May 2015, is a national scheme which aims to improve the nation’s manufacturing industry – initially up to 2025 and then on to 2035 and 2049. The government hopes to transform China into a leading manufacturing power. Through the introduction of a number of pilot schemes last year, the initiative is well under way in a number of sectors and arguably this is reflected in the deals which Chinese acquirers have completed of late. The programme is aimed at improving a number of industries, including advanced rail and equipment, aviation and aerospace equipment, agricultural machinery and technology, power equipment and technology, and low and new-energy vehicles. Focus will also be on developing new materials, high-end manufacturing control equipment and robotics, biopharmaceuticals and high-end medical equipment. Advanced marine equipment and high-tech vessels, as well as integrated circuits and new generation information technology also feature, according to the China-Britain Business Council. As a result, we can expect acquiring Chinese companies to be particularly active in these sectors moving forward.

With much of this new overseas focus firmly on Western assets, more headline-grabbing Chinese deals in the European bloc are likely. Asian acquirers in general have been prolific in Europe this year. According to data from Baker & McKenzie, Asia firms completed 96 deals in the region in the second quarter of 2016, with a combined total of $29bn. German companies have attracted the attention of ambitious Chinese firms over the last two years. As of June 2016, 24 German companies had been acquired by Chinese companies, compared to 25 for all of 2015. While the EU was the main target for Chinese buyers, the US still remains a key target country by both deal value and volume for Asia Pacific acquirers.

Chinese banks have also been active in facilitating outbound M&A. In the first eight months of the year, Chinese banks were the lead arrangers on $19.9bn worth of global syndicated loans for M&A, raising their share of the market to 4.4 percent from 0.9 percent in 2015, according to Bloomberg.

Bank of China has been the most notable financier of deals, however a number of second tier banks have also been active. China Citic Bank International was involved in big ticket deals, helping to deliver a $12.7bn loan in June to facilitate China National Chemical Corp.’s acquisition of Syngenta AG. China Merchants Bank led a $3bn loan in July for the privatisation of the formerly New York-listed Qihoo 360 Technology Co.


In June, Japanese multinational telecoms company SoftBank announced its intention to acquire British semiconductor company ARM Holdings for $31.6bn. The deal catapulted Asia-Pacific outbound dealmaking to $201.4bn for the year to date. That figure far outstripped last year’s $187bn full-year record and is almost double the $104.4bn of US outbound activity recorded during the first sixth months of 2016. “We see more and more Japanese companies seeking investment opportunities outside of Japan because they think it will be difficult for them to cultivate Japanese markets any further due to the decreasing Japanese population and low birth rates,” says Gaku Ishiwata, a partner at Mori Hamada & Matsumoto. “In addition, because employee wages are getting higher in China, Japanese companies feel the necessity to develop their operations in countries other than China. We believe that these are the reasons why Japanese companies are becoming more active in their M&A activities in East and Southeast Asia.”

2015 was a notable year for outbound Japanese M&A activity, with $88bn worth of deals announced – the second highest annual total on record after the $115.6bn recorded in 2012. Though Japanese outbound M&A stalled in the first half of 2016 – with Brexit fears one cause of consternation – the appetite for dealmaking has recovered. Cash rich Japanese companies have been eying possible acquisitions in Europe in the aftermath of the Brexit vote, following the appreciation of the yen since late June. The manufacturing, financial and services sectors are popular. Japanese companies are likely to push forward with plans to acquire businesses in the US, Asia and Europe, albeit with some hesitation toward the British market, which has become a less attractive destination following the Brexit decision.

Looking ahead

Asian acquirers should continue to pursue deals overseas, with Europe and the US the most likely destinations. Intra-regional transactions will also be a key focus in the months to come, following a second quarter of 2016 which saw 30 deals completed within the region for around $5.7bn.

However, looking globally, merger control may hold back the pace of activity. In late August, for example, the Australian government rejected the sale of state-owned electricity infrastructure company Ausgrid to a Chinese consortium. The deal was expected to bring in around $7.7bn, but Australian treasurer Scott Morrison blocked the deal on national security grounds.

Western governments are treading carefully when Chinese organisations attempt to acquire local assets. But making generalisations or rushing to conclusions can prejudice an objective assessment of potential opportunities. Precluding companies from certain jurisdictions from making genuine offers can close the door to value creation.

More Chinese companies are set to look overseas for their next deal. Though this new overseas focus will generate new geopolitical challenges for Chinese firms, in the absence of genuine national security concerns, many Chinese suitors will be welcomed with open arms. Yet, navigating the regulatory minefield may prove difficult. In the US, some Chinese acquirers are sure to run afoul of CFIUS requirements, for example. At the same time, PRC regulators impose an elaborate pre-approval process, with timing and reporting requirements, on Chinese companies before they can complete acquisitions. These strident requirements are triggered for deals that cross a certain value threshold or involve sensitive industries.

Other challenges lie in the relative inexperience of Chinese companies executing cross-border deals. A lack of post-acquisition planning has caused some Chinese-acquired companies to wither on the vine. Others have fallen short on identifying and delivering synergies.

However, for deals that make sense and satisfy regulators, Asian acquirers could prove a valuable source of activity. Generating shareholder value should be a priority, and Asian outbound M&A can help facilitate this process.

© Financier Worldwide


Richard Summerfield

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