When U.S. corporate CEOs take global M&A surveys, they just can't resist checking off China as their next deal destination. The choice is arguably a no-brainer, given that China's relative economic growth rate -- 8.9% in the fourth quarter -- continues to be one of the most enviable in the world, even if it's slowing along with everyone else's. And yet, for all the talk about wanting to hop on a plane to the Far East, relatively few U.S. corporates have plunked their money down on Chinese soil. Regulatory concerns, coupled with the relative lack of attractive, available targets for sale, are a big part of the holdup.
"U.S. strategics have been quite restrained" in making acquisitions in China, says Michael Gisser, the Beijing-based head of the Asia-Pacific practice of Skadden, Arps, Slate, Meagher & Flom LLP. "It's almost unnatural how little M&A has been going into China versus what the flows should be as an economic matter. I think that's going to change significantly in the next five years, with deals to be announced this year becoming rapidly more impressive in size and significance."
Since 2008, financial institutions and PE firms have dominated U.S. acquisitions in China. (See chart.) "Private equity is naturally better at dealing with risk," says one deal professional. By contrast, strategic M&A executives worry about championing risky deals, only to see them fail.
"If you're the one sponsoring a deal at your company and it doesn't work out, your career might be over," the deal professional adds. "So every public failure can deter 10 to 20 other deals from even getting started."
Among the biggest risks when making acquisitions in China is dealing with the country's regulators. One U.S. corporate M&A executive who worked on a multibillion-dollar acquisition last year involving the Chinese market recalls a conversation with China's Ministry of Commerce, or Mofcom, the country's merger control agency. "They said, 'We're concerned about your size.' We had to try and steer the discussion back to competition," the executive recalls. "Our position is that it's all about market share, not your size. They have a different yardstick in how they're measuring. They're in a learning process, and it's really opaque. It's going to take time."
|Slow boat to China|
|Top U.S. acquirers in China M&A since 2008|
|Rank||Acquirer||Deal value ($M)||No. of deals|
|1||Bank of America Corp.||$8,922||2|
|3||Capital Group Cos.||1,629||1|
|4||Goldman Sachs Group Inc.||1,553||10|
|5||Joy Global Inc.||1,445||2|
|10||Yum! Brands Inc.||684||4|
That means U.S. companies remain on a steep learning curve, too. "We're going back and retesting our advisers so we're sure we're being represented by the best people," the M&A executive says. "We not only want to have attorneys that come up with the best arguments, but also those that have the best relationships with those in Mofcom and elsewhere."
After years of forecasting a big uptick in China-bound M&A, advisers say 2012 could be the start of a turning point as China looks to attract more foreign capital. The country's market for initial public offerings has struggled, while its privately owned companies have been gaining critical mass, making them ripe for potential acquisitions down the road.
"More private Chinese companies are coming onto the market, and there is increased clarity about regulations," Gisser says. Others agree.
"State-owned enterprises are being cued up. We're going to see the rise of a seller's market in China," says Paul Louie, managing director of Cascadia Capital LLC in Seattle, where he is spearheading the firm's investing activities in China.
"I've been talking to friends of mine who have been making investments in China, and they're not going to just rely on the country's three stock markets to have a liquidity event," he says. "Venture capital and private equity groups are being engaged to talk with banks and pursue trade sales with Chinese and non-Chinese companies."
Louie also anticipates more Chinese companies buying up U.S. assets, especially in manufacturing. So far this year, China has purchased $2.5 billion worth of U.S. assets in five transactions, making it the second most active acquiring country here. That compares with the $3.5 billion China spent for all of 2011, according to Dealogic.
Some suggest this could be good news for U.S. buyers. "As Chinese companies do more acquisitions here, they may be more welcoming of U.S. and European [acquisitions] in China," says Frank Aquila, an M&A partner at Sullivan & Cromwell LLP in New York.
That won't happen overnight, which is probably just as well, considering that U.S. CEOs are still learning to decode China's rules and opportunities. In the meantime, those hungry for more China M&A activity can find some reassurance in all those surveys where U.S. CEOs continue to tick off the China-bound boxes.