Despite the global economy slowing to a standstill, China is still bustling with merger talk as Asia's largest M&A market. This year alone has featured several high-profile deals such as China Petroleum & Chemical Corp.'s $7.2 billion acquisition of Swiss-Canadian independent Addax Petroleum Corp. and China Minmetals Corp.'s $1.2 billion takeover of Australian miner Oz Minerals Ltd. More deals, often smaller in size and nonresource related, are taking place in high-growth sectors such as IT, logistics, healthcare and cleantech.
The recent flurry of investments in these higher value-added sectors, both domestically and abroad, signals the beginning of a powerful trend that will dominate the future of the Chinese M&A landscape. Many Chinese companies are sitting on large cash balances. They have the ambition, scale and potential to buy out foreign assets and become the new global challengers.
According to the Ministry of Commerce, or Mofcom, total outbound investments in 2008 increased twofold, to $52.2 billion. The upward trend seems to be on track this year with an outbound volume increase of 37.6% year-over-year during the second quarter.
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There are two main drivers for the recent boom in outbound M&A in China. One is timing: The global financial crisis has led to a significant discounting in foreign assets, particularly in the U.S., where current valuation multiples make U.S. companies more affordable.
The second and perhaps more interesting reason is China's changing attitude toward business expansion. Chinese companies no longer want to just produce cutting-edge goods; they want to create and own the intellectual property and know-how in order to shed the image of being domestic original equipment manufacturers. Foreign acquisition is the quickest way to upgrade.
Chinese management has also become better prepared to take on the task of global acquisition by leveraging the influx of foreign talent into China. Since the crisis began, a record number of professionals worldwide have migrated to China. A recent job fair in Beijing hosted by Chinajob.com attracted 1,300 foreigners, more than double that of the year before.
Though inbound investments have experienced a sharp drop since the crisis began, recent numbers indicate a hopeful rebound. Mofcom reported that inbound M&A deals reached $1.03 billion in the first half of 2009. The figure is a decrease of 1.4% from last year but represents a growth of 0.7% to 2.4% as a proportion of total foreign investments into China.
On the industry level, value-added sectors occupy a greater portion of foreign investments than before, in line with the pattern that we have seen in outbound M&A. According to SmithStreetSolutions' analysis of M&A trends over the past few years, the biggest change occurred in the information technology industry, where M&A activity was barely existent in 2004 but now represents more than 10% of all inbound dollars. SmithStreetSolutions projects that the information technology outsourcing, or ITO, sector will grow at a compounded annual growth rate of 22.3% up to 2011 and will experience a surge in merger activities as larger firms seek to expand client and product offerings by acquiring smaller and more specialized firms.
As China continues to open up its economy, new policies have been implemented to make it easier for cross-border M&A. Following the announcement of China's fiscal stimulus package, China Banking Regulatory Commission overturned a long-standing restriction on the granting of bank loans for equity investments in China. The new regulations also attempt to clarify and streamline the approval process for acquisitions. Some argue that the regulations have made M&A in China more complex and unwieldy, citing the government's rejection of Coca-Cola Co.'s bid for juicemaker China Huiyuan Juice Group Ltd. based on the recently instated antimonopoly law. In our view, the government is taking a careful, hands-on approach to ensure that investments are made strategically and in line with long-term goals. With the exception of deals involving state-owned enterprises or industry leaders, dealmaking should be easier, particularly for smaller ones that can stay off Beijing's radar.
With a slew of new policies supporting outbound investments, we will likely witness many domestic companies rising to global status. As a matter of fact, China already ranks second (after the U.S.) by total market capitalization in a list of Top 500 Global Companies for 2009 released by the Financial Times. Continuing with the trend, future M&A transactions should reflect this upgrading of the Chinese economy.
Franklin Yao is the CEO of SmithStreetSolutions.
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