In this undated photo, a technician of China Guodian Corp checks facilities in Lanzhou, capital of China’s Gansu province. (PHOTO / XINHUA)
HONG KONG – Merger and acquisition activity on the Chinese mainland is expected to pick up this year, driven by a strong economy and mainland firms’ strategic need to expand abroad.
Mainland M&A deals shifted to a slower gear last year, falling 11 percent to $671 billion from the record-high value of $753.5 billion recorded in 2016. Outbound investment slowed as regulations tightened, accounting firm PricewaterhouseCoopers said in a report.
Despite liquidity issues a handful of mainland conglomerates face, there is no funding shortfall for M&A activities.
Christopher Chan, Advisory partner, PwC China and Hong Kong
Many of the most acquisitive firms on the mainland curbed their buying sprees as liquidity pressure grew. Conglomerate HNA Group Chairman Chen Feng admitted in an earlier interview with Reuters that the company faces a liquidity problem. Leading real-estate firm Dalian Wanda Commercial Properties is also selling off most of its global hotel and development projects as debt comes due.
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“The government is concerned some of the acquisitions are not rational, in particular those which are financed by debt might eventually roll over to the banking sector, this process of very aggressive acquisition financed by high level of leverage will definitely be discouraged,” said David Brown, transaction services leader for PwC mainland and Hong Kong.
The State Council rolled out new rules on foreign investment in August last year, restricting “irrational acquisitions” such as property, hotels, sports clubs and entertainment firms, while encouraging deals aligned with the Belt and Road Initiative and those which enhance the country’s technical standards. Brown believed this clarification of rules will result in a more orderly cross-broader M&A scene this year.
Technology and industrial products remained the most active sectors last year and there was a significant increase in deals in B&R countries, the report finds. PwC believed the trend would continue as mainland companies’ strategic need to acquire technologies and advanced industrial know-how would be the primary driving force in M&A activities.
Despite liquidity issues a handful of mainland conglomerates face, there is no funding shortfall for M&A activities. On the contrary, fast-growing wealth in the mainland would prompt outbound M&As to resume their growth trend and perhaps exceed record levels seen in 2016, said Christopher Chan, advisory partner for PwC China and Hong Kong.
The self-regulated Asset Management Association of China said assets under management by private equity funds reached $1.5 trillion at the end of last year – a nearly sevenfold increase over the past three years.
Chan said apart from fund-raising by traditional private-equity funds, PwC saw an increasing number of private conglomerates’ investment arms, State-owned enterprise-backed funds or government-backed funds – “big asset management” entities with unprecedented amounts of capital in play – also eyeing potential M&A opportunities said Chan.
The market saw and increase in exit activity last year, mostly in initial public offering and trade-sale exits, the report finds.
There were 132 PE or venture capital-backed exit IPOs in Shenzhen and 122 of such IPOs in Shanghai last year. Chan believed the growth of M&A activity will lend extra help to the stock market, but Shenzhen and Shanghai will remain favored venues over Hong Kong because of higher valuations.
