
China outbound M&A: The smarter money
Despite regulatory curbs on Chinese outbound investment, companies are still interested in M&A opportunities – and they are pursuing less high-profile assets with greater sophistication
Prolific sums of money can have a strange effect on a market. Such was the case in the explosion of China outbound M&A deals in recent years. Many sell-side investment banks saw the outpouring of capital as an opportunity, seeking to bring Chinese buyers into the bidding process purely as to force other participants to put their best bids on the table at the beginning.
“There was a game being played to make sure you always had a Chinese bidder in there, even if you had some doubts about their ability to ultimately execute,” explains Christopher Kelly, head of Asia M&A for law firm White & Case.
This approach left a bad taste in the mouths of market participants who saw it as next to extortion, with bankers putting good assets at risk of being acquired by groups that didn’t really know what they were getting into simply for the sake of driving up the deal price. In some cases, far from making a bidding process more competitive, the strategy would reduce it until the deal became unviable.
A lot of these Western assets have been in the market for a long time, and the fact that they still haven't been sold means that the appetite for them from the Western world is quite limited – Samson Lo
“We’ve had some situations where the Western buyers decide not to engage, because they feel that the Chinese are going to make the bidding process very messy,” says Samson Lo, managing director and head of Asia M&A at UBS. “Then in the end the Chinese drop out as well, and you end up with no buyers.”
Now that era of unrestrained investment seems to have passed. Established Chinese buyers continue to be attracted to overseas assets, but they are more sophisticated in their approach, while a new crop of participants is emerging with better-defined goals for their acquisitions. The M&A market seems set for a new phase of growth based on more measured assessments of target companies’ potential rather than irrational exuberance.
Behind the numbers
The exponential growth in Chinese outbound investment over the last 10 years is unmistakable. Mergermarket data shows 44 overseas deals announced in 2007 for a total of $17 billion. In 2016, the total swelled to 386 transactions worth a combined $208 billion – more than doubling the $92 billion invested the previous year.
The Chinese government’s recent moves aimed at slowing the outflow of foreign currency appear to have placed this overseas push on temporary hold. In the most recent quarter just 81 deals were announced for $14 billion, a sharp drop from the $82 billion in the same quarter last year. However, industry participants say these figures do not tell the whole story.
For example, the China National Chemical Corporation’s $47 billion purchase of Swiss seed and agrochemicals player Syngenta counted for more than half of that $82 billion committed in the first quarter of 2016. Such enormous deals are rare occurrences at any time, and likely to be more so in light of the current challenges around financing. But many say activity at the lower end of the deal scale remains robust.
“There’s still a genuine interest for the Chinese to make outbound investments, and the government is supporting it,” says Lo of UBS. “It’s just that because of the capital controls and the regulatory risk, people are looking at smaller deals these days, because smaller deals are easier to finance.”
Going for smaller deals does not necessarily guarantee success, as shown by the proposed purchase of US-listed money transfer services provider MoneyGram by Ant Financial, the online financial services affiliate of Alibaba Group, in a deal that would value the business at $880 million. The acquisition was announced in January, but a recent $2 billion offer for MoneyGram by US rival Euronet Worldwide has put its completion in doubt.
Market participants say the challenge to Ant Financial’s bid is notable because it highlights a cause of significant skepticism toward Chinese buyers venturing overseas. Euronet’s bid emphasized Ant Financial’s need to gain approval from the Committee on Foreign Investment in the United States (CFIUS), which has been difficult in recent years for technology companies. MoneyGram’s consideration of the rival bid is seen as a sign that its management is wary of the chance of trouble with a Chinese bidder.
Whether it is completed or not, the MoneyGram deal illustrates another important shift in the M&A market, away from the previous emphasis on energy, mining and utilities and toward the industrial, technology and financial services sectors. While energy and mining represented the vast majority of capital invested overseas from 2008-2013, this balance abruptly shifted in 2014, and by last year the value of industrials and chemicals purchases alone more than doubled that of energy and mining. Technology deals’ value nearly equaled that of energy and mining as well.
This change in focus is seen to reflect the growing confidence of domestic Chinese companies in a wider variety of sectors – another example is Shandong Ruyi, the textile manufacturer that bought French apparel retailer SMCP Group from KKR last year. These players have come to see themselves as having unique strengths that can benefit an acquisition target just as much as it benefits the parent.
“Because China is a huge market, all these Western companies can benefit from the value increase by expanding their market share in China,” says John Gu, head of private equity for KPMG China. “In addition, this kind of acquisition is consistent with the Chinese government’s policy to encourage Chinese companies to move up the value chain.”
Willing targets
This point of view is increasingly shared among potential target companies, many of which, particularly on the consumer side, are eager for a crack at the Chinese market and unenthusiastic about expanding into smaller, fragmented markets such as Southeast Asia or Europe.
“A lot of these Western assets have been in the market for a long time, and the fact that they still haven’t been sold means that the appetite for them from the Western world is quite limited,” says Lo. “They see these emerging Chinese buyers, and given how many companies there are and that they all have a need to do something significant, maybe a Chinese player can come into the game.”
However, attracting a Chinese buyer does not ensure the target company’s success in penetrating the new market. Industry professionals point out several challenges that typically emerge post-acquisition.
Lin Feng, founder and CEO of advisory firm Dealglobe, points to the reticence of many Chinese owners to get deeply involved in newly purchased companies as an ongoing difficulty that bidders from other markets shed long ago. He contrasts the very hands-on approach of Japanese buyers, who get into the details of a business and start making changes right away with the tendency among Chinese companies to leave the details to management.
“That’s not a completely bad thing for the management team, since it means they have more independence,” Feng adds. He notes, however, that if a Chinese buyer is unable or unwilling to make necessary changes to help a portfolio company compete in China, it negates one of the attractions of such an acquisition.
Ironically, target companies’ perceptions of Chinese buyers do not always agree with this assessment – particularly among management teams that expect buyers to focus on cutting costs. New owners must ensure they don’t scare off the leaders of the companies in which they have invested so much, while still taking the steps to position the target for continued success.
“The ability to run overseas assets once you’ve bought them has not historically been a strong point for Chinese buyers,” says White & Case’s Kelly. “Buyers need to give thought to transition services and incentivizing management teams in the right way to entice them to stick around and run the business under the new owner.”
Market participants say the recent slowdown in outbound M&A could provide a needed respite for Chinese buyers to develop their overseas acquisition strategies in more depth. Better planning for local regulatory hurdles such as CFIUS in the US will increase the chances of deals going through.
Even with increased investor sophistication, however, this unsated appetite for outbound M&A is expected to crystallize in a surge of activity once regulators’ capital controls are lifted. This could happen by the end of the year. Valuations are also likely to remain high because Chinese corporate buyers are working off of different priorities than Western investors.
“Chinese investors are willing to pay higher premiums because they have a different value proposition for those types of deals,” says KPMG’s Gu. “They’re not necessarily looking at the historical performance of the portfolio company; they’re thinking more about expanding the target’s products and services into China, so the value enhancement may not be the same as other buyers.”
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