In the past I have examined and explained how the legal framework concerning M&A is organized here in China, but I never mentioned what is the situation of the Chinese outward foreign direct investment in the form of M&A. So, today this entry is dedicated to this important theme.
In fact it is necessary to underline that from 2008 to 2011, Chinese companies’ outward foreign direct investment in (OFDI) the form of M&As of totaled $106.3 billion, representing an annualized growth of 44 percent. This is also because the value of the local currency makes these acquisitions for Chinese cheaper than before. In 2011 alone, OFDI in the form of M&As amounted to $27.2 billion, accounting for 37 percent of the total OFDI that year Mining, manufacturing and power generation are among the most favored se
cto
rs for Chinese investors. Chinese outbound mergers and acquisitions activity is expected to increase partly supported by the continued implementation of the country’s 12th Five-Year Plan (2011-15). (The goals of the Chinese government on the different sectors are explained exhaustively here:
http://www.china-greentech.com/node/1666
).
Despite the fact that the Chinese economy is undergoing a recalibration, as it looks to move away from an export-led growth model toward a model based on domestic consumption, industry practitioners from across the world expect Chinese overseas investments to continue to grow.
In particular, outbound mergers and acquisition deals by Chinese companies are expected to increase because with the economic crisis in the West there is plenty of High-quality assets available at a lower price. In fact Outbound merger and acquisition transaction by Chinese companies are expected to increase due to the favorable
momentum
of the Chinese currency also. (On the appreciation of the RMB, please read this entry:
http://blawg.lehmanlaw.com/wordpress/?p=1825
).
It is a matter of fact that due to the eurozone debt crisis, many high-quality assets have became available in Europe at very competitive valuations, so Chinese companies have been active in large-scale M&A transactions since 2011.
But what are the main sectors interested by this new trend? Well, the main se
cto
rs for M&A activity are expected to be energy, engineering machinery and infrastructure, which require significant funds and policy support. Chinese companies in these sectors are expected to increase their M&A activity. China is home to a number of industries that turn to inorganic growth abroad. Yet, none do so as obviously and as frequently as the energy and resource sectors. In order to satisfy China’s extensive energy needs, energy and resources corporate are active buyers. This is due to a shortfall in domestic production and China’s turn away from coal to stymie pollution. Energy & resources deals accounted for around a third of deal volume and two-thirds of value in 2012. In absolute terms, the sector totaled 48 outbound transactions in 2012, down 8% from 2011. The sector’s value was also somewhat depressed, amounting to $39.6bn, an 11% drop from 2011. This is likely due to many of China’s state-owned oil and gas operations – some of the sector’s most active acquirers posting falling profits in 2012.
The financial services sector too forms an increasingly significant proportion of Chinese outbound M&A, growing its share of value from 11% in 2007 through 2011 to 12% in 2012 and 2013 YTD, although it dropped from 7% to 5% of volume over the same period. A generator of high-value activity is beleaguered financial institutions from developed markets disposing of assets to pay down debt, with opportunistic Chinese buyers eyeing bargains. Meanwhile, North America is considered the most attractive target for potential deals in the technology, media and telecommunications sectors, as well as for real estate acquisitions by Chinese buyers. From 2005 to the third quarter of 2012, around 41 percent of all outbound technology, media and telecom deals were to buy North American targets. Chinese companies are also interested in buying life sciences and healthcare assets in North America and Europe to complement existing products or to allow them to move into new product areas.
But you might ask who are the main actors in these transactions involving Chinese investors?
The answer is easy. The main actors are usually State-owned enterprises, this makes the trade value of these deals extremely considerable. M&A deals by Chinese companies linked to their own industry sector are also becoming increasingly popular in China.
It is also necessary to pose the following question: what are the Regional prospectives for a Chinese company to expand their presence abroad?
In this case we have to answer as follows: Although M&A with regional neighbours is important to many Chinese buyers’ expansion plans, far-flung target markets, including Canada, the USA and the UK are among the most active. This may be down to a scarcity of quality targets in the Asia-Pacific, or an effect of the ample opportunities borne by the crisis in Europe and North America, and the cache (both in terms of profits and brand equity) that often comes with acquiring businesses from these countries. Among target markets, Canada stands out for its concentration of high value deals. This is largely due to a handful of large-cap energy and mining transactions, boosting Canada’s overall value to US$20.9bn, despite a meagre 11 deals. Canada’s strong value figures were undoubtedly boosted by the largest-ever acquisition with a Chinese outbound acquirer, when China National Offshore Oil Corporation (CNOOC) – majority owned by the Chinese government – purchased Canada-based Nexen in 2012. This deal follows CNOOC’s takeover of American Unocal Oil Company blocked by the Securities and Exchange Commission in 2005.
It seems that this trend, i.e. investing abroad through M&A, will continue in the future. In fact,
it looks unlikely that strong Chinese outbound growth will abate any time soon. There are several encouraging signs that point to continued M&A in the near future. For starters, attitudes toward takeovers by Chinese companies are changing.
Some developed-market countries were initially put off by Chinese acquirers, particularly those under full or partial state ownership. This trend is particularly evident in the energy sector, with oil giants such as Sinopec, China National Offshore Oil Corporation (CNOOC), the CNPC and PetroChina actively pursuing outbound acquisitions.
However, the point is that Chinese investments abroad not only are growing, but they are also becoming more important for foreign businesses.
It seems that the world economy needs Chinese investments to recover completely from the recent crisis, however one fact must be remembered: to grasp the full potential of an investment structured by a Chinese entity, the foreign counterpart should at least try to become more familiar with Chinese culture and the way of doing business in China to be sure to be effective (
http://blawg.lehmanlaw.com/wordpress/?p=1671
). Remember differences in culture if not completely understood might cause difficulties to the smooth development of all sort of investment and business adventure.
Cristiano Rizzi