U.S. leads pack in acquiring Chinese companies
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More than 250 Chinese companies worth in excess of US$14 billion have been bought by international acquirers over the past year, with the United States, the United Kingdom and Singapore leading the way in establishing a foothold in China's rapidly expanding economy. However, the rate of increase in terms of inward merger and acquisition (M&A) investment into China appears to be static, with regulatory and often cultural issues still providing hurdles, according to new research carried out by Grant Thornton Corporate Finance.
Deal volumes and valuesIn the 12 months to June 30, 2006, a total of 266 international companies (worth US$14 billion) from 41 different countries bought a Chinese company. This is almost exactly the same number as the previous 12 months (268), but represents a 52 percent increase in deal value terms (from US$9 billion to US$14 billion). U.S. companies claim a 26.1 percent market share and completed 62 deals worth a total of US$5.365 billion in the period. The U.K., while strong on value, carried out 6 percent of deals, and Singapore proved strong on both value and number of transactions with US$1.84 billion, or 11 percent of activity. Hong Kong was one of the most active acquirers in the period and carried out 19 percent in deal volume terms.
Stephen Weatherseed, International business partner and China desk head at Grant Thornton UK said: "China's economy is experiencing a rampant expansion. On one hand it is surprising to see such a small cluster of countries taking real advantage of the economic opportunities that investment in China offers. However, the relatively static level of international investment is largely due to the Chinese Government's reform of the stock market during the first half of last year and the introduction of new legislation to foster investor confidence. As a result of this, a number of deals had to be put on hold".
Sector focusIn terms of deal volumes, the Chinese high-technology sector accounted for the highest number of cross-border deal activity (16 percent). This sector was closely followed by the materials (14 percent), industrials (13 percent), financial services and consumer staples sector (both with a 12 percent market share). However, in terms of the highest value deals, the financial services sector proved to be head and shoulders above the rest with a 71 percent market share and with almost US$10 billion worth of international funds pouring into Chinese financial services companies.
"It's attractive for all sectors wanting to invest in China," said Weatherseed. "However, with the average financial services deal being US$322 million, it is clear to see that this is currently where the greatest opportunities for investment lie.
"This trend can be attributed to several factors. Firstly, it has been one of the Chinese Government's key priorities to assist the nation's domestic financial services industry and to internationalise its financial services offering. As a result, Chinese banks are actively bringing in new personnel from all over the world to develop the sector. What's more, it is internationally recognised that China's financial services sector is big news. This means that many of the big investment houses are devising entry strategies into the market and buying stakes in Chinese banks before the market overheats."
Barriers to investment Weatherseed advises that there are still a number of hurdles to be overcome by international companies aspiring to invest in China.
"One of the major hurdles is the country's complex regulatory regime and its multi-faceted tax system," he said. "Any international investment on Chinese soil requires approval from a number of different regulators as well as from a host of different government agencies. Investors should also be mindful of the significant cultural differences that exist and make adequate steps to prepare."
"Further, it is important to remember that the market for M&A in China's booming economy is still in its embryonic stages of development and Government reform can be a slow moving train."