Challenges Remain in Chinese M&A Market
A recent flurry of approved deals with foreign buyers certainly indicates that the Chinese market is open to foreign investment. However, overseas firms thinking that the completion of acquisition or merger deals in China is a mere formality need to be prepared to face some stubborn obstacles that would not appear elsewhere.
After years of delays, punctuated with periods of intense pressure from the UK government, Chinese authorities finally approved the purchase of spirit manufacturer Swellfun by British drinks giant Diageo in early July 2011. The deal is reported to have finally gone through on the agreement that Diageo would divest one of Swellfun’s top brands, Quanxing. Analysts agree that Diageo demonstrated the necessary patience and willingness to complete the process by the book and with respect for Chinese regulators.
This July has also seen the approval of a huge deal giving Nestle a 60 per cent controlling stake in Chinese confectioner Hsu Fu Chi. Does this wave of activity signal a new openness in China to foreign investment after several years of simmering protectionism? The answer, from a long-term perspective, could be yes, but foreign firms may find themselves jumping through hoops to get there.
Recent figures from Dealogic show that there was just $42.4 billion of inbound M&A deals in China in 2010, which was down from levels seen before the financial crisis. And it doesn’t look positive for outbound M&A deals by Chinese firms either, with total M&A activity for Chinese firms totaling just $46.3 billion in the past year, down from over $53 billion the year before.
Although the Diageo and Nestle deals do indicate an improvement, analysts believe this will be short-lived as protectionism will take over again in preparation for a change in Chinese leadership in 2012. A Shanghai-based investment banker speaking to UK newspaper The Telegraph explained, "Difficult decisions are going to be delayed until 2013, whether in M&A or even in the number of foreign films allowed at the cinema.
“Leaders are changing and either people are jockeying for a position, or they are keeping their head below the parapet in case the new leader has different ideas," he added.
Although this cautious approach to major international deals is understandable in the run-up to a leadership change, the Chinese regulators have very strict limitations and rules over both a deal’s value and the potential level of its profile, regardless of the timing. "If the deal is over $300m, the central government has to rule on it, rather than the regional government,” explained the banker. He added that deals involving high-profile brands are also likely to alert the attention of the authorities.
Despite this trend for caution, the official stance from the Chinese government is one that welcomes, if not encourages, foreign M&As. A spokesman for the Ministry of Commerce, Yao Jian, said, “We think mergers and acquisitions by foreign-invested enterprises will become a major trend in China.” So with the Communist Party keen to stress that it is open to deals with foreign firms, the long-term future of the Chinese M&A market does look more promising.
UBS’s head of investment banking for Asia, David Chin, has explained that an “economically challenging” phase for China could see the country embrace more foreign deals. On the other hand, as more Chinese firms start expanding overseas, this too could increase the pressure on the government to open the country to foreign M&A deals.
The message for any business looking to move into the Chinese market through mergers or acquisitions in the future is loud and clear - the road ahead will be littered with challenges, so a clear strategy and approach to due diligence, HR matters and negotiations is essential, as well as a considerable amount of patience.