China proving one-sided when it comes to cross-border M&A
China’s outbound M&A and international business expansion is set to grow even stronger in the second half of the year. Meanwhile, the Asian behemoth is building even greater barriers for those looking to participate in inbound deals.
Falling share prices and disappointing income from dollar-based deals in recent months are spurring on Chinese businesses in their pursuit of overseas expansion. After being instructed to sit tight and wait during the worst of the global crisis years, large Chinese firms are now more eager than ever to see what they can do overseas.
M&A analyst, Andrew Thomson, speaking on ABC TV’s Inside Business in Australia, explained, “Any large Chinese State-owned enterprises who have been eager to buy large-scale assets, especially in bulk commodities, have really been told to wait and see for the last couple of years.
“But now…the authorities in Beijing are much more ready to give them permission to make these acquisitions,” he added.
Much of the overseas investment could come from the handful of industry giants who are looking to raise large sums through IPOs in the coming months. Citic Securities is one such business. The financial services firm is hoping that a listing in early October 2011 will allow it to raise some $1.94 billion. It claims that 65 per cent of the money raised will be spent on “establishing international research teams, expanding international sale networks, developing other overseas and cross-border businesses.”
Sinohydro Group, a Beijing-based dam maker, is looking to raise an impressive $2.7 billion from its impending listing. This cash will help it to further expand its international activities, which already involve 261 projects spread over 55 countries.
It’s fair to say that Chinese businesses are among the most ambitious at the moment, when it comes to cross-border M&A. Many of the senior executives running these businesses are younger, more forward thinking people - many of whom have been educated in the West. They are bringing with them a new taste for risk and a healthier attitude to dealmaking. Mr. Thomson explained, “In the past, it was ‘if I bid for something, I have to follow it through, otherwise I’ve lost face.’” He added, “Now it is also ‘if I bid, I want to be successful, but I’m not going to bid to the point that I destroy value.’”
This appetite for overseas expansion and cross-border M&A does not extend, however, to incoming M&A. September 1, 2011 indicated the implementation of China’s National Security Review of Mergers and Acquisitions, which has caused some disquiet among firms hoping to move into the Chinese market.
The full regulations have replaced the temporary regulations on the subject and widened the scope for Chinese authorities to block deals that are perceived to threaten national security. At first glance, the regulations may seem fair and limited in impact to certain sectors like military-industrial and energy. Intense scrutiny is also expected over deals involving firms located near major and sensitive military facilities.”
However, despite the Chinese Ministry of Commerce’s assurances that the new regulations “do not mean a new threshold has been set up for acquisitions and mergers by foreign investors,” prospective dealmakers are still concerned.
One of the main areas of conflict is the fact that the regulations allow major industry trade bodies and competitors to request a national security review of a deal, basically giving influential Chinese firms the green light to block deals that could cause them headaches.
Although the rest of the world is proving to be a welcoming place for swiftly growing Chinese businesses, it could still be a long wait until China fully embraces cross-border M&A activity in both directions.
