Market Spotlight: Greater China Deal Momentum

By Robert Torio, Content Marketing Manager, APAC

China’s economy expanded by 4.9% year on year in Q3 2020, with industrial growth driving the country’s recovery from the COVID-19 pandemic. In September alone, industrial production rose 6.9% and consumer spending also appears to be bouncing back strongly, with retail sales up 3.3% over the month.

This resurgence reflects the Chinese government’s pandemic response. From a public health perspective, China’s disciplined lockdowns from January onwards rapidly brought COVID-19 cases under control. Since then, the government has kept case numbers low through further interventions and avoided a second wave. Economically, China’s industrial boom was incited and maintained by state support.

According to the Deal Drivers APAC Q3 2020 report published by Datasite and Mergermarket, the 3^rd quarter of last year saw 504 M&A transactions worth a combined US$192.9bn in Greater China – Taiwan, Hong Kong, and Macau, also included in this count, have successfully managed their COVID-19 exposures. This represents a marked improvement on the Q2 figures of 485 deals worth US$84.2bn. Indeed, the recovery in Greater China M&A has been so strong that Q3 2020 saw more activity in both value and volume terms than the same period in 2019.

Upbeat mood in a resurgent APAC, led by China M&A activity

As Mainland China managed to achieve a V-shape economic recovery post Covid-19, the burst activities of M&As since the second half of last year help recorded a 52.6% full-year increase compared to 2019.

Deal-making in the mainland in 2020 alone, mounted 56.5% year-on-year to US$463.9bn, while Hong Kong M&A activity increased by 0.7% year-on-year to US$22bn over the same period.

At the recent webinar hosted by Datasite and Mergermarket, Greater China Deal Momentum: Boosting cross-border deals in 2021, the expert panel lead by Yiqing Wang, China Editor and Head of APAC Editorial Operations at Mergermarke,t discussed the impact of Beijing’s “dual circulation” strategy, domestic and cross-border deal drivers, as well as capital market trends including SPACs, IPOs, and more.

PE and corporate activities to drive M&A in 2021

Like M&A generally, private equity activity in APAC also saw significant disruption early in 2020, according to the Deal Drivers APAC FY 2020 report. Buyouts plummeted in Q1, however, sentiment picked up in Q2, and, by the end of the year, aggregate buyout value had reached nearly US$121bn, up 10% year on year.

We asked the dealmakers what will drive M&A market activity the most this year, and almost 40% expect corporate carve-outs, divestitures, or restructurings to drive deal activity, while over a third believe high levels of dry powder and PE activity will dominate.

Lei Li, Managing Director at Citi, noted that while you will see different dynamics and drivers for deal flow, this year will be a great opportunity for both corporates and sponsors to find their sweet spot. She added that sponsors would be eager to either acquire or exit, due to low interest rates and high market valuations.

Keys to M&A success in 2021

After a year shaped by the first major, deadly pandemic in more than a century, the mood for the rest of the year is increasingly upbeat for dealmakers across APAC. The region has logged a sharp rebound in consumer confidence and bears a positive GDP outlook, while the prospect of mass vaccinations signals a hopeful return to normality.

According to Mergermarket’s forward-looking APAC heat chart, which illustrates the distribution of ‘companies for sale’ stories on the Mergermarket intelligence tool, industrials & chemicals (I&C) is the sector in which dealmakers should expect to see the most activity, followed closely by technology, media, and telecom (TMT). Unsurprisingly, Greater China accounted for the lion’s share of this activity, contributing more than half of the stories.

More than 40% of webinar attendees said strategy, as well as identifying and screening targets will be the most important factors to ensure deal success. Meanwhile, over 20% believe the key would be the ability to negotiate and close deals quickly and virtually.

Edward Freeman, Partner at Freshfields Bruckhaus Deringer, agreed that screening targets is critical given travel and social distancing restrictions. He noted that the ability to deploy people in different jurisdictions and having existing relationships or expertise within a target sector provides an advantage to get deals done despite physical restrictions.

Raymond Goh,  Group General Counsel, International, China Tourism Group Corporation Limited, noted that it depends on what acquirers are looking for, whether it’s a complementary business in the same sector or a different sector. He added that the ability to negotiate and close deals quickly and virtually would be a huge advantage given the high liquidity and a large amount of dry powder just waiting for the right opportunity.

Technology and digitization to help bridge gaps in M&A processes

Technologies being utilized by dealmakers to address various challenges – from preparing for deals and marketing assets to the absence of onsite due diligence and in-person management/stakeholder meetings.

Almost half of our webinar audience believe due diligence – the most time-consuming phase – could be enhanced the most by technologies and digitization.

Jacey Paik, Datasite’s Co-Head of Greater China and Head of South Korea, noted that the pandemic has highlighted two critical success factors in dealmaking – preparedness and agility.

She explained that the ability to move quickly is key to running deals properly and closing deals successfully, which is why the technologies and infrastructure to collaborate and conduct due diligence remotely, as well as anticipate gaps and needs in advance will be crucial.

And although technology cannot fulfill or replace the human element and face-to-face aspects of deal-making entirely, it has the potential to transform key areas of M&A processes and may even transform the process entirely.