Overseas M&A deals gather momentum

Rising valuations will not deter firms from outbound moves

Chinese overseas mergers and acquisitions reached a new high in the first half of the year, with deals getting bigger in size and moving up on the value chain, global accounting firm Deloitte Touche Tohmatsu said in a report released on Oct 15.

M&A activity in China may stay buoyant, though economic improvements in Europe and the United States are expected to push up valuations, the report said. The two regions will be the main targets for Chinese buyers due to the rising demand from Chinese consumers for better products.

Chinese companies closed 98 deals worth $35.3 billion in the January-June period, compared with 97 transactions totaling $22.9 billion in the same period last year. Mega deals worth more than $1 billion accounted for a record high of 13 percent of total deals this year, as Chinese investors are more confident about overseas moves. Deals under $100 million accounted for 48.1 percent, the lowest level since 2005.

"With the US, European and Chinese economies having shown signs of growth over 2013 to date, it should be no surprise that Chinese companies are becoming more optimistic," says Stanley Lah, a partner handling M&A transaction services at Deloitte China. "Growing demand for branded quality products from Chinese consumers has moved outbound investors up the value chain as well, leading to higher deal value."

Lah adds that the rising valuations won't deter Chinese companies as price tags are a relatively low concern for Chinese investors.

More than half of the 98 deals were in the energy, resources and consumer sectors. A total of 52 deals - worth $29.1 billion - took place in the two sectors in the first half, up from 49 transactions totaling $17 billion in the first half of last year.

Around three-quarters of the respondents to the Deloitte survey, which polled 100 Chinese "M&A practitioners", says that they're looking to buy overseas assets sometime over the next three years. Ninety percent says that the aim of their outbound M&A activities would be to acquire cutting-edge technology, 86 percent to secure resources and 86 percent to grow their overseas market share.

He Bangjing, president of the China Appraisal Society, stresses the importance of target appraisal due to the Chinese companies' intensifying outbound M&A activities.

Adequate transnational appraisal work would help Chinese companies to better identify high-potential assets, and mitigate risks, she says. That work, however, is highly challenging, and He encourages companies to seek professional help to get quality appraisals.

"Conducting appraisals overseas is particularly difficult because the indicators and policies are drastically different from the conventional practices at home," says Liu Ping, vice-president of the China Appraisal Society.

Overseas M&A deals have presented significant challenges in technical issues, such as the rating of risks, the estimation of the rate of return, and the value of control rights, particularly when the deals involve more than two countries, Liu says.

Contact the writers at gaochangxin@chinadaily.com.cn and yangziman@chinadaily.com.cn.

(China Daily Africa Weekly 10/18/2013 page22)