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Mergers losing steam in China

By Hu Yuanyuan (China Daily)
Updated: 2008-12-17 08:08

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China's deal-making spree has witnessed significant retraction from July to November, with a nearly 47 percent decline in merger and acquisition deals, a report from accounting firm PricewaterhouseCoopers said yesterday.

Only 543 M&A deals have been announced in this period despite a 14 percent growth in the first six months, when over 920 deals worth $46 billion were transacted.

The accounting firm said it expects the overall M&A activity in China to remain slow in the first half of 2009 before a pick-up in the second half as pricing expectations align.

"M&A deals fell dramatically in the second half of 2008, on compounding domestic issues and the global economic crunch," said Xie Tao, PricewaterhouseCoopers Transactions Partner in Beijing.

Domestic factors like regulatory policies to deal with high inflation, interest rate hikes, development of new labor laws, increasing commodity prices, and the plummeting stock market affected sentiment. This was followed by the effects of the global economic crisis hitting China, Xie said.

Despite the drop in activity, manufacturing remains the most active sector by number of deals, while real estate is the biggest sector by deal value, said the report.

Outbound deal volume fell 29 percent in the second half of the year, with only 32 transactions.

"Chinese companies still have money and government support to invest abroad and are now simply putting their activities on hold until the overall global economic conditions become less volatile," said Xie.

"Interest from Chinese companies in overseas acquisitions remains high, and more deals should be executed sometime in 2009," he said.

Xie said he believed that the general economic conditions would gradually improve in China, as it is likely to recover faster than the rest of the world.

As in the previous couple of years, the main industries for Chinese acquisitions abroad were still mining and financial services, with 22 and 9 deals transacted in 2008. Deals were also clinched in hi-tech industries like medical equipment, hardware, software and biotechnology.

"This reflects the increased level of maturity of the Chinese economy and shifting of China's focus to other industries that can add value to the country's economic growth," said Xie.

Strategic buyers are currently waiting for conditions to improve, and are likely to execute deals in the second half of 2009, said Xie.

While planning their acquisitions, buyers are also waiting to see whether things turn around and are looking to preserve cash to manage their existing operations through the economic downturn.

Private equity buyers with cash for acquisitions will have buying opportunities as valuations decrease and alternative sources of capital dry up. But with sellers reluctant to sell in a declining market, there could be a "valuation gap" that needs to narrow before PE activity can pick up again, said Xie.