• AIBC 2020

Chinese Cross-border M&A Update

With China’s ascent as a global economic and political powerhouse, cross-border M&A activity involving Chinese firms has increasingly been a compelling story in the global M&A landscape, yet remains one mired by troubles both within and beyond the Chinese borders. AIBC 2019’s research team explored this topic in their featured article. One year on, we take a look at what has happened since, the current landscape in cross-border M&A, and the outlook for what is to come in this space.


A brief history



Fig. 1.1

Cross-border M&A activity accessing China has declined progressively since a landmark year in 2016

With China’s “going out” policy push in the early 2010s, outbound M&A activity by Chinese firms soared. This was capped by a landmark year of deal-making in 2016, where Chinese firms announced US$219bn of deals, marking the first time in history where China overtook the US for outbound M&A volume. M&A activity in this space has failed to regain this level of success since then, however, with deal volume booking a decline every year since. Core factors driving this decline encompass considerations both at home, with decisive government regulation in curbing cash outflows and former deal-making champions reeling from the aftereffects of aggressive debt-financed acquisition sprees, and abroad, with enhanced regulation, macroeconomic uncertainty, and political tensions hindering access to core global markets.

2019 – a rocky year


Fig 2.1

Cross-border M&A activity accessing China was subdued in 2019, with deal volume accessing traditional markets like North America and Europe booking steep declines

The slide in cross-border Chinese M&A activity since its 2016 peak continued in 2019, with outbound deal activity plummeting to a 10-year low in what proved to be an extraordinarily rocky year. Cross-border M&A volume by Chinese firms shrank 31% to US$68.6bn, with the number of deals falling 24% to 591.

Deal activity with core global markets in North America and Europe booked particularly steep declines. Persisting political tensions with the US and heavy US-led regulatory scrutiny surrounding deals initiated by or involving Chinese companies – especially within industries considered to hold security value, such as various high-tech sectors – have severely dampened Chinese companies’ access to and interest in foreign assets, while macroeconomic uncertainty in Europe limited deal-making appetite in the region.

This is slightly offset by more encouraging developments in cross-border M&A within Asia, which became the top M&A destination after booking a gain in deal volume. Also of note is enhanced M&A accessing the Latin American market, with deals such as a Chinese consortium’s acquisition of Empresa de Generación Huallaga S.A., which owns one of Peru’s largest hydroelectric power plants. While significant, these developments are ultimately relatively muted, and are insufficient in mitigating a sharp decline overall in Chinese cross-border M&A activity.

The external challenges facing cross-border M&A activity mentioned above are further exacerbated by troubles surrounding past Chinese deal-making champions. Several notable deals earlier in the decade have not performed as expected, while the companies who pursued these deals through aggressive debt-driven financing are now facing the repercussions of their capital allocation decisions. Shandong Ruyi, once dubbed the “LVMH of China” after an acquisition spree of renowned global fashion labels, faced a ratings downgrade over doubts over whether it would be able to meet its bond repayment obligations. HNA Group, a Chinese conglomerate which went on a US$40bn spending spree between 2015 and 2017 (notable purchases include stakes in Deutsche Bank and Hilton), has undergone a painful unwinding of these investments, and is now facing a government takeover and asset sell-off with Covid-19 dealing the final blow for the troubled business.

A look ahead

Going forward, the longer-term outlook for Chinese cross-border deal-making is marked by cautious optimism. The present troubles facing many companies as a result of past M&A pursuits have given relevant stakeholders a good reason to exercise due caution and discretion before pursuing cross-border moves. The broader macroeconomic and regulatory environment remains tense, and the ongoing Covid-19 crisis has further put a significant dampener on deal-making activity. It is of note, however, that with China and its corporations seeing an early stabilisation of and recovery from the Covid-19 crisis, distress and depressed valuations across diverse geographic and industry sectors may present compelling opportunities to acquire foreign assets on the cheap. Looking further ahead, broader tailwinds do also inspire optimism for an eventual turnaround, with the ongoing liberalisation of the Chinese currency and financial markets in particular lending crucial support for the internationalisation of Chinese enterprise.

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