China passes US in out­bound M&A

China Daily (USA) - - FRONT PAGE - By PAUL WELITZKIN in New York paulwelitzkin@chi­nadai­lyusa.com

$173.9 bn Value of Chi­nese M&As in first nine months of 2016

China has sur­passed the US as the largest source of out­bound merg­ers-and-ac­qui­si­tion ac­tiv­ity as a built-up main­land looks for other in­vest­ment op­por­tu­ni­ties over­seas.

Ac­cord­ing to Dealogic, in the first nine months of the year the to­tal value of merg­ers and ac­qui­si­tions (M&A) by Chi­nese com­pa­nies jumped 68 per cent year-on-year to $173.9 bil­lion. It was the first time China has done more deals than the US. Dealogic said the US had been the top cross-bor­der ac­quirer since 2008.

An­a­lysts said a slow­down in do­mes­tic growth due to a main­land econ­omy that is em­pha­siz­ing ser­vices and con­sump­tion over man­u­fac­tur­ing ex­ports, and a de­pre­ci­at­ing cur­rency that could make fu­ture deals more ex­pen­sive are help­ing to spur the Chi­nese shop­ping spree.

“China’s out­bound M&A ac­tiv­ity will reach a new high this year be­cause there are di­min­ish­ing in­vest­ment op­por­tu­ni­ties in the home mar­ket,” com­mented David Dol­lar, a se­nior fel­low at the Brook­ings In­sti­tu­tion’s John L Thorn­ton China Cen­ter in Wash­ing­ton. “China has built up ex­cess ca­pac­ity in a wide range of sec­tors so that prof­itabil­ity has dropped and new in­vest­ment op­por­tu­ni­ties have shrunk.”

Jian Yang, direc­tor of the Cen­ter for China Fi­nan­cial Re­search at the Univer­sity of Colorado Den­ver Busi­ness School, noted in an email that the “Chi­nese govern­ment makes very con­scious ef­forts to pro­mote out­bound M&A ac­tiv­i­ties by Chi­nese com­pa­nies, and its policy plays a cru­cial role in this re­gard.”

No­table Chi­nese ac­qui­si­tions this year in­clude China Na­tional Chem­i­cal Corp’s pur­chase of Swiss-based Syn­genta AG for about $43 bil­lion. Ear­lier, China Na­tional Chem­i­cal also said it would buy Ger­man ma­chine maker KraussMaf­fei Group for $1 bil­lion. A unit of alu­minum maker China Zhong­wang Hold­ings Ltd agreed to ac­quire USbased Aleris Corp in a deal val­ued at about $2.33 bil­lion.

Michael DeFranco, chair­man of the Baker & McKen­zie LLP law firm’s global M&A prac­tice, said in an email that the ma­jor­ity of Chi­nese M&A in the US this year is in strate­gic in­vest­ments — “real econ­omy firms in­vest­ing in their core ar­eas of busi­ness whether it is con­sumer goods, en­ter­tain­ment or au­to­mo­tive”.

“I think we will see the same broad mix of sec­tors with a real econ­omy fo­cus of tech­nol­ogy, leisure, au­to­mo­tive and ma­te­ri­als,” he said of pos­si­ble Chi­nese US ac­qui­si­tion tar­gets in 2017.

“In 2017, we can expect con­tin­ued strong out­bound M&A ac­tiv­ity by Chi­nese firms and gen­er­ally a con­tin­u­a­tion of several tar­get sec­tors for Chi­nese ac­quir­ers,” said Yang. “Tech­nol­ogy and fi­nan­cial ser­vices prob­a­bly will con­tinue to be among the most fa­vored sec­tors for out­bound ac­qui­si­tions by Chi­nese com­pa­nies. It re­mains to be seen whether the hos­pi­tal­ity in­dus­try will still be a fa­vorite tar­get in 2017.”

The US is one of the big­gest re­cip­i­ents of this in­vest­ment be­cause it is very open and pro­vides at­trac­tive ac­qui­si­tion tar­gets. Many of the Chi­nese firms that are buy­ing for­eign as­sets are State-owned en­ter­prises (SOEs) like China Na­tional Chem­i­cal, and that could pose prob­lems for fu­ture Chi­nese pur­chases es­pe­cially in the US, warned Dol­lar of the Brook­ings In­sti­tu­tion.

“As ev­i­denced in the (US pres­i­den­tial) elec­tion cam­paigns, Amer­i­cans are in­creas­ingly un­happy that China’s state en­ter­prises are mak­ing these pur­chases while China it­self re­mains quite closed,” he said. “US firms can­not go into China and make sim­i­lar pur­chases. It is un­likely that this asym­me­try can last,” he wrote.

Yang said there is a po­ten­tial in­crease in po­lit­i­cal risk in the US that could af­fect some deals, par­tic­u­larly those in the tech­nol­ogy sec­tor, which could fail a na­tional security review from the Com­mit­tee on For­eign In­vest­ment in the US or CFIUS.

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