Given how China nowadays dominates mergers and acquisitions activity in Asia, a bad year for China usually means a subdued year for the region as a whole. But with China's leadership changes out of the way, 2014 saw an uptick in business.
"China went through a leadership transition last year, which made it more difficult for companies to execute deals” Mayooran Elalingam, head of M&A for Asia at Deutsche Bank, said. "But that has changed this year."
So it is no surprise that China is emerging once again as the top market for both inbound and outbound M&A.
A whopping 72.1% of respondents in a poll by FinanceAsia said they now expect to see an increase in the level of outbound M&A from Chinese strategic acquirers. The poll of regional bankers, key investors, commercial lawyers and companies was conducted in partnership with global law firm Clifford Chance; close to half the 172 respondents are managing directors, chief executive officers or partners.
Helping to grease the wheels of deal activity is the Chinese government's move to streamline its approval process for offshore acquisitions. Since May this year, Chinese firms planning to invest less than $1 billion in an overseas company have only needed to register with the National Development and Reform Commission rather than seek prior approval from the authorities.
"With the changes around regulations for overseas M&A, we have seen more activity from Chinese private companies," said John Kim, head of M&A Asia ex-Japan at Goldman Sachs.
According to Dealogic data, China outbound M&A so far this year has risen 19% to $282 billion compared with the same period last year, while China inbound M&A has risen by 21% year-on-year to $200 billion. Judging by the poll results there's more growth to come.
To some extent, the opportunities have changed as the reorganisation of China's lumbering state-owned giants has gathered pace. Sinopec's sale of a 30% stake in its retail unit for $17.4 billion and Cofco group's injection of property assets into Hong Kong-listed Cofco Land are two prime, recent examples of SOEs reshuffling their assets. For investment bankers, that offers up fresh chances to play an advisory and financing role.
"The broader Chinese SOE restructuring will encompass a wide range of deal flow including mergers and asset injections," Kim said. "Some deals will not require advisory but may require financing, such as having to raise equity to fund an asset injection.”
Bringing back expertise
While the key driving force for many Chinese companies going overseas is to pursue global strategies, many are also looking at bringing that expertise back to China. Chinese private equity firm Hony's acquisition of Pizza Express is an example of that, along with Bright Food's acquisition of UK breakfast cereal maker Weetabix.
"For Chinese companies, it is not just about buying brands, know-how and technology to allow them to globalise," said Roger Denny, Head of M&A, Asia Pacific at Clifford Chance. "It is also about bringing those brands and know-how back to China to compete in their home market."
China is a crucial part of Asia's M&A market but increasingly Southeast Asia has attracted investor interest too. In contrast to China, Southeast Asia is a more diversified market and when deal activity in one country slows down, it sometimes picks up in another country. The buyer list is also tilted towards wealthy families, such as Thai tycoons making acquisitions outside of Thailand.
"The second leg of Asian M&A is Southeast Asia," said Deutsche's Elalingam. "Southeast Asia has become a more sustainable and active market, which has surprised some people."
Interest in Indonesia remains keen with 68 of the respondents picking it as either a first, second or third choice as a popular investment destination in the next 18 months.
But equally important is the Philippines where interest has also picked up after the government in July scrapped foreign ownership limits on domestic banks. There has been some foreign investor interest in Philippine banks previously, with private equity firm CVC Capital Partners buying a 15% stake in Rizal Commercial Bank in 2011. According to one M&A banker, though, that interest has accelerated this year.
