China M&A to have record year

China M&A activity up 168% in the first half and predicted to hit $70 billion for the full year.

Chinese M&A is going to have a record year, according to PricewaterhouseCoopers. The firms says the aggregate value of announced M&A in China and Hong Kong hit $26 billion in the first half - an increase of 168% over the same period last year - and predicts that full year issuance will be $70 billion.

"We believe the second half of this year is going to be very strong based on what we are seeing in China," says Jim Woods, PWC's transaction services partner. Woods acknowledges that some of the $70 billion of predicted activity will result from restructurings and asset injections, but estimates that two thirds will involve companies and stakes changing hands.

The bulk of activity will come from domestic M&A and foreign multinationals buying stakes in Chinese companies, he reckons. "Outbound Chinese M&A is not yet at a significant level," he says. "But the potential deal sizes involving Chinese firms buying abroad are getting bigger."

PWC, which has 11 offices in China and specializes in due diligence services, says that when it talks to companies in Europe and the US, it is always China they ask about. "There is confidence that the long term fundamentals in China offer great opportunities," says Woods. "However, that is not to say that major US and European companies are not aware of the challenges they'll face in China. Unlike in the first wave of investment 15 years ago, multinationals are not rushing in blind."

Matthew Philips, another partner in the transaction services group, forecasts that a lot of activity will be generated in financial services. "Activity continues to be mostly in the banking sector," he says. "There are 120 city commercial banks and many are looking for a foreign investor. Plus the forthcoming IPO of China Construction Bank is likely to be preceded by the sale of a strategic stake to an international bank."

What is also fuelling the M&A trend, says Philips, are stake sales by the State-Owned Asset Supervision & Administration Commission (SASAC). This government department was set up in mid-2003 to manage China's SOEs and oversee their reform. Having spent the first nine months understanding the assets in the portfolio, and making key decisions on strategic direction, SASAC is now being more proactive about divesting stakes. "There are significant number of deals yet to be completed," says Philips. SASAC, he points out, has opened offices in all of China major cities.

Philips believes SASAC will be the key driver of M&A in China - based on the decisions it takes as to which industries are strategic (ie requiring government ownership) and which can be sold.

Woods says the good news for M&A advisors is that thanks to the rising volume of work, the resources of the industry are being stretched quite thin. And as with any situation where resources become constrained, that will mean that investment banking advisory fees will likely rise in China.

PWC says that total Asia-Pacific M&A volumes in the first half of the year were $121 billion - including Japan - which means that Hong Kong and China made up 21.5% of the total. Woods believes this percentage can only rise in the coming years.