As the US-China trade war rumbles on, a more protectionist mood seems to have spread to Europe as well, with a brace of potential Chinese acquisitions rebuffed by Germany in the past month.
Going forward, it seems reasonable to assume that wannabe Chinese acquirers of developed market assets are likely to encounter greater scrutiny – particularly in sensitive sectors with national security ramifications but on all larger deals generally.
That could continue to drag on Chinese mergers and acquisitions over the rest of the year, said David Brown, PwC's China and Hong Kong transaction services leader, at a presentation on Tuesday by the consultancy firm of its ‘M&A 2018 Mid-Year Review and Outlook’ report.
According to the report, China plus Hong Kong and Macau spent a combined $41.2 billion overseas via 315 outbound M&As in the first half of 2018, down from $54.9 billion and 376 transactions in the second half of 2017.
“The outbound M&A has declined for four consecutive half-year periods since the record highs [seen] in 2016,” Brown said.
And as the taste for greater protectionism spreads globally, so the chances of big Chinese names bidding for big foreign names in ‘mega deals’ – in key areas such as energy, hi-tech, and food production – grows slimmer.
Brown said that the message coming from the Committee on Foreign Investment in the United States (Cfius) is that, “if you are a Chinese buyer and the deal is big, there is a high probability that it will be blocked.”
“This [is] about the US becoming politically sensitive to China coming in and acquiring the technologies, the know-how, the brands, and bringing it back [to China],” he said, noting how some European countries have also grown sensitive around the subject.
Given the change in mood, another ChemChina-Syngenta-type deal – even for non-US companies – seems unlikely to get clearance anytime soon.
“It will be more difficult for Chinese acquirers to make cross-border transactions in developed markets [over the coming quarters],” Brown said.
CURB YOUR ENTHUSIASM
So how should acquisitive Chinese companies play it, having been encouraged by Beijing to be more outward-looking?
Brown's advice to them is curb your enthusiasm and aim lower because less-sensitive sectors, such as traditional industrial equipment manufacturing, and smaller-sized acquisitions, are likely to face fewer curbs.
Indeed, some evidence of that is already emerging.
Chinese M&A into the US totalled $6 billion in the first half of 2018, broadly similar to what it was in the previous six-month period. However, the number of deals increased to 110 from 98 while the average deal size shrunk to $54.5 million from $61.2 million.
In the future “big dollar transactions will continue to be where the risk lies,” Brown said. “But I do think there will be enough room in sectors that are considered to be not so sensitive, sectors are both apolitical and necessary, which attract less publicity,” Brown concluded.