China International Capital Corp (CICC) is looking to expand its mergers & acquisition franchise abroad to help feed China’s growing appetite for overseas assets, which has seen billions splurged on buying big-name companies.
China’s outbound M&A reached $135 billion in the first half of 2016, already surpassing the record $107 billion for the whole of last year, according to data provider Dealogic. Meanwhile, 401 deals were announced in the first six months of 2016, up from 265 in the same period last year, making it the most active half year on record, Dealogic data shows.
Deep-pocketed Chinese investors are keen to chase global assets, seeking more than just financial returns from investments in fields such as real eatate. They also have a strategic rationale in mind, looking for local market access, branding and high-tech know-how, CICC M&A head Wang Zilong told FinanceAsia in an interview
“The deal number and the deal size keep growing,” he said. “The clients also become more confident when it comes to cross-border M&A. They are more familiar with the local language and market environment.”
Founded in 1995 as China’s first joint-venture investment bank, CICC has in recent years broadened its client base beyond large Chinese state-owned enterprises to privately owned giants in a variety of industries, which are looking to expand worldwide and access new technologies and skillsets through M&A.
To grasp the opportunity provided by the surge in Chinese M&A activity, the Beijing-headquartered bank is expanding its 40-strong M&A team, of whom only 20% are based overseas, notably New York, London and Singapore.
“While our deal value quadrupled from 2013 to 2015, our team only doubled from 20 people to 40, which lags behind [our business expansion],” Wang said. “We need to expand in the US and Europe, the main battlefields of China’s outbound M&A.”
The expansion makes a lot of sense, given last year CICC passed another milestone in China-related M&A, advising on $87.3 billion worth of deals, up from $48 billion in 2014 and $19.4 billion in 2013, according to Dealogic data.
As China’s buying spree continues in 2016, CICC has surged to the top of the country’s M&A league table for the year so far, ahead of Western heavyweights such as Goldman Sachs and UBS. Dealogic data shows it worked on deals worth $103 billion and had a 25.4% market share.
Among its recent landmark deals are ChemChina’s planned $48 billion acquisition of Swiss agrochemicals firm Syngenta, which once completed will be the largest-ever outbound purchase by a Chinese firm, and HNA’s acquisition of Ingram Micro for $6.3 billion, the largest Chinese takeover of an American information technology firm.
CICC also advised on Qingdao Haier’s $5.4 billion acquisition of General Electric’s home appliance unit and Dalian Wanda’s purchase of Legendary Entertainment for $3.5 billion.
In spite of the growing enthusiasm from Chinese investors, Wang said there would be some slowdown in China’s outbound M&A activity in the second half, as Beijing has tightened rules to stem one-off capital outflows, as well as tightening the approval process for A-share-listed companies' M&A deals.
“The foreign exchange issue wouldn’t be easily resolved,” Wang said. “In plain words, it means it would be more troublesome and take longer to conduct the currency swap,” which could cut the size of any deal and make the target firm “uncomfortable”.
“If it takes eight months to complete a deal, the target firm might give up on you and choose the bidder who gives the second highest offer instead” to avoid uncertainty in the execution process, he added.
In the meantime, capital outflow pressures seem to have eased somewhat. The net capital outflows dropped to $123 billion in the first quarter, from $163 billion in the third quarter and $166 billion in the last quarter of last year, according to the State Administration of Foreign Exchange (Safe).
Besides, the Chinese securities regulator in late June also tightened rules on A-share listed firms’ M&A activity - in particular those which have previously failed to deliver promised financial returns after conducting acquisitions.
The move is the latest in a string of crackdowns on market speculation practices through M&A or restructuring that are intended to boost stock prices and seek arbitrage opportunities based on the gap between domestic and overseas stock market valuations.
“Many cross-border M&A deals took place because people planned to inject the [acquired] assets into their A-share listed entities. Such practices will be [further] regulated,” said Wang of CICC.
Not surprisingly, Chinese companies, like their Western counterparts, are increasingly open to offering - and sometimes paying - high reverse termination fees, generally known as break-up fees, to reassure potential overseas acquisition targets about regulatory hurdles.
While the usual break-up fee was about 1% of a deal’s value, Wang says it has increased to 3% to 5% globally. He said Haier agreed to pay up to 7% in its $5.4 billion acquisition of General Electric’s home appliance unit.
As for CICC, besides further strengthening its M&A franchise, it is also keen to broaden its product offering in areas such as fixed income, currencies, and commodities as well as equity derivatives. Last year, it poached a team of 10 fixed income bankers from Standard Chartered, according to one person familiar with the matter.
Aside from the more traditional lines of investment banking, CICC has been a major player in private placements, helping fast-growing companies tap capital sources without venturing into volatile public markets. It was one of the lead advisers on a $4.5 billion private funding round for Ant Financial, Alibaba’s financial affiliate.
Last year, CICC’s gross revenues jumped by 54.4% year-on-year to Rmb9.5 billion ($1.5 billion). Net profit soared 74.6% to Rmb1.9 billion over the same period, thanks to strong growth in fee and commission income from its M&A and brokerage businesses.