China has already proven its fee-paying ability to privatization bankers. But thus far, its M&A potential has seemed a long way off.
Not so, says law firm OMelveny & Myers which says its China M&A practice is booming.
Weve done a lot of M&A deals in China, says Howard Chao, one of the firms Shanghai-based partners. Most of the deals are Western companies or funds buying or selling assets in China. They are small and medium-sized deals and thats why they dont register on the radar screen.
The firm has 25 professionals in Shanghai and says that most of the deals tend to be between $30 million and $100 million.
If you have $40 billion of foreign capital going into China every year, that creates a lot of assets and some of those are bound to turnover.
Last year, the firm was one of two law firms advising on the restructuring of Fuji Xeroxs China and Hong Kong assets. This $550 million deal saw Fuji buy troubled Xerox out of the joint venture. No investment bank was involved.
Another deal Chao cites was the advisory work it did for private equity firm ASIMCO which sold two Beijing breweries to Tsing Tao last year. The premium beer market in China was overbuilt, and there has been huge consolidation going on. Tsing Tao has been an aggressive buyer. This deal allowed it to expand into Beijing, a key market.
Chao says the firm charges the same fees in China as it does in Hong Kong because for international clients they are now effectively the same market. And he says the big investment banks have not made the same inroads into Chinese M&A that law firms such as his have.
One reason for this is that a lot of the transactions are between strategic investors and are of a smaller deal size. If its less than $100 million then the big investment banks dont tend to be interested. Also, strategic investors already tend to know a lot about the industry anyway.
He says that one of the key issues is often how to get the money out of China. If the buyer is the Chinese partner then they only have renminbi, and must get the approval from SAFE to give the foreign partner US dollars.
In addition, whenever a change takes place in the equity structure of a joint venture, the deal must be approved by the agency that originally approved the deal, MOFTEC for example. This has always been the case in China, says Chao.
However, he says that thus far he has never come across an M&A deal being vetoed at this bureaucratic level.