PricewaterhouseCoopers says M&A will rebound in China

Analysis by PwC suggests China domestic and outbound M&A activity is back on track, but inbound investment in China will only recover by 2011.

The first quarter of 2009 was a quiet period for mergers and acquisitions in China, which fell to their lowest point in two years. During the quarter 1,427 deals were announced, down from 1,812 in the same period in 2008. The worst, however, is over, according to transaction partner Matthew Phillips from PricewaterhouseCoopers (PwC) Shanghai office, who foresees a recovery in China-related M&A transactions starting from the second half of 2009.

Deals in the first quarter of 2009 dropped both because the number of domestic-to-domestic deals in China came down and because foreign corporate buyers reduced their exposure to China so inbound transactions fell as well. The good news is that things improved in the second quarter of 2009 with both domestic-to-domestic and outbound deals recovering.

Phillips suggested the second half of 2009 will be even more promising, as the Chinese stimulus package takes further effect. In particular, the resources and industrial sectors will witness activity since these are focus areas of the Chinese government. M&A activity will also increase on account of companies in the manufacturing sector using M&A as an avenue to garner new technology and build a foundation to support growth. Phillips is confident that the recovery in China's economy will cause domestic deal activity to recover to 2008 levels, a record year where almost $160 billion worth of deals was completed.

China outbound activity will increase as Chinese companies pursue acquisitions overseas, said Phillips. Resources companies in Australia are the major targets as Chinese companies seek to secure natural resources and protect themselves from price hikes. PwC suggests Chinese companies will continue to expand in foreign markets in order to achieve economies of scale, capture technology and increase market share. Therefore China is likely to move nearer its "go global" goal, said Phillips.

On foreign investment into China, Phillips is less optimistic. Foreign strategic investment will remain subdued for the course of 2009 and it is unlikely foreign financial investors will enter the Chinese market in the short term, said Phillips. Major economies are lagging China in their economic recovery, which makes companies in these regions unable to invest as they are themselves capital constrained. Further, buyers and sellers will be unable to agree upon prices due to different perspectives on the future. Phillips expects foreign investment into China to return to 2008 levels by 2011.

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