M&A deals in China and Hong Kong hit record high as market brushes aside economic headwinds
- The number of deals rose nearly 20 per cent to 2,381 in 2021, the most since records began in 2006, according to Mergermarket
- The US$111.5 billion merger between Sichuan Railway Investment Group and Sichuan Transportation Investment Group was the largest deal in China and the world
The number of mergers and acquisitions in China and Hong Kong rose nearly 20 per cent to a record high last year despite headwinds from a slowing economy and sporadic Covid-19 outbreaks, according to Mergermarket.
A total of 2,381 deals were concluded in 2021, the most since records began in 2006, according to a report released by the financial data provider on Thursday. The value rose 13 per cent to US$545.2 billion, the second-highest ever.
The increase in deal making was attributed to the consolidation of infrastructure, and technology, media and telecommunications firms as well as a record-breaking upswing in private equity buyouts and the government’s domestic policies.
“Despite headwinds blowing in the face of the Chinese economy in 2021 – including a major downturn in the real estate market … Covid outbreaks and falling retail sales and consumer confidence – the M&A market withstood the buffeting,” the report said.
China’s latest five-year plan for “common prosperity” has put growth at home under the spotlight. It is focused on boosting domestic consumption, strengthening internal supply chains while reducing dependency on foreign ones, enhancing regulation in a variety of industries including financial services and education.
“Despite market turbulence and regulatory risk concerns, the Chinese domestic market is booming,” said John Yuan, country manager of China and Southeast Asia for virtual data room iDeals in the report. “And many multinational companies are developing a China-to-China strategy and acquiring Chinese targets to reshape supply chains and make them more local.”
Most of the M&A activity was concentrated in mainland China. 2,179 deals worth US$503.5 billion were concluded last year.
The largest deal was the US$111.5 billion merger between Sichuan Railway Investment Group and Sichuan Transportation Investment Group. This was also the top deal globally last year.
“Sub-sectors of larger industries such as semiconductors, renewable energy and electrical vehicles are ripe for investment,” said Yuan. “Given that technological innovation, renewables and the digital economy are priorities for the government, acquirers and investors should be focusing on hi-tech manufacturing and emissions reduction projects.”
Meanwhile, China’s outbound foreign direct investment has fallen steadily in the last five years because of greater domestic hurdles for outbound capital flows as well as a more complicated regulatory environment abroad, according to a report on Chinese outbound investment trends released by Baker McKenzie and Rhodium Group last week.
Completed global outbound M&A deals by Chinese companies slumped almost 83 per cent to US$23.7 billion in 2021, from US$138.9 billion in 2017.
“Slowed deal making since 2017 has resulted in a situation where China is underinvested in the world compared to its economic footprint, which suggests substantial catch-up potential if pandemic restrictions and policy headwinds were to subside,” the report said.
The decline in outbound deal making has been especially acute and China’s strict pandemic measures further weighed on M&A in 2020 and 2021, contrasting with a strong recovery in global cross-border M&A during the same period, the report said.
Less sensitive sectors like consumer products and services and entertainment were the top attractions for Chinese outbound M&A globally, accounting for almost half of total investment.
“With increased foreign investment scrutiny from overseas regulators, particularly in the technology sector, many Chinese companies are also pursuing domestic options,” said Jannan Crozier, global chair of Baker McKenzie’s global M&A practice group.
Author: Lam Ka-sing, SCMP