Chinese companies have been on a buying spree around the globe in the past two years, with 2016 witnessing a record level of outbound Chinese mergers and acquisitions (M&As). A total of 932 deals, worth over HK$220 billion, took place, an increase of 246 per cent compared to 2015, according to PricewaterhouseCoopers China.
The surge in deal value is driven by multiple factors, including companies’ attempts to move up the value chain, diversify their portfolios, and hedge currency risk. It also closely relates to the shifting direction of Chinese economic growth: from low-end manufacturing and exports to a model driven more by technological innovation, industrial know-how and consumption.
A report by CITIC Securities says that, between 2010 and 2013, Chinese companies’ overseas deals primarily involved the energy, mining and utilities sectors. But from 2014 onwards, there have been more M&As in financial services and TMT (technology, media and telecoms). Companies that invest in technology are primarily seeking to move up the value chain and expand their overseas reach.
A high-profile case in 2016 was that of Midea, the top home appliance manufacturer in China. The company launched a €US$5 billion (HK$39.1 billion) offer for the German robot maker Kuka to upgrade its manufacturing capabilities and seek new growth in the automation business. Besides Kuka, Midea also became the largest stakeholder in Toshiba’s home appliance business. Another merger is taking shape: Clivet, an Italian air conditioning equipment manufacturer, might become part of Midea in the near future.
Ruyi Group, which is headquartered in Shandong province and used to be an apparel contract manufacturer for the luxury brand Armani, bought French fashion group SMCP in 2016 for €€1.3 billion (HK$11.6 billion). SMCP has a chain of luxury brands, such as Sandro, Maje and Claudie Pierlot, all favoured by young professionals in Asia.
Ruyi says the design work will still be done in Paris, while it will work on promoting SMCP in the Asian market.
While trying to move up the value chain, Chinese companies are looking to diversify. Many are in the process of acquiring a range of high-end foreign brands to meet the increasing needs of China’s middle class, particularly those in the health and wellness sectors.
Having long been aware of Chinese people’s concerns about food and supplement safety, Biostime, a Hong Kong-listed company that sells children’s goods and maternity products, bought the Australian vitamin brand Swisse Wellness in 2016.
In the entertainment sector, Wanda Group has been the most active company in the past few years. After acquiring AMC and Legendary, it became the largest theatre chain in the world, but it didn’t halt plans to expand even further. In January 2017, Wanda bought Nordic Cinema Group in Europe.
However, the surge in outbound investments has brought concerns about capital flight, especially with the Chinese authorities. In December 2016, the Ministry of Commerce claimed it would closely monitor deals related to real estate and entertainment, and it sent a warning to banks that enterprises trying to purchase assets unrelated to their main business operations are likely to be refused.
Not all deals go to plan. For example, Anbang Insurance Group, which successfully bought Waldorf Astoria and Strategic Hotel & Resorts in 2016, failed in its HK$14 billion bid for Starwood in the same year. One of the reasons, according to media reports, is that the deal would breach a condition set by China’s insurance regulator that overseas investments should not exceed 15 per cent of the company’s total assets.
“The government will closely watch companies that invest big sums in overseas real estate, hotel, entertainment and sports clubs ... but the guidance on encouraging companies to move up the industrial value chain remains unchanged,” the national news agency Xinhua reported in November 2016.
The pressure comes not only from the Chinese government. Recipient countries are also becoming more cautious, with concerns arising over the presence of Chinese capital in large-scale deals in key industries. The deal between Fujian-based Grand Chip Investment Fund and the German semiconductor company Axitron, for example, broke down after the US government blocked Chinese investment in Axitron’s US branch because of national security concerns.
Such concerns and tighter government scrutiny mean the number of M&A deals might not be as high this year, but the trend will not stop.
“In 2017, Chinese economic growth is slowing, arbitrage chances will not disappear, and the RMB depreciation risk remains. So, for Chinese enterprises, going global will still be an inevitable choice if they are to expand and gain strong pricing power worldwide,” says Li Haitao, professor of finance at the Cheung Kong Graduate School of Business (CKGSB).
He predicts that the trend of buying assets worldwide will continue. “The high-tech industry will be a focus and, driven by new middle-class demand, there will be more big M&As in premium consumption industries.”
Li also predicts that, compared to state-owned enterprises (SOEs), private companies will play a more important role in Chinese outbound M&As. “Private enterprises focus more on efficiency, which helps them avoid a blind pursuit of scale. They care more about profitability and future collaboration.”
This article was originally published in CKGSB Knowledge.
This article appeared in the Classified Post print edition as New additions.
