These three scenarios include: The U.S. China trade tensions stabilizing through phased agreements. Second, China\u2019s new foreign investment law<\/a> and policy coming into play. Third, China\u2019s planned new rules to open up certain heavily regulated industries such as automobiles and financial services. Therefore, the 2020 and 2021 the outlook for China’s M&A market be more active than in 2019, especially in those industries and particularly through inbound deals.<\/p>\n\n\n\n Looking deeper into 2020 and beyond, Chinese outbound transactions focused on strategic areas will continue to be a main driver for Chinese outbound M&A activity in the region. However, continued tensions between the U.S. and China in combination with the hurdles presented by national security reviews may dampen China\u2019s interests in outbound activities to the U.S. and Europe. On the other hand, multinational companies in China will continue to review their domestic China market strategy and reevaluate their interests in forming partnerships with Chinese firms. As a result, this will drive support for steady deal activity. Furthermore, sponsors will remain active in Greater China with additional capital to deploy attractive valuations.<\/p>\n\n\n\n There is no\nsingle law or regulation<\/a> specifically regulating M&A in China.\nAn M&A deal may involve many laws and regulations. For example, PRC Company\nLaw may be relevant when designing the corporate structure of the target\ncompany. PRC Securities Law and its supporting regulations may come into play\nin a public M&A transaction. Contract Law may govern when an asset purchase\nis part of the deal. Employment Law and Employment Contract Law may come into\nplay when employees need to be transferred in the transaction. In addition, tax\nlaw is always relevant, and foreign exchange policy and regulation is important\nwhen payment of the deal needs to be made cross-border. Antitrust Law may be\nrelevant if a deal meets a certain threshold triggering a regulatory\nrequirement to make a filing.<\/p>\n\n\n\n The Foreign Investment Law<\/a>, which took effect on January 1 2020, will replace a collection of decades old laws with a single, unified and streamlined legal and regulatory framework for foreign investment that is applicable nationwide. The Chinese national legislature passed the Foreign Investment Law with the aim of creating a better business environment for overseas investors. Inbound investment via M&A in China is expected to reach $1.5 trillion dollars over the next 10 years according to a report from Xinhua News.<\/a> <\/p>\n\n\n\n The Foreign Investment Law seeks to protect the rights of foreign investors and their intellectual property, and clearly incentivizes them to invest in China. It also helps Chinese companies move up the value chain. The evolving nature of China\u2019s consumer economy and the desire for Chinese industry to continue to move up the value chain are two particularly important drivers of economic opportunity. These factors are expected to boost inbound M&A transactions in the future. <\/p>\n\n\n\n A merger<\/a>\nis the process by which two or more companies merge together as one new\ncompany. Acquisition often refers to the process when a financially stronger\ncompany acquires over 50% of shares of another company and brings it into its\nown operation. Companies can also engage in a minority share, majority share,\nequal share and buyout scenario acquisition. The decision of which option to\ntake is tied into a corporate\u2019s\nstrategy and growth plans. Additionally, it is important to consider\nacquisition structure, as each option offers varying degrees of control and\nvarious other trade offs. There are five types of mergers: horizontal,\nvertical, market-extension, product-extension, and conglomerate mergers.<\/p>\n\n\n\n Moreover, M&A acquirers fall under two broad categories. First are strategic investors, which are operating companies looking to buy other businesses in order to expand or defend market share and enhance profitability. The second are private equity investors (or financial buyers). Financial buyers are buyers that purchase minority stakes in start-ups, mid-growth enterprises and mature businesses using funds pooled from individual investors. Financial buyers typically aim to eventually sell out at a profit through exits such as initial public offerings (IPOs) or a sale to strategic investors.<\/p>\n\n\n\n Global\nM&A made a strong showing in 2019. This came as stock markets reached\nall-time highs, private equity firms raised record funds, and companies\nsearched for growth and other ways to address technological and economic\ndisruptions. This was impressive given the fears of a potential recession,\nstock pull-backs in certain markets, increasing trade disputes, as well as\nheightened national security and competition concerns.<\/p>\n\n\n\n However, global M&A value<\/a> in 2019 lagged behind 2018 numbers for much of the year. But, a surge of deals in Q4 2019 drove total M&A value to $3.9 trillion dollars, just 3% lower than 2018. This made 2019 the fourth biggest year for M&A since 1980. In particular, M&A value rose for deals in the United States and Japan, but fell for deals in Europe and the rest of Asia. Healthcare, technology, and energy were the most active sectors, accounting for about half the overall volume.<\/p>\n\n\n\n [Source: IMAA analysis, Worldwide M&A and Chinese M&A statistics]<\/p>\n\n\n\n In 2019, M&A involving Chinese targets totaled roughly $170 billion dollars, but represented only 5%<\/a> of all global M&A volume. This is a small share compared to M&A involving U.S. targets, which made up more than half of global M&A volume in 2019. This makes China vastly underrepresented in the global M&A market in consideration of and relation to the sheer size of the Chinese economy. GDP in China was $15 trillion in 2019 compared to $22 trillion in the U.S. Also, 2019\u2019s volume for deals involving Chinese targets was the lowest since 2014, which has been part of a downward trend over recent years following a peak in 2015.<\/p>\n\n\n\n From 2000-2016, China\u2019s industry with the largest M&A\nactivity in terms of transaction value has been the financial sector.\nWhich has represented 16.8% of all deals with a total value of $753 billion\ndollars. The second most important industry by value is the materials sector\nwith $558 billion dollars worth of transactions. The industrial industry\nreached the third rank with $527 billion of deals.<\/p>\n\n\n\n The\nindustry with the largest number of transactions has been Industrials, which\nhas represented 14.2% with a total number of over 9,737 transactions. The\nsecond most active acquirers are companies from Materials with more than 9,516\ndeals accounting for 13.8% of transactions. Lastly, Financials companies are\nthe third most frequent industry in terms of consolidation with 13.8% of all\ndeals.\n <\/p>\n\n\n\n [Source:\nIMAA analysis, Announced M&A in China and Hong Kong by Industries\n(2000-2016)]<\/p>\n\n\n\n At the\nmicro level, in 2018, 2,584\ntakeovers<\/a> with Chinese participation took place. The leading five\nsectors of company takeovers with Chinese involvement based\non the total M&A transaction value<\/a>s were real estate, financial\ntelecommunications with value-added services, energy, mineral deposits, and\nchemical processing. The M&A transaction value amounted to around 113\nbillion yuan in the real estate sector. In terms of volume<\/a>,\nthe sectors with the largest amount of M&A company takeover transactions in\nChina were the IT, biotechnology\/pharmaceuticals, mechanical engineering,\nfinance, and electronics sectors.<\/p>\n\n\n\n [Source: Statista, PEdaily.cn<\/a>, Value and number of M&A transactions with Chinese involvement by sector]<\/p>\n\n\n\n To measure China’s M&A market in its entirety, any assessment must include the added values of 1) domestic strategic buyers, 2) foreign strategic buyers, 3) private equity deals, 4) Hong Kong outbound, and 5) China mainland outbound.<\/p>\n\n\n\n In recent years, the landscape of China’s M&A market has changed fundamentally. While the growth of inbound, outbound, and domestic M&A has been affected by global economic downswings and fluctuating Chinese growth, more and more Chinese companies will continue to seek opportunities through oversea Belt and Road M&A and domestic consolidation. China\u2019s leading sectors for M&A in Belt and Road countries are oil and gas, diversified industrial products, financial services, TMT, power and utilities, consumer products, mining and metals.<\/p>\n\n\n\n China’s M&A market experienced a slow start in the first half of 2019 but picked up considerably after June.<\/a> Nonetheless, the market has slowed indefinitely. In particular, the principal drivers of the 14% decline<\/a> in China’s M&A deal values were the domestic and outbound sectors. The drop in outbound M&A and private equity (PE) resulted in the lowest year for deal values since 2013. According to Dealogic<\/a>, announced M&A deals in China amounted to $486 billion<\/a>, as compared to $562 billion in 2018 and $661 billion in 2017. While inbound M&A remains stable ($30 billion in 2019, a slight decrease from $33 billion in 2018), both outbound deals ($53 billion in 2019 compared to $72 billion in 2018) and domestic deals ($368 billion in 2019 compared to $440 billion in 2018) saw a notable downturn. [Source:\nJPMorgan, Dealogic, China M&A announced $ volume ($billion)]<\/p>\n\n\n\n Most\nM&A transactions of Chinese companies still take place in the domestic\nmarket. Roughly\n80% of all Chinese M&A activity is domestic<\/a>, involving both\nChinese acquirers and Chinese targets. The expectation is that the bulk of\nM&A volume going forward will be accounted for by foreigners investing in,\nor acquiring, domestic companies. Also, by domestic companies merging with and\nacquiring each other. The key drivers here include rising purchasing power and\nprivate consumption, the government\u2019s desire for foreign funds and expertise\nfor SOEs as it fully opens sectors of the economy to foreign competition, and a\nmore relaxed regulatory regime that, for example, has expanded the scope and\ngeographical reach of wholly owned foreign enterprises (WOFEs).<\/p>\n\n\n\n The economically better developed regions such as China\u2019s largest cities Beijing and Shanghai still lead the market. In 2018, 299 M&A transactions<\/a> were completed in Beijing with a transaction value of around 207 billion yuan. In line with China\u2019s economic reforms, foreign buyers will increase their activity in China’s M&A market in those sectors and areas favorable to making deals.<\/p>\n\n\n\n In China,\nespecially those MNCs in consumer\/retail and enterprise service sectors\ncontinued to explore strategic reviews and partnered with local players. Some\nof which were structured as a divestiture of a controlling stake. High-profile\ntransactions in this category include Metro China\u2019s partnership with Wumart<\/a>,\nCarrefour\u2019s\npartnership with Suning, and DHL\u2019s sale of its supply chain business\nto SF Express. This is a continuation of a theme that has gained strong momentum\nsince 2017, as companies such as McDonald\u2019s, Yum! China, Heineken, and Salesforce partner with Chinese companies to\nstrengthen their competitiveness in a fast-changing local market.<\/p>\n\n\n\n [Source:\nIMAA analysis, Dealogic, Announced M&A from China to abroad (outbound) and M&A by foreign acquirers into\nChina (inbound)]<\/p>\n\n\n\n China\nwas not a major player in global investment until the mid 2000s. Driven by\npolicy loosening by Beijing and favorable global conditions, its outbound FDI\n(OFDI) grew from next to nothing to an average of almost $50 billion\nper year in the late 2000s.<\/a> Easy money and loosening of Chinese\npolicy in 2014 boosted flows to more than $200 billion in 2016, eliciting both\nenthusiasm about fresh capital and anxiety about economic and security risks.<\/p>\n\n\n\n Since 2016<\/a> China\u2019s outbound investment has been on a\ndownward trajectory. Outflows dropped precipitously in 2017 and 2018 after\nBeijing restricted \u201cirrational\u201d outflows. In addition to domestic regulators, Chinese\ninvestors also were confronted with greater regulatory and political scrutiny\nabroad, as economies tightened investment screening regimes due to concerns\nabout China\u2019s\ncompatibility with their democratic market economies.<\/p>\n\n\n\n In\n2019 this downward trajectory continued with China\u2019s global outbound foreign direct\ninvestment dropping back to 2014 levels. Official\nChinese statistics<\/a> show a modest decline in outbound FDI for the\nyear: MOFCOM reports outbound FDI at $117 billion for January-December 2019, a\ndecrease of 9.8% from the same period in 2018 in dollar terms. The global\nM&A component shows a deep drop, with newly announced 2019 deals at $50\nbillion, versus $80 billion in 2018, amounting to the lowest level in eight\nyears.<\/p>\n\n\n\n Thus, China\u2019s efforts to cut debt levels\ncombined with the negative effects from the trade war have cut into outbound\ndeal activity by Chinese firms. China\u2019s outbound M&A fell back relatively\nto 2015 levels in value terms, with various factors combining to severely\ncurtail large sized cross border\ntransactions. However, there is still a good amount of smaller sized\noutbound transactions taking place with overall deal volumes holding up.<\/p>\n\n\n\n Chinese\noutbound M&A players are segmented by three categories: state owned\nenterprises (SOEs) , privately owned enterprises (POEs), and financial buyers.<\/p>\n\n\n\n POEs\nremained the most active overseas buyers in terms of volume although the\noverall value of those deals fell with considerably fewer mega deals. Mirroring\nthe domestic scene, outbound deal values were strongest in the industrial and\nconsumer sectors, but larger-sized high-tech deals took a significant hit due\nto the various sensitivities in this vertical. Furthermore, outbound M&A in\nthe energy and power sectors, materials, and healthcare saw relative downturns\nin deal value.<\/p>\n\n\n\n However,\nin terms of deal volumes, outbound activity continues to be reasonably robust\nwith smaller transactions being less affected. China\u2019s strategy to acquire technology know how, IP, and brand\nstrength to put to use in the Chinese market is continuing despite the headline\ndeclines in larger deals. Therefore, Chinese outbound M&A in the high\ntechnology, industrials, consumer, healthcare, financial, and materials sectors\nall carried out a high number of deal volumes.<\/p>\n\n\n\n In terms of geographies, the squeeze in outbound deal\nvalues is now evident in Europe with significant declines in the bigger markets\nof Germany ($6.5 billion in 2019 from $11 billion in 2018) and UK ($1.4 billion\nin 2019 from $4.5 billion in 2018). Chinese FDI in the European\nUnion declined for a third straight year in 2019.<\/a> The combined value\nof completed Chinese FDI transactions in the EU fell to EUR 11.7 billion, down\n33% from 2018 levels (EUR 17.4 billion). This represents the lowest investment\nlevel since 2013 and a drop of 69% from the peak of EUR 37.3 billion in\n2016.<\/p>\n\n\n\n But,\nthis drop was not specific to the EU. Chinese global FDI fell in 2019 due largely to domestic variables\nwhich made it more difficult for Chinese firms to raise funding and get\napproval for overseas investments. The global decline also reflected a growing\npolitical and regulatory backlash against Chinese acquisitions, particularly in\nthe U.S., but also in Europe.<\/p>\n\n\n\n Outbound\nactivity to Belt and Road countries held up reasonably well in the context of\nthe otherwise significant declines in deal values seen elsewhere. Furthermore,\ndespite China\u2019s outbound volume being down y-o-y,\noutbound activities remained active for investments into the Asia Pacific\n(outside China), Latin America, and EMEA. Consistent\nwith China\u2019s strategic needs, outbound\ninvestments in power and utilities, technology, and industrial sectors\nexperienced strong\nmomentum in 2019<\/a>, with notable transactions including Three Gorges\u2019\n$3.6 billion cash acquisition of an 84% stake in Peruvian\nelectric company Luz del Sur, Beijing Auto\u2019s acquisition of a 5% stake in\nGerman automaker Daimler, and Jiangsu Shagang Steel Group\u2019s $2.2 billion acquisition of\nLondon-based Global Switch Holdings.<\/p>\n\n\n\n In sum,\nthe trade war between the U.S. and China along with a tightened CFIUS approval\nprocesses made Chinese buyers increasingly cautious when considering targets\nwith significant business presence in the U.S. The expanded CFIUS jurisdiction\nthat is expected to be implemented in 2020 will likely generate further\nheadwinds for Chinese investment in the U.S., particularly for targets involved\nwith advanced technologies, critical infrastructure, or sensitive personal\ndata.<\/p>\n\n\n\n Added\nto the mix were national security reviews in Europe, which further drove the\ndecline in outbound M&A from China. Thus, the uncertainty in M&A deals\nincreasingly came from antitrust regulators across the globe. This trend makes\nearly planning and engagement with the regulatory bodies in the cross-border\ndeal making process a priority.<\/p>\n\n\n\n Concerning\nChinese inbound M&A, while overall deal values and volumes posted marginal\nannual declines of 1% each, the M&A market avoided much deeper downtrends\namid trade tensions with the U.S. and economic growth uncertainties\ndomestically. Real estate, financial services and telecoms remain the sectors\nwhere M&A transactions with the largest deal values took place.<\/p>\n\n\n\n Dealmakers in the Chinese M&A market can expect to find opportunities in industries such as AI, advanced manufacturing, Fintech and healthcare. Particularly, the industrials and technology areas amongst other sectors are showing signs of robust growth. Moreover, on the regulatory front, China has begun a campaign to ease restrictions on foreign investment as it continues to open up the market. This could result in further inbound M&A, particularly from the U.S. should there be a thaw in trade negotiations currently taking place.<\/p>\n\n\n\n According to the 2019\nKPMP China CEO outlook survey results<\/a>, 48% of CEOs in China believe\nthat the most important strategy for achieving their growth objectives in the\nnext three years are forming strategic alliances with third parties and\nconducting M&A transactions. In that same survey 56% of CEOs are reported\nto having a moderate M&A appetite, with 29% having a strong M&A\nappetite, and 15% having a low M&A appetite. Thus, in spite of the current\nglobal economic and investment climate, CEOs are still focusing on the\nopportunities in the Chinese M&A market. <\/p>\n\n\n\n The primary drivers for M&A among China\u2019s CEOs ranked (in order) are: to\nreduce costs through synergies\/economies of scale, to diversify the business, to\ntransform the business model faster than organic growth, to increase market\nshare, to on-board new digital technology\/innovation, to take advantage of\nfavorable valuations, to eliminate direct competitors, and to utilize cheap\nfinancing before interest rates rise.<\/p>\n\n\n\n Thus, in M&A consideration, it is important to assess the market value and proposition for each party in the deal, specifically what benefit a foreign stakeholder may bring to a Chinese enterprise. Concerning the benefits of M&A dealmaking with foreign MNCs, Chinese participant enterprises stated that expanding brand awareness<\/a>, increasing market share, improving technology and productivity, increasing margins, and reducing costs were some of the benefits of engaging with oversea businesses in M&A deals. In addition, M&A benefits include: extending their upstream and downstream industrial chains, industrial transformation and upgrading, and cross-industry diversified operations. Thus, leading overseas businesses can reference these contributions from foreign MNCs to Chinese enterprises following the M&A deal to craft their own proposition.<\/p>\n\n\n\n![\"The](\"https:\/\/daxueconsulting.com\/wp-content\/uploads\/2020\/11\/daxue-consulting_MA-market-in-China-cover.jpg\")
<\/a>Download the report<\/a><\/div>\n\n\n\nLegislation and Policy Changes in China’s M&A market<\/h2>\n\n\n\n
Defining M&A: Types of Mergers and Deal Players<\/h2>\n\n\n\n
Global M&A Market<\/h2>\n\n\n\n
![\"Worldwide](\"https:\/\/daxueconsulting.com\/wp-content\/uploads\/2020\/05\/daxueconsulting_MA-Market-in-China_Worldwide-MA-China-MA-800x264.png\")
<\/figure>\n\n\n\nChina’s M&A Market: Top Industries 2000-2016<\/h2>\n\n\n\n
![\"Announced](\"https:\/\/daxueconsulting.com\/wp-content\/uploads\/2020\/05\/daxueconsulting_MA-Market-in-China_Types-of-MA-Deals-in-China-and-Industries-800x448.png\")
<\/figure>\n\n\n\n![\"China's](\"https:\/\/daxueconsulting.com\/wp-content\/uploads\/2020\/05\/daxueconsulting_MA-Market-in-China_Company-Takeovers-with-Chinese-Involvement-Number-and-Sector-800x516.png\")
<\/figure>\n\n\n\nAssessing China’s M&A Market<\/h2>\n\n\n\n
<\/p>\n\n\n\n![\"China's](\"https:\/\/daxueconsulting.com\/wp-content\/uploads\/2020\/05\/daxueconsulting_MA-Market-in-China_China-Announced-MA-800x580.png\")
<\/figure>\n\n\n\nOutbound and Inbound M&A\n \n \n \n \n \n \n \n \n \n
\n<\/h2>\n\n\n\n![\"Outbound](\"https:\/\/daxueconsulting.com\/wp-content\/uploads\/2020\/05\/daxueconsulting_MA-Market-in-China_Inbound-and-Outbound-MA-1-800x281.png\")
<\/figure>\n\n\n\n![\"IMAA](\"https:\/\/daxueconsulting.com\/wp-content\/uploads\/2020\/05\/daxueconsulting_MA-Market-in-China_Inbound-Outbound-MA-graphic-800x630.png\")
<\/figure>\n\n\n\nGlobal outbound direct investment dropped<\/h3>\n\n\n\n
Smaller outbound transactions less affected<\/h3>\n\n\n\n
Outbound M&A with Europe<\/h3>\n\n\n\n
Belt and Road countries and Latin America<\/h3>\n\n\n\n
Important Considerations for Navigating China’s M&A Market<\/h3>\n\n\n\n
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Takeaway: What CEOs are saying?<\/h2>\n\n\n\n
\n\n\n\nSee our full report on China’s M&A market<\/h2>\n\n\n\n