How China’s mergers and acquisitions abroad are shifting amid headwinds

Chinese deals have dropped to a 17-year low in the US as M&A shift towards the rest of Asia, Middle East and elsewhere
While deals have dipped overall, there are reasons to be optimistic about the second half of the year, such as in the life sciences

Merlin Piscitelli

Published: 6:15am, 21 Aug 2023

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China’s cross-border mergers and acquisitions (M&A) continue to face strong headwinds, with a slowing economy and a wave of new Covid-19 cases weighing on the market.

Growing foreign market regulation has also affected M&A activity. Late last year, for example, Canadian and British governments, citing national security concerns, ordered several Chinese firms to divest their investments in lithium mining and microchip companies.

This heightened regulatory environment has pushed China to pivot its investments from the historically attractive markets of the United States and Europe towards other parts of Asia and the Middle East. As a result, Chinese M&A activity in the US has dropped to its lowest in 17 years, with just US$221 million invested so far this year, compared to US$3.4 billion for the same time last year, according to data from Dealogic.

Activity on Datasite’s platform shows this, too, with China deals down 23 per cent year on year in the first seven months of the year, led by fewer consumer, tech, media and telecoms, and industrial deals. By contrast, M&A activity in the Asia-Pacific is up by 42 per cent year on year.

The drastic dip in Chinese cross-border M&A activity isn’t attributable to the US alone. Chinese deals in Germany total just US$189 million so far this year, the lowest in more than a decade, according to Dealogic. Activity in the United Kingdom and Australia are also down, at just US$503 million and US$228 million respectively.

While geopolitical tensions undoubtedly played a role, the global pandemic and rising global inflation may also have played a part in the investment decline. For example, many retailers have reconsidered their supply chains and shifted manufacturing from China to countries such as Vietnam and the Philippines.

Lego breaks ground on a carbon-neutral factory in Binh Duong, Vietnam, on November 3 last year. It is the company’s first carbon-neutral factory, its sixth global manufacturing base and its first in Vietnam. Photo: AFP

Also, the decrease in M&A deal activity isn’t confined to the past year. Chinese investors have been shying away from overseas deals since 2016, when China launched a deleveraging campaign to reduce its systemic financial risks. The country’s economic slowdown arguably began due to the increased complexity involved in Chinese companies obtaining loans for cross-border M&A.

Across the wider economy, the cut in credit growth hit hard, especially in the property sector, leading to developers expanding their borrowing and inflating the national real-estate bubble until it started to burst in 2021. The impact can still be observed this year as the housing market teeters between boom and bust.

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The aftershock of the 2016 deleveraging campaign combined with the latest heightened regulatory environment mean that many Chinese investors are also “self censoring”: opting not to pursue cross-border takeovers, citing concerns about being banned. This led to more deals being blocked, or withdrawn due to regulatory concerns, including in technology and resources.

China’s zero-Covid policy also hampered manufacturing, including supply lines and cross-border trade. This led to a decline in economic growth that was the most significant since the country introduced pro-market reforms in the 1970s.

As China’s cross-border M&A activity dipped, foreign investment banks struggled to remain active in China’s initial public offering (IPO) market. As of early June, foreign banks had been involved in barely 1 per cent of the 109 IPOs in China’s vast stock market this year.

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Still, there are reasons to be optimistic about the second half of the year. Datasite shows that China life science deals are up 40 per cent year on year in the first seven months of this year, prompted by continued healthcare, pharmaceutical and biotech demand. And since this data captures deal-making activity at its inception, rather than when publicly announced, it’s an encouraging sign of M&A activity to come.

Also, while China’s M&A activity has waned in the US, it is growing in other markets. Just consider the recent US$2.9 billion purchase of an Italian utility company’s Peruvian assets by a Chinese utility company, which looks to be the biggest outbound deal of the year.

Despite concerns around another Covid-19 wave, geopolitical tensions and regulatory requirements, China’s market size, growing middle class and advanced manufacturing capabilities still make the region attractive to foreign investors.

On top of this, digital innovation is transforming how deal-makers approach M&A. Companies are addressing the challenges of disconnected deal-making systems by providing centralised, online deal rooms. This allows deal-makers to manage all the distinct phases of the deal-making process, promoting fast, efficient and secure M&A transactions.

Merlin Piscitelli is chief revenue officer for Europe, the Middle East and Africa at Datasite

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