Outbound M&A hits record value of transactions in Greater China last year

Regional bidders seen to remain acquisitive despite highly volatile, uncertain economy outlook.

Outbound merger and acquisition activity (M&A) in Greater China achieved a record-breaking total deal value of US$62 billion in 2010, a 157 percent increase from last year, as Chinese companies continue to deepen their reach overseas, according to the latest Deloitte report: "Borderless, boundless: 2011 Greater outbound M&A spotlight". In the first half of 2011, financial market uncertainty did not impede M&A sentiment as the total deal value has reached US$17 billion for the period. M&A activities would continue to grow as Greater China companies have become more adept and sophisticated at acquiring assets overseas even in the face of market turbulence.

Produced by Deloitte utilizing data from independent M&A intelligence service, mergermarket, this report aims at reviewing outbound M&A activities in the region over recent years and offering insights about M&A market drivers and trend over the next 18 months. Predominately, all the deals involved bidders in Hong Kong, Taiwan, Macau and the Chinese Mainland, with analysis being conducted on transactions with a value of above US$5 million made from January 1, 2005 to June 30, 2011.

"Greater China companies are increasingly willing to invest abroad, driven by the need to secure raw materials from overseas and to escape from the overly crowded domestic markets. By investing overseas, Greater China companies can also acquire new technologies, create partnerships back at home and pave the way for their future investment in a target country," said Mr. Lawrence Chia, Head of M&A Services of Deloitte China and Global Chinese Services Group Co-Chairman.

Mr. Chia cited that the region's M&A activity peaked in the last quarter of 2010 with the highest-ever number of 51 transactions that worth US$29.9 billion, driven primarily by a trio of multi-billion dollar Energy & Resources (E&R) plays in the U.K. and South America. Another interesting phenomenon is that deal sizes continued to range higher than normal. In 2010, nearly 30 percent of all transactions exceeded US$250 million in value, the highest proportion since 2005.

"In the next couple of years, market volatility is unlikely to demoralize Chinese companies and they will play an increasingly important role in the global economy and the M&A market. Historical data indicates that the influence of regional bidders has continued to grow in terms of both outbound deal volumes and valuations, jumping from comprising roughly 0.5 percent of global M&A activity in 2005 to approximately 1.3 percent in the first half of 2011," said Mr. Chia.

In terms of industry sectors, Mr. Chia said, M&A activities will be the most active among E&R companies, having contributed one quarter (25 percent) of overall deal flows in the first half of 2011. Under the guidance of the Chinese government, however, investments also flew into other value-added industries, such as Consumer Business & Transportation (CB&T) and Technology, Media & Telecommunications (TMT), which together accounted for 29 percent of the overall deal volume in the same period.

Another recent development is that Greater China buyers are now snapping up assets in more diverse destinations, such as Cambodia, Kazakhstan, Mongolia and the Ukraine, shifting away from their traditional hunting grounds in Western Europe and North America partly as a result of political scrutiny and national security concerns. Deal volume to targets in the Western Europe and North America have, therefore, fallen from 47 percent in 2005 to 41 percent in 2010, accoriding to a Deloitte report.

Mr. Chia concluded that, while the fundamental drivers of Greater China outbound M&A are still present, prospective bidders will have to face some potential challenges, including regulatory concerns in target markets, weak macroeconomic outlook and a continued lack of cultural awareness of the implications of a proposed tie-up from a bidder's perspective.