China's burgeoning overseas M&A activity sees a trend toward developed markets and private enterprise.
First world focus
After overseas mergers and acquisitions (M&A) activity by Chinese firms reached record levels in 2014, this year looks to be following the same trend. According to offshore legal services provider Appleby, there have been 275 deals publicly recorded in the first half of this year. This compares with 405 outbound deals over the whole of last year and 352 deals in 2013.
"Appleby's latest analysis shows that deal value is currently around US$37 billion, very much in line with the start of 2014," says Hong Kong-based corporate partner Judy Lee.
"With almost 100 more deals recorded, however, 2015 is likely to be a bumper year for the total number of deals."
Data compiled by KPMG shows that during the first seven months of 2015, the top 10 countries attracting overseas Chinese M&A investment in terms of total value were:
- The US
- the Netherlands
- The UK
- South Korea
Of these, the US, France, Australia, Italy, the Netherlands and the UK were also within the top 10 countries attracting Chinese overseas M&A investment in 2014.
That nine out of the 10 countries in both periods are developed markets helps to demonstrate the importance that Chinese companies attach to investing in them. In fact from 2007 onwards, outbound M&A deals by Chinese firms in developed countries have exceeded those concluded in developing countries, both in terms of total number and value, according to KPMG.
Why China now leads the way in innovation
"We expect this trend to continue throughout 2015 and beyond," says Vaughn Barber, Beijing-based global chair of KPMG's Global China Practice.
"During the first seven months of this year, roughly twice as many Chinese outbound M&A deals have been concluded in developed markets than in developing ones."
China's push toward a high value-added economy means domestic consumption is increasingly important. This is clearly influencing the nature of Chinese outbound M&A investment.
"To be successful, Chinese companies must innovate and raise productivity," says Barber.
"Many view overseas investment as the best way to access new technology, expertise and high-quality products that will enable them to move up the value chain, reduce costs and improve competitiveness, both at home and abroad."
This largely explains why a hefty percentage of Chinese M&A investment is now flowing into Europe. According to global law firm Baker & McKenzie, Chinese M&A activity in Europe stands at record levels, with 153 separate investments worth US$18 billion last year. Chinese investors have spent an average of US$12 billion across the continent over the past four years.
Since 2000, the four European countries that have attracted the most Chinese investment are:
- The UK (US$16 billion)
- Germany (US$8.4 billion)
- France (US$8 billion)
- Portugal (US$6.7 billion)
Between 2000 and 2014, the industrial sectors receiving most Chinese capital were:
- energy (US$17 billion)
- automotive (US$7.7 billion)
- agriculture (US$6.9 billion)
- real estate (US$6.4 billion)
- industrial equipment (US$5.3 billion)
- information and communications technology (US$3.5 billion)
European industries that showed above-trend growth in 2014 were finance and business services, agriculture and food, and transportation and infrastructure.
Investment in these sectors has been driven by financial liberalisation in China and internationalisation of the renminbi (RMB); a desire to acquire the expertise, technology and brands to service China's burgeoning food market; and increasing Chinese tourism, trade and business activities in Europe.
While continuing uncertainty over low economic growth, the issue of a possible "Brexit" (British exit from the European Union) and the ongoing woes of Greece may have caused some consternation, Chinese investment in Europe looks set to continue its upward trend.
Indeed, Chinese Premier Li Keqiang recently called for the early conclusion of a bilateral treaty that would make it easier for Chinese companies to acquire European counterparts.
Chinese M&A activity in Australia is steadily shifting from metals to agriculture, food and real estate, showing that the country remains attractive to Chinese capital despite the downturn in the commodities market.
Can ShineWing become China's first great multinational professional services firm?
After experiencing two relatively flat years, Chinese M&A activity totalled US$2.4 billion in the first half of 2014, a year-on-year rise of 43 per cent. The weak Australian dollar and China-Australia Free Trade Agreement should see activity remain buoyant this year, with some analysts predicting a deal surge next year after the agreement is ratified in late 2015.
Energy and power investments comprised almost half of Chinese M&A deals in the US between 2005 and 2012, but activity has recently diversified. Last year saw major moves into pharmaceuticals, biotechnology, agriculture and food, while information technology (IT) boasted the biggest slice of the M&A pie.
According to money management firm Rhodium Capital, IT accounted for 48 per cent of total Chinese foreign direct investment (FDI) in the US, boosted by tech giant Lenovo’s US$2.9 billion purchase of Motorola Mobility.
"Within developed markets, there has recently been a clear increase in M&A investment by Chinese companies into the IT sector," says Barber.
"The number of deals increased from 27 in 2013, to 44 in 2014, while the first seven months of this year have already seen over 30."
Total no. of deals
Total no. of deals with value disclosed
Note: Target developed countries of Chinese outbound M&A deals in computer & electronics sector during 2013 – July 2015 include: Australia, Canada, Denmark, Germany, Israel, Italy, Japan, Netherlands, Norway, Singapore, South Korea, UK, US.
In the past, China's overseas M&A activity was dominated by state-owned enterprises (SOEs), but this is now changing. The financial services (FS) market typifies the trend.
According to KPMG, from 2013 to the end of July 2015, privately-owned Chinese FS companies conducted 80 overseas deals for US$13.5 billion, while state-owned FS firms conducted 106 deals for US$20.7 billion. This contrasts sharply with the period 2005–2012, when privately-owned FS firms conducted 149 outbound M&A deals for an approximate value of US$5.3 billion, while state-owned FS firms conducted nearly 100 deals for around US$66.3 billion.
Unlike SOEs, which mainly target resource-related M&A deals, it is China's private-owned enterprises (POEs) that are driving the trend toward high technology, telecommunications and retail investment.
"We have seen POEs take the lead in outbound M&A deals over the past few years," says Barber.
"We believe this trend will also continue throughout 2015 and beyond."
Appleby’s Lee adds: "With the recent RMB devaluation and Chinese stock market issues, we may well see a hiatus in private sector deals as investors sit back and wait for things to calm down. But POE investments should start to make a comeback in the latter part of 2015."
Which countries are investing the most in Australia?