Chinese M&A activity surges

Updated: 2013-12-25 05:58

By MICHAEL BARRIS in New York (China Daily USA)

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Merger-and-acquisition activity in China surged to an all-time high in 2013, with US companies a prime target. China's M&A surge contrasted with a 2 percent drop in global deals, which observers attributed to a rise in activist campaigns, economic uncertainty and regulatory interventions.

But 2014 promises to be a better year. Analysts project an increase in 2014 global M&A of 10 to 15 percent.

"It would appear that corporate leaders' reticence toward megamerger deals in 2013 will not persist during 2014," Mike Bastin, a visiting professor at the University of International Business and Economics in Beijing, wrote in China Daily on Tuesday. Corporate leaders, he wrote, are "far more comfortable toward debt financing of takeover deals".

Observers say the US Federal Reserve's recent decision to modestly trim the pace of its monthly asset purchases could eventually stimulate more deals. "Once tapering begins, we return to a more normalized economic environment and the market has had a chance to adjust, my sense is that will be a long term positive for M&A," Bob Eatroff, co-head of M&A for the Americas at Morgan Stanley, was quoted by Thomson Reuters.

"Tapering should begin to eliminate one of the most important elements of uncertainty - uncertainty about the legitimacy of the underlying asset values of acquisition candidates," he said.

Instead of making deals, many companies used excess cash to buy back their own stock. This was the biggest year for US corporate share repurchases since 2007, with nearly 500 US companies doing buybacks, including industry leaders like Microsoft Corp, General Electric Co and Wal-Mart Stores Inc.

China had $261.9 billion worth of deals in 2013, up 24.4 percent from last year's record $210.6 billion. Energy- and power-sector acquisitions, representing 17.8 percent of China M&A activity, led the way with a value of $46.5 billion, down 2.3 percent from 2012, according to Thomson Reuters data.

China completed $12.2 billion in US acquisitions, up 96.6 percent from 2012. Driven by Shuanghui International's $4.7 billion purchase of US pork giant Smithfield Foods Inc, the largest Chinese takeover of a US company, the figure represents 19.8 percent of the overall market. Deal volume in the Asia-Pacific region rose 10 percent.

The global decline came in spite of a flurry of transactions, including a number of major cross-border acquisitions. In the third-largest corporate deal in history, US wireless carrier Verizon Communications Inc paid $130 billion to buy back its stake in Vodafone Group PLC. In another deal, Chinese conglomerate Dalian Wanda Group Corp paid 300 million pounds ($490 million) in August for a 92 percent interest in British luxury yacht maker Sunseeker International. And Shuanghui International's successful bid for Smithfield represented China's largest cross-border transaction since China National Offshore Oil Corp, or CNOOC, bought Canadian oil and gas producer Nexen Inc for $15.1 billion in 2012.

Gene Sykes, co-head of global mergers and acquisitions at Goldman Sachs, attributed the four-year-low in global M&A volume to corporate executives being "careful only to bring deals forward that they felt shareholders would reward".

Shareholder activism and "the prospect that shareholders can exercise authority over a company's strategies, especially their capital and portfolio strategies, acts as a real restraint on corporate freedom of activity", Sykes was quoted by Thomson Reuters. "Any CEO is going to be much more cautious or deliberate about doing something that looks venturesome or aggressive. I think that does make people more cautious," he said.

For each of the past three years, there have been more activist campaigns than in any year since 2000. M&A volumes fell as corporate decision makers avoided doing deals that could be second guessed, dealmakers said. Dealmakers do not expect activism to subside in 2014.

In the United States, activists challenged Michael Dell's $25 billion offer to take Dell Inc private, as well as the Shuanghui-Smithfield transaction.

In China, completed M&A activity totaled $149 billion, less than 1 percent below 2012's full-year volume. Total cross-border activity reached $96.4 billion, up 2.1 percent from a year ago, and the highest level since 2008's $97.1 billion. Outbound M&A activity accounted for 64 percent of China's cross-border activity while inbound M&A took 36 percent, according to the data.

Going the other way, foreign acquisitions targeting Chinese companies stood at $34.5 billion, down 8.1 percent from last year. The bulk of the inbound transactions targeted China's real-estate sector, with $8.5 billion worth of deals, up 40.5 percent from 2012 and accounting for a 24.7 percent share of the market.

Overseas acquisitions from Chinese companies rose 8.8 percent to $61.9 billion – the strongest level since the $70.4 billion of 2008. Most of China's outbound acquisitions were in the Energy & Power sector with $28 billion, down 23 percent from last year's $35.3 billion, capturing a 45.2 percent market share.

Domestic M&A activity surged 41.7 percent to a record $162.9 billion, despite a 4.6 percent decline in deal value from last year. Real estate accounted for 16 percent of the market, or $26.1 billion in deals, a fourfold increase from 2012, while high-tech, with a 14.9 percent share, had $8.7 billion.

Morgan Stanley leaped atop the rankings of M&A advisors in China, from 12th last year, boosted by advising Shuanghui in the historic Smithfield transaction. UBS, the top advisor for 2012, fell to the seventh spot. Goldman Sachs Group Inc was the top M&A adviser worldwide, with $616.7 billion worth of deals this year. JPMorgan Chase & Co, Morgan Stanley, Bank of America Merrill Lynch, and Barclays rounded out the top five.