Even as Chinese firms continue their pursuit for overseas assets – either to add capabilities or grow in scale – outbound mergers and acquisitions (M&A) in the first half of this year took a significant hit for the country largely amid fears of a trade war and capital control measures by the government. For the first half of 2018, outbound deals totaled $22 billion, a significant drop from $56.7 billion for the same period in 2017 and from $118.7 billion for the first half of 2016, according to a report published by Bain & Co last Thursday.
“A host of factors contributed to that decline. Currency depreciation took a toll, for example, as did fears of the effects of the US–China trade wars on both domestic company profits and US opportunities. Also, deals were hurt by restrictions on investments in the US, Germany, Australia and other markets, as well as the Chinese government’s careful monitoring of outbound investments,” said the report co-authored by Bain & Co Shanghai Partner Philip Leunghe who leads the firm’s M&A practice in Asia-Pacific, Hong Kong Partner leading M&A practice in Greater China Hao Zhou and Dorothy Cai a partner based in Toronto.
According to Bain & Company’s 2018 China outbound M&A report, Europe and North America are the biggest destinations for outbound M&A, leading both deal value and deal count even as Latin America is catching up. Meanwhile, Southeast Asia and the rest of Asia Pacific still remain at the same level in both deal value and volume through the phases of outbound deals even though it is believed that the two regions will be an obvious bet for any Chinese firm to expand its regional footprint.
Explaining the phases, the report said that Chinese companies acquiring overseas are entering their third phase. During the first phase, the vast majority of outbound M&A deals were made to secure natural resources. The second wave of activity was largely about acquiring brands or technology and other capabilities that Chinese companies could use to help build their businesses at home. “Now, when companies look to acquire beyond China’s borders, it’s often to help them achieve the dual goals of winning at home and exporting abroad, enabling them to strengthen their domestic competitive stance while simultaneously positioning for global expansion, especially in other developing markets,” Bain & Co noted.
This latest stage of M&A is helping Chinese companies gain market share in utilities, construction and Internet-based businesses in countries such as Brazil, India and Indonesia, and it will continue to build momentum in fits and starts.