Chinese firms set to take acquisition opportunities
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Chinese companies intend to seek growth opportunities in mergers and acquisitions in the second half of the year, capitalizing on the means, motivation and opportunities available, according to a survey by Ernst & Young.
The bi-annual Capital Confidence Barometer revealed that 51 percent of Chinese respondents are likely or highly likely to make an acquisition in the next 12 months. The global average was 44 percent. And, when presented with the prospect of making an acquisition at short notice, half of Chinese executives say they are financially and strategically well-positioned to act quickly.
The report cites increased corporate confidence and economic recovery as the main driving forces behind merger and acquisition activity this year.
According to the CCB, 82 percent of Chinese respondents felt more confident about prospects for the domestic economy than six months ago, while 71 percent of China respondents said credit and capital conditions are better now than six months ago.
"Conditions that facilitate mergers and acquisitions are changing positively," said Bob Partridge, Ernst & Young Greater China Leader of Transaction Advisory Services, in a press release. "2010 was a year of recovery worldwide and Chinese corporate deal-making could really roar back into the headlines in 2011. Chinese companies clearly have a stronger appetite for transactions than their global counterparts."
Interest rate hikes 'not a big deal'
The recent interest rate hikes set by the central bank and tightening credit will unlikely deter Chinese companies from seeking acquisitions.
Cai Lin, China North Leader of Transaction Advisory Services at Ernst & Young, said the rise in interest rates would "certainly" affect the market – for example, when it comes to valuations – but "it's not a big deal."
"Globally, mergers and acquisitions are made through loans or debt," Cai said. "But Chinese companies prefer to make investments in cash."
And, as Cai pointed out: "Most Chinese companies have plenty of cash and usually they needn’t borrow money from the bank." A company abundant in cash will not be as affected by capital market volatility.
According to the survey, Chinese respondents expect to narrow their focus on their cash position over the next 12 months. The bulk of executives, 79 percent, said they would concentrate on cash flow liquidity over the next year, with 61% saying operational and cost efficiencies will receive increased attention.
The survey also shows that Chinese executives are comfortable with their debt situation, reflecting improving sentiment about global credit conditions. Of the respondents, 44 percent said they do not need to refinance their debt obligations.
Number of foreign transactions to grow
Outbound transactions are a growing force in the Chinese merger and acquisition landscape, the survey shows. "Chinese companies are increasingly competitive with more established international companies," the press release says. Over the next six months, 35 percent of Chinese companies expect to make emerging market acquisitions, compared to 31 percent of global companies.
Another recent report from Ernst & Young showed that China was the fifth largest global outbound investor in 2009, up seven places from a year earlier.
Still, the increase in foreign investments by Chinese companies does not mean a lack of interest in the domestic market. Cai predicts that there will be more domestic mergers than foreign ones.
"Overseas mergers and acquisitions are more likely to catch people's attention, probably because they are larger," Cai said. "But the trend in domestic mergers and acquisitions is growing strongly. Although the price of a single merger or acquisition may be lower than an international one, the total domestic amount should be huge and substantive."
