China Leading The Asian M&A Growth Wave

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Includes: CHN, CN, CXSE, FCA, FXI, FXP, GCH, GXC, JFC, MCHI, PGJ, TDF, XPP, YANG, YAO, YINN, YXI
by: Reid K.

By Reid Kirchenbauer

Despite the worsening economic situations in 2015, Asia saw its highest ever M&A volume with record levels of growth, particularly fueled by the immense growth in China's own M&A market. Overtaking the EU to become the second most active region for the very first time, the Asian M&A volume reached over US$770 billion by October of 2015.

It is essential to cover the countries and sectors that are contributing the most to this change to truly understand the phenomenon.

Despite economic uncertainty in China, it has not stopped the PRC contributing to nearly half of the total M&A volume, with Australia following closely. In fact, the volume in China alone in the first 9 months were nearly 50% higher than in the previous year.

As for the most targeted sectors, technology leads the way with a little above US$120 billion worth of total deals, with real estate and holding companies following closely behind.

Slowing Economy, Hastening M&A Activity?

Even though increased M&A volume during times of economic instability might not make sense, there is a perfectly rational explanation for the behavior.

According to the head of research on M&A at Dealogic, the primary reason firms are aggressively making acquisitions of smaller firms are to produce growth to satisfy the demands of their shareholders.

Acquisitions satisfy the shareholders because most of the acquisitions boost earnings, which would lead to a higher dividend payout by the company. It would effectively increase the earnings of the acquiring company and keep its shareholders happy.

According to the same professional, this is the perfect time for companies with deep pockets to take over smaller companies in the market in an attempt to consolidate their market position.

And in the region, China seems to be leading this movement.

China Will Retain its Top Spot for M&A

The country's wild acquisition spree in 2015 was the main driving force in breaking the US$1 trillion ceiling for Asia-Pacific's annual M&A volume. It is also one of the main reasons why market analysts expect 2016 to be even stronger for the region.

According to preliminary data from Thomson Reuters, 2015 saw a total M&A volume of US$1.2 trillion, which was a whopping 46% increase from the previous year's figures.

Just as the worsening economic situation of the world economy is driving many acquisitions in Asia, it is having the same effect in mainland China, but for another reason. Due to its slowing economic growth, Chinese firms are looking to invest abroad to acquire cutting-edge technology to improve their production processes, especially with the current weakening Chinese yuan.

The main type of firms expected to be affected are the chipmakers and agrochemical suppliers.

Statistics show that the top three global sectors for M&A were technology, healthcare, and real estate. This holds true for China as well, with bankers expecting much more M&A among Chinese tech companies, especially with the declining GDP growth and intense local competition.

Beijing is Backing China M&A

Even though the country's larger state-owned enterprises are less active in the M&A market than before, many M&A activities are still being backed by the central government, especially in the chipmakers and agrochemical suppliers.

Prime examples that should be carefully monitored due to the estimated impact it will have on M&A volume in 2016 are Tsinghua Unigroup Ltd. and China National Chemicals Corp.

The state has given the green light to invest about US$47 billion in Tsinghua Unigroup Ltd., hoping for it to become one of the top three chipmakers.

The media also reported that the state-owned China National Chemicals Corp, better known as ChemChina, is also looking to buy European agrochemicals maker Syngenta AG (NYSE:SYT), now valued at around US$35 billion.

2015 saw a great increase in the M&A volume across the Asia-Pacific, led by China. 2016 does not look to be any different.

With over 4 billion people and rapid economic expansion, Asia will be the main driver of growth in the 21st century.