Expect the Unexpected

24 Jul 2020 Miranda Zhao, Head of Mergers and Acquisitions, Natixis Asia Pacific Australia | Editorial

Miranda Zhao
Head of Mergers and Acquisitions
Natixis Asia Pacific

Covid-19 barreled into 2020 like an unprecedented tsunami, disrupting all aspects of our lives, from personal endeavors to business pursuits. It is not surprising that in the first half of 2020, global M&A deal volumes fell by close to 30%, while deal values were down just over 50% year-on-year*, reaching the lowest level since the Global Financial Crisis (‘GFC’). In APAC, as expected, Q2 continued to be a weak quarter, leading to the lowest half-year deal value since 1H 2013. However, today’s situation presents a couple of unique characteristics compared to the GFC period, and in navigating this very special period, we should be prepared to expect the unexpected, such as China becoming a net inbound M&A market for the first time in last 10 years, an increased likelihood of privatizations of large Chinese companies listed in the US, and the fact that 2020 may end up being a record year for capital raisings in Hong Kong, etc.


While uncertainties are so high, it is important to try to better understand recent developments, in order to capture the future opportunities and work closely with our clients. 


In APAC, we have observed a clear divergence between outbound and inbound M&A. While the total outbound deal value is down by 43% compared to 1H 2019, the total inbound deal value surprisingly recorded gentle increase year-on-year. The dramatic change in China’s M&A market is the key driving force of this development, together with the rise of India as a recipient of global M&A flows, as well as Southeast Asian markets.


China continues to be the largest contributor to the APAC M&A market, accounting for 54% of deal value. What is unexpected is that, for the first time in the last ten years, foreign investments into China have surpassed China’s outbound transactions, both in terms of total deal value and the total number of transactions.


China’s outbound transaction deal value decreased by approximately 60-80% in many key markets in Europe and the US. However, total inbound acquisitions and investments by foreign players, doubled in 1H2020 versus the same period in 2019. To put things in context – over the past 5 years (2015-2019), total deal value for China outbound was 3-4 times larger than China inbound, and 2-3 times more in terms of deal number.


One explanation for this dramatic change is that a significant number of countries and regions have tightened their regulations around their Foreign Direct Investment ('FDI') approval processes in response to the Covid-19 pandemic, in order to protect domestic companies, especially those in sensitive and strategic sectors, from opportunistic acquisitions by foreign parties. By 2020 year-end, we expect to see new EU Regulations, establishing a framework for the screening of FDI. In the US, CFIUS (Committee on Foreign Investment in the United States)’s jurisdiction continues to be expanded, and there are discussions around potential new regulations around de-listing of foreign companies. In Asia, we are seeing tightening regulations by, for example, the FIRB (Foreign Investment review Board) in Australia, and additional approvals will be required for investments from any country with a land border with India.


Aside from the tightening of FDI controls globally and the more challenging geopolitical climate, especially between the US and China, this dramatic change can also be explained by China’s accelerating its ‘opening-up’ policies to attract capital overseas. China has lifted foreign ownership limits on sectors previously considered strategic, such as securities and fund management and lowered the restrictions of foreign strategic investments into China A-share listed companies. It has actively promoted FDI into manufacturing and consumer sectors, as well as the services industry. The recent policy has driven many financial institutions acquiring controlling stakes in their Joint Ventures (‘JV’) in China in securities, insurance and fund management sectors, including Goldman Sachs, JP Morgan, UBS and AIA, to name a few. What is worth mentioning too, is that while China is certainty opening up some sectors to attract foreign capital, it is also working to build its own supply chain for what it considers to be key strategic sectors, striving for a high level of self-reliance during this unexpected time. The government has also strongly encouraged some domestic funds in China to support their local economy, and similarly, some domestic investors may just naturally prefers to focus on their home market or very selected regions with more deal certainties instead, given the increased FDI scrutiny process in many of the overseas countries in current environment.


Also, there are more and more discussions around the potential privatization of some of Chinese companies currently listed in the US due to the regulatory uncertainties and the political tensions between the two countries. The US-listed Chinese e-commerce player 58.com was taken private for USD 7.6bn in June 2020, and Sina.com announced a similar move and more are coming.


Apart from the recent policy driven inbound activities, from a long-term perspective, China remains a critical market for multinationals; it is still the largest global growth engine, with a sizeable domestic market and increasing consumption. While some multinational companies may exit China due to market competitiveness or global supply chain movements for example, we still see a meaningful amount of inbound investment through JV or acquisition of Chinese businesses. Volkswagen has announced two sizeable deals in 1H 2020 with a total transaction value of around USD 2bn, to both increase its shares in its China JV and to acquire a 26% stake of China’s Guoxuan High-Tech, one of the largest electric vehicle battery players. The French state-controlled EDF is setting up its China JV with China Energy Investment Corporation to capture the significant growth potential in China offshore wind farms market. PepsiCo has also announced the acquisition of one of China’s major online snacking players, Baicao Flavor, for around USD 700m, to further expand its market share in China. Meanwhile, global financial sponsors are also actively exploring opportunities in China, with tech being one of the most focused sectors.


Although inbound and domestic activities have dominated  China’s M&A market in 1H2020, and this situation may last for a certain period of time, we do expect China outbound M&A to pick up over time, likely after the Covid-19 crisis subsides globally and there is more clarity around the FDI restrictions.


Apart from China, India has also seen a recent spike in interest from multinationals, especially in the technology sector. Global giants such as Google, Facebook and Microsoft have taken a strong interest in this large and fast-growing economy. Jio Platforms, Indian’s largest telecom operator, has raised significant funds from international players including US tech giants and Middle Eastern investors, with the total amount reaching around USD 20bn as of July 2020. However, it remains to be seen if this trend can be broadened and sustained.


Southeast Asia continues to attract global and regional M&A flows too. Again here, the technology and consumer sectors are the most active. For example, Singapore-based Grab successfully raised another USD 856m from Japanese investors in February 2020, after attracting multi-billion investments globally during 2018 and 2019.

As a conclusion, it is too early to write off Asia, especially China, as a major outbound M&A driver, but the region has been attracting global businesses looking for growth opportunities and continues to open up structurally.


Despite lower deal volume, the M&A world remains very busy with the existing pipeline to be executed, the need to come up with innovative structures to deal with market uncertainties or regulatory issues in order to make those deals happen, and finally the responsibilities to identify and capitalize on those unexpected developments. Our China Boutique, Vermilion Partners, experts in China cross-border M&A for over 20 years, is actively working on several Inbound transactions. Our clients are facing unprecedented challenges as much as we are, as their partner, we will be working closely with them to come out stronger together through the situations created by this “unexpected” world.


*Source: Mergermarket

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