Chinese foreign M&A slowing but growing smarter, shows Bain report

17 October 2018 4 min. read

Despite slowing growth, the outbound mergers & acquisitions activity of Chinese firms is increasing in sophistication according to a new report from Bain & Company.

"Chinese companies acquiring overseas are entering their third phase," contends global strategy and management firm Bain & Company in the introduction to its latest report on the M&A market of China: ‘More Rigor Means Better Results in China’s Global Pursuit.’ The report looks into the increasing sophistication and strategic targeting of Chinese firms engaging in foreign purchases, despite an overall decline in activity.

According to Bain, the first phase of Chinese foreign M&A saw the vast majority of outbound deals conducted in the interests of securing natural resources, while the second phase concerned the acquisition of brands or technologies to improve domestic capacity and compete in the local market. Now, the firm says, Chinese companies are on the lookout for business entities which will help position them for global expansion – especially in other emerging markets.Development of Chinese foreign M&A strategyThe ten-year study of Chinese outbound deal value and type from 2008 to 2017 reveals that up until 2012 the majority of deals were in the oil & gas and utilities and alternative energies sectors, with regions such as Australia and Latin America accounting for a large share of transactions, at 14 percent and 13 percent respectively. Over this period, foreign deal value and count steadily rose, from $38 billion and 305 deals in 2008 to $61 billion from 461 deals in 2012 (excluding the worth of deals with an undisclosed value).

A shift then occurred between 2013 and 2015, with deals migrating to Europe with a focus on the technology, media and telecommunications (TMT), industry goods and consumer products sectors, with Chinese firms seeking to import advanced technologies, high-quality products and premium brands to their local market – the deal count exploding to 637 in 2015 from 455 the year prior, reaching a combined ‘known-value’ price-tag of $87 billion.

Lastly, over the past two years, a new phase of activity has emerged, with purchases pursued with the dual purpose of competing at home and expanding abroad. While the US and Europe are still the largest destinations for outbound M&A, this stage, Bain outlines, is ‘helping Chinese companies gain market share in utilities, construction and Internet-based businesses in countries such as Brazil, India and Indonesia.” Chinese M&A value in Latin America has more than doubled since 2016.Ten-year Asia Pacific share of foreign M&A by countryDespite this pivot to capture overseas markets, and an initial boom in deal count and value in 2016 – jumping to 637 handshakes worth a whopping $202 billion – Chinese outbound M&A activity has since been in decline, dropping back to roughly 2015 levels last year (684 deals worth a known $84 billion) and continuing the downward trend in the first half of this year – totaling a worth of just $22 billion compared to $56.7 billion for the same period last year.

The slowdown in activity can be attributed to a number of factors according to the report – a weakening yuan, uncertainty over the escalating trade war with the US, growing restrictions in markets such as Australia, Germany and the US – yet, Bain contends that China’s outbound boom will only continue in the longer run, with the market becoming increasingly more sophisticated and rigorous in its approach as it learns valuable lessons from past missteps.

One aspect of this acquired acumen is in the development of repeatable models, with Bain noting a hallmark of this approach is in the basic retention of an acquired company’s operating model and key personnel. “In the past, many Chinese acquirers assumed that they would need to take full control of, or at least strongly influence, the management of an acquired business,” states the report. “Now, leaders take a more sophisticated approach… learn(ing) when it pays to use a lighter control model.”

Bain’s head of Greater China Hao Zhou however sounds a small note of caution for Chinese companies at the front of the overseas acquisitions boom; “As they build their repeatable models, they will also need to keep one eye on the future. In China, as elsewhere, winning outbound acquirers will be those that make the necessary adjustments to evolve their M&A strategy along with a global market that never stops changing.”