M&A REGULATORY THREATS LOOM, FOREIGN INTEREST WANES
July 01, 2007 | BY
clpstaffGreater regulatory oversight of foreign acquisitions of domestic firms has been written into the draft anti-monopoly law, according to China Daily. State…
Greater regulatory oversight of foreign acquisitions of domestic firms has been written into the draft anti-monopoly law, according to China Daily. State media have warned that foreigners seeking to acquire Chinese firms will face tougher national security checks.
“Foreign mergers and acquisitions of domestic companies or foreign capital invested in domestic companies in other forms should be examined … if the cases are related to national security,” the newspaper quoted the draft law as saying. The draft law has been submitted to top legislators for a second reading.
According to a Pricewaterhouse Coopers report on July 17 2007, merger and acquisition (M&A) activity has continued to grow with the buoyant equity market, and domestic transaction volumes have increased rapidly. However, the source of this activity appears to be increasingly domestic.
Local fears of foreign monopolies in the past had in part been generated by the growth in M&A activity involving foreign investors, and yet foreign interest seems to have diverged from the steadily-climbing local demand due in part to high prices, according to PwC. Selling prices are often pegged to A-share valuations that are high multiples of earnings, rather than to the underlying value. Some Chinese companies will pursue an initial public offering (IPO) at the same time as negotiating a buyout, in order to have a fallback position, which also allows the sellers to ask for more.
“There is still a huge appetite for deals in China, and that appetite is growing,” says David Brown, a PwC transactions partner in Hong Kong. “However, with the recovery of the stock markets since April 2006, valuation expectations have inflated, and many deals are being derailed by valuation gaps.” Brown notes that the perception in China of foreigners having “deeper pockets” might also contribute to unequal pricing in such deals.
Reports gathered by PwC say that announced deal volumes increased by 20% to 808 inbound deals in the first six months of 2007, up from 674 in the same period last year. Nearly all of this increase is attributed to domestic transactions. Disclosed deal value, meanwhile, fell slightly to US$27.6 billion in the first six months, compared to US$29.4 billion last year. Such figures can be difficult to interpret, however, as they are easily affected by large one-off transactions, such as sales of assets by state-owned groups to listed parents and backdoor listings. Also worth noting is the government's encouragement of its flagship industries to invest outward, to secure natural resources through outbound investment.
Thus, M&A numbers have not grown as much as expected, but should grow exponentially in future, according to PwC. “They haven't grown as strongly as we thought that they would,” says Brown, “[but we] generally expect those numbers to get a lot bigger
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