Why Chinese companies are using Hong Kong for outbound M&A

September 12, 2012 | BY

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Chinese outbound investment has grown exponentially in the past two years, but as domestic companies become more ambitious, does Hong Kong still have a role to play?

“When Chinese companies think about outbound, they always think about Hong Kong,” said Jeffrey Mak, a partner at DLA Piper's Hong Kong office who specialises in securities and corporate transactions.

In 2010, Chinese outbound investment reached $56.5 billion. A year later, that amount doubled to $116 billion. Chinese companies have become more adventurous with their investments. They are looking farther afield and tapping into new markets.

Bright Food's two high-profile acquisitions in the UK and France and Dalian Wanda Group's acquisition of AMC in the US highlight these developments and how complex outbound investment is becoming.

Mak, who recently assisted a mainland listed company, Success Well Investments, take over a Hong Kong listed company, Tonic Industries, argues that Hong Kong has many advantages when it comes to outbound transactions.


Transactional haven

The territory is culturally and geographically close to the mainland. In addition, the stock market is also gaining traction with investors. A vibrant stock market is essential for mainland companies looking to raise funds.

Hong Kong and the mainland also enjoy multiple advantages under the Closer Economic Partnership Agreement (CEPA). The bilateral agreements facilitate cross-border transactions and companies can enjoy certain tax benefits.

For example, when using a Hong Kong-based company as an intermediate, business enterprises can enjoy a lower tax rate when remitting profits via the Hong Kong company. “By using a Hong Kong company, investors have the flexibility of a better oriented structure, which is less prone to income tax,” said Mak.

Hong Kong's infrastructure is also attractive. Banking and legal professionals can use market intelligence and better advise mainland companies, who are used to dealing with a closed and regulated market. The guidance offered by this talent is invaluable to potential investors from across the border.


International platform

With its multiple advantages, the territory also provides a perfect platform from which companies can expand their business operations.

“Chinese companies do not just have a mind to develop a business in Hong Kong, they are also thinking about how to get into the international market,” noted Mak.

Establishing or acquiring a presence in Hong Kong brings the company into a credible international network. The territory opens doors to international branches and provides important connections abroad.

The 2009 acquisition of Taifook Securities by Haitong Securities for $253 million is an example of a company making use of that platform to further develop into other parts of the world, said Mak.


Preparation

Despite Hong Kong's status as a haven, preparation is still needed. The territory opens a door, but understanding the legal differences and possessing market intelligence are essential.

“The acquirers would also have their own studies and integration plan. They need to look at integrating the target with their business and it is important for the future that they try maximise the opportunities from the transaction,” said Mak.

The M&A market is not a quiet space, with $35.4 billion already invested in Chinese outbound deals in the first half of this year. Mak notes that there might be a shift in activity attention from initial public offerings (IPOs) to M&A transactions as well, which will only increase Hong Kong's role as a platform for outbound transactions.

By David Tring

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