The COVID-19 pandemic hit Chinese M&A hard in Q1, but the second quarter has already witnessed a remarkable recovery with a total of 434 deals announced—an increase of 56% on Q1. Value also rebounded strongly, with deals worth US$58.19 billion recorded during the second quarter, up more than 16% on Q1.
Looking at the year-on-year trend, the total value of Chinese M&A in H1 2020—US$108.3 billion—represents a 20% decline on the year before. Volume also fell, but less starkly: The total of 713 deals in H1 2020 was 7% below the 770 deals in the year before. This rate of decline is still far less steep than overall global M&A, which dropped 53% and 32% in terms of value and volume respectively.
Inbound upsurge
A key factor in the Q2 recovery was a sharp increase in activity by inbound bidders. The proportion of value represented by this group shot up 24% in Q2 2020 with inbound acquirers preparing to pour more than US$14.06 billion into Chinese companies.
Overseas investment in China’s vast market has been on an upward trajectory since 2015, with overall deal value growing by an average of 11.7% year on year to the end of 2019. However, the proportion of value represented by foreign capital in Q2 2020 is the highest for six years.
US acquirers drove the inbound surge, with announced transactions totaling US$8.36 billion in Q2—the second-highest US quarterly total on record. This was followed by bidders from Hong Kong SAR (US$2.87 billion), Japan (US$1.18 billion) and Singapore (US$1.04 billion).
All of this is taking place against the background of Beijing’s increasing efforts to attract foreign capital and to open up the country’s financial sector. Although the value of financial services-related M&A in Q2 was modest, more than a third of it (37%) was accounted for by inbound bidders.
Tech leads the charge
The technology, media, and telecom (TMT) sector stands out as the best-performing sector in terms of value, with deal activity worth US$26.63 billion in H1 2020. TMT was one of the few sectors that saw a year-on-year rise in deal value, up 69% compared to H1 2019. Volume in the sector remained unchanged.
The biggest transaction of H1 targeting a Chinese company was a TMT deal. The proposed acquisition of 58.com, China’s largest online classifieds marketplace, would see the NYSE-listed company being taken private by a PE consortium in a deal worth nearly US$7.6 billion, if approved.
Earlier this year, a consortium formed by Tencent Holdings and Hammer Capital Opportunities Fund made a US$504 million non-binding bid for 44.36% of Bitauto Holdings. Tencent also participated in a US$2.4 billion investment in online real estate information platform Tianjin Xiaowu.
The most popular sector in terms of deal volume was industrials and chemicals (I&C), which registered 189 transactions in H1. This was a 58% drop on H1 2019, while value in the sector tumbled 67% to US$24.4 billion.
The second-largest transaction of H1 was in I&C: a US$5.3 billion deal in which aluminum extrusion products manufacturer Liaoning Zhongwang Group may become a public company on the Shanghai Stock Exchange through a backdoor listing via a merger with real estate company Cred Holding.
PE focus
Total PE deal value has seen a rise thanks to the trend toward PE-backed take-privates—a point underscored by the proposed 58.com acquisition. Q2 saw 39 PE transactions totaling US$16.8 billion—a 31% increase by value compared to the same period in 2019, although volume was down 17% over the same period.
This increase was mainly fueled by a rise in buyouts. There were 34 buyouts (both primary and secondary) in Q2 worth US$16.1 billion in total—a 26% and 154% year-on-year rise respectively in terms of volume and value. Trade exits, on the other hand, fell 75% in terms of volume and 90% in terms of value year on year in Q2. There were only five such deals, worth US$618 million in total, over the second quarter.
PE firms remain strongly placed to drive deals thanks to record stockpiles of dry powder, now estimated by data provider Preqin to be worth almost US$1.5 trillion globally.
Outbound M&A under pressure
Chinese outbound M&A has fallen dramatically since its 2016 peak, when 384 deals worth nearly US$200 billion were announced. By 2019, the deal total had fallen to 220 transactions worth US$53.26 billion. H1 2020, meanwhile, has seen outbound deal activity hitting new lows.
There were only 62 outbound cross-border transactions involving Chinese bidders in H1 2020, a 41% year-on-year drop and the lowest number in eight years. Value totaled US$7.2 billion, a 65% year-on-year decline.
Among the factors weighing on outbound M&A are growing US-China trade tensions and tougher scrutiny of inbound deals involving Chinese acquirers, particularly by US regulators. The COVID-19 crisis, meanwhile, continues to pile on uncertainty.
Despite overall lower levels of activity, Q2 saw an uptick in outbound deals by Chinese acquirers. Overseas deal value rose to US$4.7 billion in Q2, up 88% on the first quarter, while volume rose from 29 to 33 deals. The top targets for Chinese bidders by value in Q2 were South Korea (US$1.1 billion), Singapore (US$760 million) and Hong Kong SAR (US$670 million).
Inbound opportunities?
Geopolitics and COVID-19 will continue to shape the M&A landscape in H2. The approaching US elections in November could see the current administration taking a tougher stance on China—potentially stimulating further PE buyouts of US-listed Chinese companies.
Meanwhile, COVID-19 will continue to drive the agenda everywhere. The Organisation for Economic Co-operation and Development (OECD) forecasts that Chinese GDP could shrink by up to 3.7% (worst case) in 2020. While a contraction of this size would be unprecedented in China’s recent history, it is much more moderate than the worst-case reductions projected for the OECD and Euro areas of -9.3% and -11.5% respectively.
Against this background, China could look to accelerate liberalization of foreign ownership rules as it seeks to stave off contraction and reboot its huge economy—paving the way for higher levels of inbound investment.