9 September 2019

BDA’s Charles Maynard speaks to Nikkei Asian Review on China’s overseas acquisitions

September 09, 2019

The Nikkei Asian Review
By Takeshi Kihara

Overseas acquisitions by Chinese companies plummeted in the first half of 2019, as tighter capital controls at home and growing wariness of Chinese takeovers abroad stifled such activity.

Chinese businesses spent $24.5 billion on foreign acquisitions during those six months, down 42% on the year and less than one-fifth of the most recent peak seen in the first half of 2016, data from Dealogic shows. No deals exceeded $10 billion, the kind that attracts the attention of regulators.

“Governments around the world have become sensitive to mergers and acquisitions by Chinese enterprises, those by state-owned enterprises have especially attracted scrutiny,” said Erica Su, Ernst & Young’s head of transaction advisory services in Greater China.

The number of outbound deals in the first half fell to a five-year low of 251. These include state-run chipmaker Unigroup Guoxin Microelectronics disclosing in June plans to fully acquire Linxens, a French supplier of smart chip components, for $2.6 billion.

U.S. President Donald Trump signed a bill in August 2018 granting greater authority to the Committee on Foreign Investment in the United States to screen acquisitions by overseas buyers. A pilot program enacting the committee’s new powers began in November.

The framework applied to 27 industries including semiconductors, telecommunications and sectors tied to defense. Businesses in the affected sectors are required to report all foreign direct investments to the panel, no matter the amount.

If the committee finds the transaction to be a national security threat, it will recommend that the White House block the deal. Trump had enforced the panel’s guidance in early 2018 when Broadcom, the chipmaker then based in Singapore, attempted to buy out U.S. peer Qualcomm.

Though few deals have been blocked, the expanded oversight creates extra red tape for companies, such as document preparation. Numerous agencies have grown suspicious of Chinese enterprises, said Robin Ganguly at data provider Acuris, who cited the lengthy time needed to review acquisitions and the instances in which transactions failed to go through.

Chinese acquisitions in the U.S. have dropped by 87% over the past three years, along with a 91% decline in Europe. This pattern indicates the outsize impact of restrictions by Chinese financial authorities, said Charles Maynard, co-founder of U.S. investment bank BDA Partners.

Since late 2016, Beijing has required domestic enterprises to submit overseas buyouts valued above a certain level to preliminary reviews. This move came in response to high-profile purchases by conglomerates HNA Group and Fosun International.

The rules were meant to stem the risk of capital flight at that time, as noted by Ernst & Young’s Su.

“The authorities were seeking to prevent the overdependence on debt, limit M&As to targets that have synergies with core businesses and avert capital outflow,” she said.

Yet the restrictions remain to this day.

State-owned enterprises are shaking up their acquisition strategies by establishing numerous investment funds that back innovative target companies, Su said. Chinese businesses are seeking investment opportunities in Southeast Asia, Africa, Russia and other regions involved in the Beijing’s Belt and Road infrastructure initiative, she said.

It was announced in April that state carrier China Telecom signed a deal pouring $5.4 billion into Mislatel, the third major mobile service provider in the Philippines. Deep-pocketed Chinese enterprises have begun looking not just at the Philippines, but also at Vietnam, Myanmar and other Asian countries as well, Ganguly said.

About BDA

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 20 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul, and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

BDA Partners has strategic partnerships with William Blair, a premier global investment banking business, and with DBJ (Development Bank of Japan), a Japanese Government-owned bank with US$150bn of assets.