China Outbound M&A Report

As they make more overseas acquisitions, Chinese companies are learning the critical nuances that contribute to a deal’s success. By Philip Leung, Hao Zhou and Dorothy Cai More Rigor Means Better Results in China’s Global Pursuit Philip Leung is a Bain & Company partner based in Shanghai, and he leads the firm’s Mergers & Acquisitions practice in Asia-Pacific. Hao Zhou is a Bain partner based in Hong Kong, and he leads the firm’s M&A practice in Greater China. Dorothy Cai is a Bain partner based in Toronto.Great Repeatable Models® and Repeatable Models® are registered trademarks of Bain & Company, Inc.Copyright © 2018 Bain & Company, Inc. All rights reserved. More Rigor Means Better Results in China’s Global Pursuit1At a Glance Chinese companies use outbound M&A to develop capabilities that will help them win at home or gain leadership in selected industries overseas. In 2015–2017, China represented more than 40% of deals in Asia-Pacific, but its share dropped dramatically in the first half of 2018. As a percentage of GDP, China usually spends half of what Japan spends on outbound M&A. As Chinese companies become more experienced at outbound M&A, they gain sophistication in critical capabilities, such as developing a clear investment thesis, due diligence and merger integration.Chinese companies acquiring overseas are entering their third phase. During the first phase, the vast majority of outbound M&A deals were made to secure natural resources. The second wave of activity was largely about acquiring brands or technology and other capabilities that Chinese companies could use to help build their businesses at home. Now, when companies look to acquire beyond China’s borders, it’s often to help them achieve the dual goals of winning at home and exporting abroad, enabling them to strengthen their domestic competitive stance while simultaneously positioning for global expansion, especially in other developing markets (see Figure 1).This latest stage of M&A is helping Chinese companies gain market share in utilities, construction and Internet-based businesses in countries such as Brazil, India and Indonesia, and it will continue to build momentum in fits and starts. Outbound deals for the first half of 2018 totaled $22 billion, a significant drop from $56.7 billion for the same period in 2017 and from $118.7 billion for the first half of 2016. A host of factors contributed to that decline. Currency depreciation took a toll, for example, as did fears of the effects of the US–China trade wars on both domestic company profits and US opportunities (see the related article “M&A in a Time of Trade Wars”). Also, deals were hurt by restrictions on investments in the US, Germany, Australia and other markets, as well as the Chinese government’s careful monitor-ing of outbound investments.While deal volume dropped in the first half of 2018, it conducted more than 40% of all outbound M&A activity in Asia-Pacific during 2015–2017, with significantly more deals aimed at gaining full or a controlling stake, according to Bain analysis (see Figure 2 and the appendix). Also, despite the decline in volume, the number of Chinese outbound deals for 100% ownership from 2016 to 2017 (the third phase) more than doubled vs. 2013 to 2015 (the second phase), and the number of deals for 50% to 100% ownership rose by more than threefold. More Rigor Means Better Results in China’s Global Pursuit2Notes: The deal value includes only deals with announced value; the deal count includes all dealsSources: Dealogic; Bain analysisIndustry• Oil and gas• Utilities and alternative energy• Technology, media and telecommunications• Industry goods• Consumer products• Technology, media and telecommunications; utilities and alternative energy (export abroad)• Consumer products (win at home, export abroad) • Healthcare (win at home)• Fast-growing deals in regions with natural resources—for instance, Australia (nearly 14% share) and Latin America (nearly 13% share) • Deals back to Europe for advanced technologies, products and brands• Europe and North America still key markets• New hot destinations in developing markets—for instance, Latin America • Secure supply of critical natural resources to satisfy fast-growing domestic demands• Import advanced technologies, premium brands, high-quality products to China’s local market• Explore new growth opportunities in global markets• Strengthen technical capabilities to nurture domestic marketDestinationObjective and focus Acquire natural resourcesImport technology and brandsWin at home, export abroad0100200$300BChina strategic outbound M&A deal value2008382009332010572011582012612013652014712015872016202201784Year305648359424452461443455637811Deal count –1% 4%Other –7% –33%ASEAN-5 –11% –13%Australasia –1% 9%South Korea –9% 0%Singapore 8% –5%India –11% –31%Japan –10% 8%China 11% 7%Asia-Pacific deal countPercentage of Asia-Pacific deal value that China comprisesNotes: The deal value includes only deals with anno