Outbound M&As on the rise, says report

High-quality assets available as West struggles with economic crisis

Outbound merger and acquisition deals by Chinese companies are expected to increase next year, a report said on Wednesday.

Due to the eurozone debt crisis, many high-quality assets have became available in Europe at competitive valuations, so Chinese companies have been active in large-scale M&A deals since 2011, said a report by Chinese research firm ChinaVenture Group.

The main sectors for M&A activity are expected to be energy, engineering machinery and infrastructure, which require significant funds and policy support. Chinese companies in these sectors are expected to increase their M&A activity next year, ChinaVenture said.

"China has a huge demand for energy and is going abroad to seek opportunities," said Wan Ge, author of the report and an analyst at ChinaVenture.

"Usually, Chinese buyers are State-owned enterprises so the trade value of these deals is considerable," Wan said.

M&A deals by Chinese companies linked to their own industry sector are also becoming increasingly popular.

In September, Lenovo Group paid 300 million reais ($144.10 million) in both cash and shares to acquire CCE, Brazil's largest domestic electronics maker. And in October, Lenovo invested 115 million euros ($151.65 million) in German consumer electronics company Medion AG for a 17.32 percent stake.

Meanwhile, as private companies require funds to go abroad for M&A deals and face some obstacles when they try to get loans from banks, venture capital and private equity firms will play a more important role in helping these companies - as well as the State-owned ones - in the next few years, said the ChinaVenture report.

For instance, Sany Heavy Industry Co and Citic PE Advisors paid 360 million euros this year for concrete-pump maker Putzmeister Holding GmbH to add technology know-how and expand overseas.

Additionally, as of Dec 21, 837 Chinese companies were waiting for their initial public offering, or IPO, applications to be reviewed. Since many of them are backed by venture capital and private equity firms, M&A deals are expected to be an important way for those VC and PE firms to exit their investments next year.

"Nowadays, as the United States stock market is chilly, the IPO channel for investment exits has been blocked somewhat. For VC and PE companies, M&A deals are an effective way to exit their investments," said Xiong Xiaoge, a founding partner of VC firm IDG Capital.

Since the start of the year, there have been some large-scale M&A deals in the domestic medical and healthcare industry.

According to the report, government policies and further consolidation of the medical industry mean even more M&A deals are expected in the sector in 2013.

According to ChinaVenture, by the end of November, the value of M&A deals announced totaled $266 billion, compared with $103.5 billion in 2007.

"The number and value of completed outbound M&A deals have greatly increased. One of the main reasons is that Chinese companies have been showing great confidence in developing their businesses by merging with and acquiring overseas companies," said Wan.

Separately, a report by law firm Clifford Chance LLP said that Chinese companies will continue to focus on the M&A markets of China, Africa and Latin America.

The underlying rationale for many deals in the US and Europe is actually to increase company exposure to higher-growth markets elsewhere.

However, Qiu Bochun, a lawyer at US-based firm Cooley, which helps Chinese companies to conduct business overseas, said that Chinese companies should be more cautious when they go abroad.

"Doing M&A overseas is much more complex because of the different cultural and investment environments in different nations. To make the M&A deals successful, the companies should know more about local markets, their laws and the business environment," said Qiu.