Outbound M&A activity on the rise, survey says

Chinese outbound mergers and acquisitions activity is expected to increase this year, partly supported by the continued implementation of the country's 12th Five-Year Plan (2011-15) and other drivers, according to a survey conducted by Deloitte Touche Tohmatsu.

Outbound M&A deals are expected to increase more than 10 percent in the next 12 months despite the mixed macroeconomic outlook, the survey said.

Despite the fact that the Chinese economy is undergoing a recalibration, as it looks to move away from an export-led growth model toward a model based on domestic consumption, industry practitioners from across the world expect Chinese overseas investments to continue to grow, said Lawrence Chia, head of Deloitte China M&A Services and co-chairman of Deloitte Global Chinese Services Group.

However, among the 69 M&A practitioners who have completed the survey, 78 percent of them expect deal sizes to be lower than $300 million this year, while about 55 percent believe that the bulk of all Chinese outbound M&A deals will take place in the lower-to-mid market space.

As the energy and resources sector continues to dominate China's outbound M&A transactions, more than half of the respondents said they believe that most of the upcoming Chinese acquisitions in the sector will take place in South America, while 20 percent of the respondents think the bulk of energy and resources-related outbound deals will be to acquire North American and European assets.

Meanwhile, North America is considered the most attractive target for potential deals in the technology, media and telecommunications sectors, as well as for real estate acquisitions by Chinese buyers.

From 2005 to the third quarter of 2012, around 41 percent of all outbound technology, media and telecom deals were to buy North American targets, according to Deloitte's data.

"Chinese companies are more likely to buy firms in the United States to acquire their technological know-how, while they buy European companies to secure brand names," said Chia. "Meanwhile, they are also expected to buy into the Asia Pacific region to expand their market share."

Chinese companies are also interested in buying life sciences and healthcare assets in North America and Europe to complement existing products or to allow them to move into new product areas.

According to M&A information provider Mergermarket, China Resources Saike Pharmaceutical Co Ltd - the Beijing-based drug maker owned by State-controlled China Resources Pharmaceutical Group - is actively seeking buyers overseas, especially of European specialist companies to widen its portfolio at home.

Meanwhile, the bulk of respondents who had conducted an overseas transaction said that the outcome of their deal was only marginally successful or not successful at all, the survey found.

The main obstacle that Chinese companies looking to acquire targets in North America face is the legislation that stifles foreign ownership of companies.

Plus, the management of cultural clashes when it comes to the price expectations of buyers and sellers could also affect potential outbound opportunities in North America.

Based on China's largest outbound M&A transaction so far, the CNOOC Ltd-Nexen Inc deal - which has seen its review stage delayed several times - the report said that another challenge that Chinese companies face in the North American energy market is whether they will be able to negotiate regulatory hurdles in both Washington and Ottawa.

"In order to ensure the success of their transactions, we recommend that Chinese bidders carry out a comprehensive amount of due-diligence during the deal," said Chia.

"The impact of this can be clearly seen in the survey results, which show that respondents who undertook the least due diligence work went on to suggest that the outcomes of their M&A deals were relatively unsuccessful."