The number of deals has dropped since 2016
In 2019, the value and volume of M&A in China dropped by 14% and 13% respectively from 2018. Both domestic and outbound deals declined especially large deals. Both the volume and value of deals in first half of 2020 drastically dropped while the world was battling COVID-19. This report breaks down the inbound and domestic M&A market in China to show the trends between deal size, industries, and COVID-19 impact.
The below graph shows the value and volume (in billion USD) of China’s M&A market. Since peaking in 2016, deals have become smaller and less frequent.
Data Source: pwc, The M&A market in China report by daxue consulting, Value and volume of Mergers & Acquisitions in China
Technology bans, economic slowdown and new policies restricting Chinese M&A initiatives are all factors that caused the record level of 2015-2016 M&A in China to be unsustainable. Overall M&A value has fell back to pre-2015 levels. However, total deal volume is relatively consistent as small-sized transactions remained active in every month.
Financials and materials industries have been historically active in M&A
The industries with the largest M&A activity in China were the financial, materials and industrials sectors during 2000-2016. Newly active industries such as Chinese high-tech, media and entertainment were also on the rise.
Data Source: IMMA institute, The M&A market in China report by daxue consulting, Number of announced M&A deals in China by industry
Inbound vs. outbound M&A
Domestic M&A deals take up to 80% of all deals involving a Chinese player. During the past decade, China’s inbound M&A has averaged 20-25 billion USD per year. However, the inbound M&A market has fluctuated since the 2008 financial crisis. Since then, less deals at a higher value signifies that foreign companies have an appetite for large M&A deals as they are driven by China’s policy liberalization and matured enterprises. In 2019, the USA was the largest source of China’s inbound M&A, both value and number. There were also many acquirers from Europe which were mostly small deals.
Data Source: Merrill, The M&A market in China report by daxue consulting, Source regions/countries of China’s inbound M&A deals
In terms of outbound deals, since 2016, China’s outbound M&A value and volume both are on the decline. However, the value fell was faster than the volume fell, hence large deals fell more than small deals. The main driver of the decline includes the increased security scrutiny in North America and Europe, and the uncertainty from antitrust regulators globally. Therefore, early planning and engagement with regulators in the cross-border M&A market is important.
Data Source: pwc, The M&A market in China report by daxue consulting, M&A from China and Hong Kong to abroad (Outbound)
The private equity (PE) market continues to garner interest
The total value of PE deals in China reached US $206.3 billion in 2019. PE held up reasonably well and there was strong foreign inbound M&A. Although this category is relatively small, PE deals were high in industrial and Chinese consumer sectors, but declined in high-tech deals. Besides, due to the increasing pressure of financing, there was a large number of PE exits and PE-backed IPOs, especially the PE trade-sales of secondary transactions. The same year, there has been a decline in many sectors’ M&A deals due to the deleveraging policy that reduced financing channels in China’s market. However, M&A deals in industrials hit a new high as the Chinese government released many favorable policies.
Data Source: ThomsonReuters, The M&A market in China report by daxue consulting, Number of China’s PE/VC-baked deals exit by types
Impact of the COVID-19 outbreak on the M&A deals in China
During COVID-19 outbreak in China, many Chinese companies had to declare bankruptcy due to operating losses. This was mostly in the finance, education, e-commerce and entertainment industries. 55% of these companies were startups under three years old. In the meantime, the registration of new firms between January and March 2020 fell 29% from a year earlier.
Data Source: IT桔子, Qcc, The M&A market in China report by daxue consulting, The distribution of bankrupt companies in China by industries and the distribution of new companies in China by industry
There were several reasons for the decrease. First of all, limited face-to-face meetings made it difficult to seal deals, especially large deals which require prolonged face-to-face meetings. Secondly, companies are facing a lack of debt-financing and an unpredictable stock market. Therefore, they decide to focus on internal handling of the pandemic over making deals. During the epidemic, stock market was unpredictable.
However, COVID-19 was not only a limitation for M&A deals in China, but also a driver. Many industries need financial support because of lost revenue during COVID-19, which created opportunities for mergers. For example, companies in the travel, hospitality and entertainment industries may be looking for buyers. Research by BCG has shown that the total shareholder return is often higher for deals made during an economic downturn. For those in a position to acquire, it could be a strategic time to acquire IP, talent and capabilities.
Retail & consumer sector: online retail M&A deals in China are on the rise
From 2016 to 2019, China’s M&A value in online retail surpassed traditional retail, although the whole M&A size showed a decreasing trend in retail and consumer sector. The online retail sector M&A deals were larger in size than other subsectors. It is because Chinese e-commerce giants (like Alibaba and JD) largely expanded their businesses through M&A. It is the most active segment for investment since the rise of new retail. Financial buyers are the main force of online retail deals.
Data Source: ThomsonReuters, The M&A market in China report by daxue consulting, China’s R&C deals size by subsector
The large deals among domestic online retail enterprises slumped after 2016 while many foreign companies came to the market in 2019. The inbound M&A deals could be a new growth point.
Alibaba leads cross-border ecommerce by acquiring Kaola
Kaola was a cross-border ecommerce platform under NetEase, which focuses on selling imported consumer goods in China. In the first half of 2019, NetEase Koala remained the #1 player in the cross-border import retail e-commerce market with 27.7% market share. In September 2019, Alibaba and NetEase announced that Alibaba is acquiring Kaola for 2 billion USD. As the cross-border market in China rises, the acquisition will allow Alibaba to combine Kaola’s expertise in self-operated business with its own strength in supply chain and technology. Even though Alibaba already has T-mall Global in the same market, its presence isn’t as strong as Kaola. Therefore, the acquisition would allow Alibaba to establish its leadership in cross-border import e-commerce market. Meanwhile, selling Kaola would allow NetEase to optimize cost and focus on its specialized markets.
Traditional retail M&A market: E-commerce companies drive the market
As the second largest M&A sector in retail, traditional retail deals are dropping year by year. Between 2016 and 2018, there were less and less large domestic and outbound deals in the market. In 2019, all large deals were e-commerce companies purchasing offline retail companies. It means there is further integration between China’s online and offline retail markets.
Data Source: ThomsonReuters, The M&A market in China report by daxue consulting, China’s traditional retail M&A deals value
Suning combined online + offline channels by acquiring Carrefour China
Carrefour is a French supermarket retailer that entered China in 1995. At its peak, it was the fastest growing foreign retailer in China, opening 10+ stores each year. Carrefour has recently been less successful and closed many of its stores. Prior to the acquisition, the company had 210 stores still open in China. Suning is one of the largest retail companies in China. In September 2018, Suning acquired 80% equity stake in Carrefour China for 620 million EUR (~4.8 billion RMB). Suning has strong logistics and technology capabilities.
Its previous acquisition moves show that the company is trying to develop a comprehensive retail model. Carrefour‘s FMCG experience and supply chain capabilities would be greatly valued in Suning’s smart retail plan. After the acquisition, Carrefour‘s Chinese brand and operation will be independent of Suning while integrating its competency in the cloud model and technology to reach the lower-tier markets. There are also plans to incorporate Suning’s other services, such as movie theaters and mother-infant stores, with Carrefour’s supermarkets to create a one-stop community center.
Hotels, dining, and leisure M&A market: Inbound deals surged up in 2019
After 2 years’ decline, the M&A value had a growth spurt, growing 49% in 2019. Outbound deals occupy a large part of the total M&A deals in China, Chinese companies and investors are keen on overseas investment, especially in tourism (outbound) and catering sectors.
Data Source: ThomsonReuters, The M&A market in China report by daxue consulting, China’s hotel, dining and leisure M&A deals value
Yum China improved supply chain by acquiring Huang Ji Huang
Huang Ji Huang, founded in 2003, is a Chinese restaurant chain. It is famous for its “Huang Ji Huang Three Sauce Simmer Pot”. This chain has over 600 restaurants worldwide. Yum! Brands is a fortune 500 American fast-food company. It entered China in 1987 as Yum China. Some of Yum China’s subsidiaries are Pizza Hut, KFC, and Little Sheep. The company has presence in 1,300 Chinese cities with over 9,200 restaurants.
In April 2020, Yum China announced that it has completed the acquisition. Huang Ji Huang, being China’s largest “simmer pot” brand, will help Yum China to better understand the market and supply chain for Chinese catering. Huang Ji Huang will also be able to contribute its rich franchise network and strong R&D capabilities. Yum China can use these assets to improve the operation its other Chinese catering brands. After acquisition Yum China will establish a Chinese food business unit to include three main Chinese dining brands: Little Sheep, East Dawning and Huang Ji Huang. It is also planning to improve digital R&D, digital marketing, operational efficiency and consumer experience for the Huang Ji Huang chain.
High-tech sector: focused on small M&A deals in China
High-tech inbound M&A ranks first in volume in comparison to other industries, with most deals being small transactions. Volume has been steady as China continues to invest in its technology sector. Many companies are looking at expansion through M&A. There have been few mega M&A deals in China leading to the low overall transaction value. The reason of this phenomenon is uncertainties over political tensions in the ongoing trade war. There are also risks and fluctuations in the valuation of Chinese technology firms.
Data Source: Verdict, The M&A market in China report by daxue consulting, China M&A deals in high-tech sector
Laiye merged with UiBot to develop new products and services
Laiye Networktechnology is a Chinese AI related startup founded in 2015. Its main product “Wulai” utilizes AI technology to help corporate customers to improve service efficiency and increase sales revenue. A Robotic Process Automation (RPA) is a Chinese startup founded in 2015. Its products allow users to generate customized robot through its platform. The new Laiye UiBot, as a result of this merger, would provide corporate customers with robotic solutions that have both “Hand Work” (Robotic process automation) and “Head Work” (Machine Learning) to improve operation efficiency and reduce R&D costs.
- Traditional and online retail are now more integrated, driving M&A deals between online and traditional retailers, especially supermarkets. Supply chain integration becomes more and more critical, especially with fresh food, driving mergers and acquisitions between retailers, suppliers and logistics companies.
- The initial impact of COVID-19 is conducive to industry consolidation, leading brands have chances to increase their.
- China’s economy is becoming more consumer-driven. This will lead to more M&A activity in the retail and consumer sector in the long term.
- As China grows to become one of the leaders in the technology field, there is a higher volume of domestic and inbound M&A deals. However, the value of the deals has limitations due to political interventions and uncertainties regarding valuation.