Chemchina’s record-breaking purchase of Syngenta and Haier’s recent $6-billion acquisition of GE’s appliance business have focused attention to an important, and growing, trend: China M&A is at a historic high, and outbound deals account for a significant share. The largest Chinese acquisitions in each of the past three years were all developed-market companies. What’s more, while state-owned enterprises (SOEs) continue to play a major role, the private sector is increasingly active.
China’s deal pace is likely to only accelerate. Total M&A activity is 7% of GDP and 10% of equity market capitalization – below the average levels for the US or Europe. And with growth at home slowing, outbound opportunities will look ever more attractive.
Most western companies are unaccustomed to dealing with Chinese suitors. Working effectively with them as counterparts requires understanding their priorities and preferences. How, then, are Chinese companies’ investments abroad unique?
6 ways Chinese buyers are different
1. Light-touch integration.
The classic approach to post-merger integration - executing rapidly, combining functions onto one operating platform, eliminating duplicated roles - isn’t China’s way. Chinese buyers tend to shy away from broad-based integration, leaving management in place and seeking selective synergies to avoid disrupting the acquired business.
2. Quality versus value.
Chinese companies are reluctant to make “buy to fix” acquisitions, and for good reason: few have managerial resources to turn around a struggling asset in a foreign market. Historically, deal flow has focused more on good assets rather than cheap assets.
3. Learning while doing.
Most Chinese acquirers recognize that their organizational capabilities and experience lag behind their US and European counterparts. As domestic growth opportunities dwindle, building these capabilities is an increasing priority for them: how to develop an M&A strategy, how to manage due diligence, how to integrate and how to efficiently manage the process with their stakeholders.
4. More and new financing.
Chinese acquirers are not afraid of high leverage - Chemchina, with a $37-billion market cap, borrowed $30 billion to fund the $43-billion acquisition of Syngenta. Chinese lenders, meanwhile, have enthusiastically supported acquisition financing, as have foreign banks. With the development of the Renminbi bond market, expect the financing sources to broaden.
5. Regulatory wildcard.
China’s track record of handling anti-trust and foreign investment regulation is improving, but remains very mixed. A few notable successes - for instance, Shuanghui’s handling of CFIUS approval- stand out amid frequent missteps, such as Huawei/3com or CNOOC/Unocal, making regulatory issues a common concern for Chinese acquirers.
The predictability of foreign investment regulation varies, as recipient countries struggle to balance economic, security and public interest considerations. Chinese companies’ ability to handle the diverse requirements likewise varies greatly.
6. Unique private-sector characteristics.
Before 2010, SOEs were behind most major outbound deals, but China’s private sector has been stepping up the acquisition pace. Investment group Fosun’s $2.3-billion acquisition of US insurer Ironshore and Haier’s deal with GE are just two recent examples.
As China’s acquisition spree continues, it is safe to presume that by the end of the decade there will be few countries not familiar with M&A “with Chinese characteristics.”
Has your organization discussed the prospect of a deal with China? I’d love to hear your perspective on how Chinese acquisitions may reshape the global M&A landscape. You can also read our earlier article on the topic of Chinese cross-border M&A here.
I’m the Leader of McKinsey’s Global Strategy Practice, based in Hong Kong. I work closely with clients in Asia, Europe and the US on topics including strategy, growth and business transformation in emerging markets.
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