The global economic crisis may have left many companies in China and elsewhere struggling to shore up their bottom lines, but this has not ruined their appetite for mergers and acquisitions (M&As).

M&As To Remain Strong in 2009

China had a record $164.3 billion M&A deals announced in 2008, up 18 percent from a year earlier. And this was the case even though China’s gross domestic product growth rate fell from 13 percent in 2007 to 8 percent in 2008.

Our firm, InterChina Consulting, expects growth in M&As to remain relatively high since many companies are looking to their China operations to help offset losses in other markets. “We are reviewing our China operations now and have found that we are still underrepresented here. So we are planning more M&As in China this year to expand our business,” said one foreign senior manager.

Multinationals, such as Roche Holding AG, Switzerland’s biggest drug maker, are considering making their first acquisitions of Chinese biotechnology companies. Pharmaceutical companies are seeking a bigger slice of sales in fast-growing emerging markets like China since sales are falling in their home markets.

PepsiCo Inc. announced last November that it will invest $1 billion in China over the next four years. It plans to build more plants in western and inland China, expand local research and development, and build bigger sales forces for distribution.

InterChina Consulting has been receiving many M&A inquiries from foreign companies, even after the dismal results of the fourth quarter of last year, when recession took hold in Europe and the United States.

M&As Have Many Advantages

There are many advantages to buying Chinese companies. M&As can allow faster entry into markets than setting up operations from scratch. And they can bring a quick infusion of strong local management and a strong, competitive local brand name.

Meanwhile, current economic trends also offer foreign companies an opportunity to make “better value” acquisitions. Compared with the boom years, managers of target companies are likely to have more modest valuation expectations. Plus, local authorities may be inclined to relax the regulatory environment. Moreover, lower costs for land and construction can make acquisitions less expensive. As a result, we anticipate a more fluid corporate arena in China in the coming years.

Organic Growth Is More Costly

Compared to 20 years ago when a predominant growth strategy for foreign companies was via organic growth and green-field investment, today’s environment has changed such that both local and foreign companies are much more competitive, making market access one of the critical factors for success. Acquisition has advantages over organic growth, in terms of faster time to market and expanding access to local markets

Booming domestic demand also will favor consolidation of strong domestic companies able to quickly move up the value chain while maintaining relatively low prices. At the same time, many industries in China already have or will soon reach maturity, most of them with overcapacity. Given these trends, organic growth will become a costly and lengthy choice. Both established players and newcomers will need to complement organic growth with expansion through M&As in order to fulfill their Chinese goals.

Key Growth Sectors

InterChina Consulting expects M&A growth to be strong in the following three key sectors in 2009 and beyond: food and beverages, infrastructure, and healthcare. China’s food and beverages is estimated at approximately $340 billion and is growing rapidly.

Its huge population of 1.3 billion people, a growing share of them middle class, ensures continued massive expansion in the future. The country is proving to be an important testing ground for foreign companies facing stagnant or slow sales growth in their home markets.

Infrastructure-related companies, such as construction and construction materials, transport, logistics and related sectors are bound to be viewed as attractive M&A targets, thanks to the Chinese government’s RMB 4 trillion economic stimulation package. Further stimulus measures are expected, including more investment in infrastructure.

Thirdly, we expect to see more foreign M&As of Chinese pharmaceutical and healthcare companies. In January, the government announced plans to spend $120 billion over the next three years on upgrading China’s long-neglected healthcare infrastructure. That includes expanding medical insurance coverage to 90 percent of the population by 2011 and revamping public hospitals.

In the past, most health sector M&A transactions were inbound cross-border deals. Foreign players will continue to search for profitable targets in China, with big multinational drug makers increasingly focusing on target companies’ core technologies and product quality.

Upgrading the healthcare system as a whole will likely bring in more and more foreign-invested or joint venture private medical service operators. The reason: the Chinese government is allowing foreign investors to hold stakes of up to 70 percent in private medical facilities.

New M&A Regulations in 2008

In many ways, 2008 was a landmark year for M&A regulations in China. Its first comprehensive Anti-Monopoly Law (AML) went into effect August 1, 2008, dramatically altering the landscape for both domestic and cross-border M&A activities. The AML establishes certain thresholds for transactions, and if they are reached, the concentration must be reported to the relevant Anti-Monopoly Enforcement Authority.

More Chinese Companies Available

Large and medium-sized MNCs increasingly recognize China as one of their most strategically important markets. Meanwhile, Chinese targets, which may not have been available during the boom years, may become available under the current economic circumstances.

Thus, more high quality companies likely will be available, and their top executives likely will have more modest expectations than in the recent past. These factors could mean that 2009 will be the most active M&A year for the China market. After all, as the saying goes, the time to buy is when the market hits bottom.

About The Author Barry Chen

Barry Chen is Corporate Practice Director for InterChina Consulting in the Shanghai Office.




www.interchinaconsulting.com