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China’s Outbound M&A Falloff in 7 Pictures

Art Dicker

Partner

Pacific Bridge Group

The decrease in outbound M&A from China, particularly to the US and Europe, has been dramatic in the last year. First, here is a chart showing the overall outbound investment out of China for all destinations.

While on the surface the total amount of investment in 2017 merely returned to the already high level of 2015, M&A fell off much more precipitously. The chart below shows outbound M&A to the US, most importantly announced M&A transactions which decreased following China restrictions on “irrational” outbound M&A at the end of 2016.

Certainly some firms were engaged in aggressive deals with companies that had minimal connection to their core business – for example, the financial and hotel/entertainment investments by HNA listed below.

At first the concern from China was the effect outbound investment in foreign currency was having on its foreign currency reserves (see chart below).

However once those levels stabilized over the first half of 2017, the concern turned to the corporate debt that major conglomerates were taking on to finance these acquisitions and the risk to the general economy that debt presented. This concern culminated in the recent takeover of Anbang by Chinese insurance regulators this month.

There was hope for an uptick in activity this past fall following the State Council issuing Clarifying Guidelines on outbound M&A with encouraged (advanced manufacturing and other new technologies) and restricted areas (real estate and entertainment sectors) for investment (below Chinese only but you get the idea):

This opened up the approval and foreign exchange process to some extent by providing clarity to regulators, but at the same time China was promoting the acquisitions in technologies such semiconductors and robotics, Europe and particularly the United States were beginning to get leery of China acquiring these key technologies of the future.

Nowhere has this been more pronounced than in the US Committee on Foreign Investment in the United States (CFIUS) rules on acquisitions by foreign parties of US companies with “national security” implications. With substantial room for interpretation what constitutes national security, CFIUS review or the threat of it has had a chilling effect on Chinese M&A into the US for certain high-tech related acquisitions. Delays in the review process have often killed deals before they even had a final recommendation by the committee. Even Alibaba’s proposed and long delayed acquisition of Moneygram was vetoed on data privacy protection concerns.

Nevertheless, most Chinese companies and funds we speak with consistently say the demand of Chinese capital to acquire foreign technology will not go away. Clearly a new investment and cooperation model is needed. More about this in a future post…

In the meantime, at Pacific Bridge Group we think a Chinese-foreign joint venture for limited application of products and technology for the China market is potential compromise solution. Our firm combines the requisite legal and engineering backgrounds and international experience to help Chinese firms understand proper investment structuring and address what their foreign technology partners will worry about on IP protection and corporate governance issues. There are still plenty of opportunities for Chinese strategic and financial players to invest in global cutting edge technology.

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