In an interview with IFLR, Zhang Hong (Head of Private Equity at Baker McKenzie FenXun) talks about what's driving China's outbound M&A in 2022 and where the hotspots for M&A activities are.
According to Ms. Zhang, China's outbound investment policies haven't changed dramatically over the past 12 months and the focus continues to be encouraging companies to do the right outbound transactions in preferred sectors such as healthcare, technology, advanced manufacturing, energy and resources.
The desire for outward expansion varies depending on the nature of the business. "For large state-owned enterprises (SOEs), the desire for outbound M&A has decreased due to geopolitical tensions and regulatory restrictions from countries such as the US. Instead, these large SOEs have been reviewing the overseas targets they have acquired in the past few years and refocusing on their core businesses," Ms. Zhang explained.
On the other hand, due to strategic synergies with overseas targets, Chinese market players in the new energy, chemicals, healthcare and machinery equipment sectors still have the desire for outbound M&A due to business growth. "With inflation and the overall economic situation in Europe and the US, mega transactions have decreased as Chinese investors focus on acquiring the right targets," Ms. Zhang added.
The clampdown on big tech companies has recently affected how companies shape their businesses, and the need to focus on domestic compliance amid heightened competition pressure may have led to them to be less aggressive, but there is still a strong desire to expand overseas.
Where are the Chinese M&A hotspots?
According to Ms. Zhang, Southeast Asia, Western Europe and Latin America are expected to see growth in interest from Chinese investors in fintech, energy, infrastructure, gaming, healthcare and technology. China's biotech firms have raised a lot of capital in the Chinese market over the last 12 to 24 months and are involved with more co-promotion and IP transactions outside of China in regions such as Western Europe and the US, with a driving force to license IP and set up local labs.
Western Europe is expected to be a strong alternative to the US for tech deals, due to their comparability of economic development, talent availability and market size, while Latin America will be a strong alternative for the resource sector.
Germany continues to be an important market for Chinese investors due to market sector synergies and is equipped with companies interested in technology development. "Despite tightened scrutiny starting four years ago on foreign direct investment (FDI) from China with tech and data-related targets, Germany still welcomes greenfield investments. Nordic countries such as Sweden and those in southern Europe still have opportunities for the new energy sector, while Eastern Europe is more opportunity driven," Ms. Zhang said.
As the rising interest in clean energy and environmental, social and corporate governance (ESG) grows, this sector can expect strong demand from Chinese investors.
Alternatives to Chinese M&A: minority investment and strategic collaboration with private equity (PE) funds
Regulatory scrutiny continues to affect Chinese acquisitions. As an alternative, Chinese investors are considering minority investments and strategic collaboration as a starting point to help address FDI concerns, Ms. Zhang observed. It also gives more opportunity, time and space for Chinese investors and the relevant stakeholders to find the right target and nurture the right business together.
"By teaming up with a PE investor and joining a consortium to bid for sensitive targets, Chinese investors may be more successful due to the different portrayal of the consortium by potential targets," Ms. Zhang commented. However, coordination with the PE fund may pose difficulty as a strategic investor has an agenda to seek control and consolidate financials, while a PE investor has a stronger desire to exit a business under a fixed timetable, so this needs to be reconciled.
For more information on 2021 and 2022 trends of Chinese outbound M&A investment by region and sectors, please read Baker McKenzie's Trends and Spotlights of the Chinese Investment Landscape.
About Baker McKenzie FenXun (FTZ) Joint Operation
The Baker McKenzie FenXun (FTZ) Joint Operation is the world's leading China legal platform, delivering integrated international and People's Republic of China (PRC) legal services from one single and uniquely aligned platform. Established in 2015, the Joint Operation is staffed by both locally admitted and foreign-licensed lawyers from Baker McKenzie and FenXun Partners, advising leading Chinese and multinational companies on both China domestic and cross-border issues across the full spectrum of corporate and commercial law. It is the first joint operation in China that was approved by the Shanghai Justice Bureau.