China’s first half M&A saw biggest fall in a decade

Outbound deals and private-equity deals declined more than expected while the country’s domestic M&A ‘rescued’ the market.
People walk past the headquarters of the PBOC, the central bank, in Beijing.

The latest data on China’s mergers and acquisitions (M&A) activity revealed a significant decline in deal value, hit by the ongoing US-China trade conflict, Brexit uncertainties, and increased scrutiny of large high-profile investments from China, especially in sectors considered strategic to countries, says PwC in a recent report.

In the first half of the year, China’s M&A deal value totalled $264 billion, an 18% decline compared with the six months prior — the largest single-period decline in a decade — driven by a sharp fall in private-equity deals and China outbound deals, according to the firm’s M&A Mid-Year Review and Outlook for China. Deal value for private equity dropped by a third, while China outbound deals almost halved.

Weaker M&A activity was expected due to geopolitical uncertainties, but the extent of declines in private equity and China outbound deals was “surprising”, as they were more substantial than expected, said David Brown, Asia-Pacific deals leader at PwC, in an interview. China outbound deals refer to cross-border M&A from China into other countries.

“Uncertainty is the enemy of M&A,” Brown added. “It makes it very difficult to make the pricing right. The sellers and buyers will have a very different view of the world and different expectations on price.”

Despite the decline in deal values, the total number of deals actually rose. This indicates that there is a reasonable flow of smaller transactions, while the downtrend concentrated on the top end of the market, the report said. Such is the case for foreign inbound deals into China, where the number of deals rose 64% while total deal value shrank by 29% compared with the prior six months.

The US-China trade conflict has also pushed Chinese companies to have a renewed inward focus on the domestic market. In the first six months of the year, deal value of China domestic M&A rose 8%, with 28 mega deals — deals with more than $1 billion in value — compared with 18 mega deals in the prior six months.

“The whole market was really rescued a bit because the domestic M&A is quite strong. In fact, it was the biggest segment,” Brown said.

This domestic-focused trend is expected to continue, driven by ongoing reforms in China’s state-owned enterprises, restructuring of smaller domestic banks, and deleveraging and debt-restructuring activities, the report noted.

A growing trend of protectionism in M&A deals is also on the horizon. High-profile cross-border deals are increasingly scrutinised by governments to protect their “strategic” interests, with the definition of “strategic” more broadly defined now than a few years ago, Brown said.

“There’s a general issue around large-sized cross-border M&A where the target company can be considered strategic,” he said. “Governments have started to become very aware of the risks in allowing strategic industries to fall within the control of other countries.”

“At the very basic level, governments now look at cross-border M&A through that kind of lens,” Brown added. “If you’re a Chinese company, it just seems like now is not the time to do outbound big-sized M&A. The big transactions have really dried up.”

However, China’s outbound M&A activity is expected to pick up next year as Chinese companies’ interests in business growth, and in acquiring leading intellectual properties and technologies, are still in play. For the rest of this year, the report notes that M&A activity is expected to be subdued because “political and economic uncertainties have, if anything, deteriorated”.

For foreign companies interested in M&A in China, or Chinese companies interested in outbound M&A, Brown advises that companies should:

Stay true to strategic intent

Organisations need to approach deals as part of a clear strategic vision, he said. Deal activities need to be aligned to the long-term objectives of the business because some M&A deals are opportunistic but not beneficial for a company’s overall strategy.

Be very clear on the comprehensive value-creation plan

Companies need to have a thorough and effective process when evaluating a deal. This requires the necessary diligence and rigour while looking at the value-creation process, Brown said.

He added that companies should consider how the value-creation plan can support the business model,  operating model, technology plans, and synergy delivery.

“Have a value-creation plan,” Brown said. “Go in an M&A thinking what the value-creation opportunities around the deal are, how you are going to create value, what your plan is to create value.”

Put culture at the heart of the deal

Keeping the people and the cultural aspects at the front of the planning is really important, Brown said.

“If you’ve had a wide communication of your value-creation plan to the employees of the target company, that will help retain and get buy-in from people,” he noted. “If you don’t do that, you will significantly undermine the value you’ve created. You have to bring the people along with you.”

Related CIMA resources:

M&A Due Diligence for CFOs: Part 1

M&A Due Diligence for CFOs: Part 2

— Alexis See Tho ( is an FM magazine associate editor.