Merger activity remains high in Asia, including China, against the backdrop of Beijing's ongoing regulatory crackdown on the technology sector, which has heightened concerns among investors, according to one of JPMorgan Chase's top bankers in the region.
The level of activity is the same as it was coming into the year, if not "a little bit more intense", according to Kerwin Clayton, JPMorgan's Asia-Pacific co-head of mergers and acquisitions (M&A).
"A more challenging deal sentiment towards some sectors can lead to a misconception that things are slow broadly and that just hasn't been the case. A big difference in China is that five years ago there were a limited number of sectors where M&A was active. Now, M&A, in some form, is happening in all sectors," Clayton said. "These counterbalance, if not overcompensate for the areas that might be slower at any time."
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Domestic deals have been a major driver of activity this year, with more than 4,200 deals worth US$272.6 billion through August 12, according to financial data provider Refinitiv. That is the largest number of domestic deals in more than a decade.
"Domestic consolidation in China is being driven in part by companies finding it harder to compete in their current state," Clayton said. "Other areas in China where we are seeing more activity include sponsor-to-sponsor trades where one private equity fund is willing to buy from another; government-led consolidations or restructurings; and multinational divestitures."
Outbound deals have remained muted this year, with 265 deals worth US$25.9 billion, according to Refinitiv. That is the smallest number of deals through mid-August since 2014 and follows sharp drops in outbound deals from China in 2019 and 2020.
Another potential driver for M&A in Asia this year are so-called special purpose acquisition companies (SPACs), which raised more than US$121 billion this year alone, albeit at a slower pace in recent months.
SPACs are created purely to raise financial war chests and buy assets within a limited period of time, but have completed few deals for Chinese assets. For example, Tim Hortons China agreed to be taken over this week by a US-listed SPAC in a rare transaction involving a company operating in the mainland.
"The SPAC wave started later in Asia than in the West where activity levels were high throughout all of 2020. There has been a slowdown globally this year, including in Asia," Clayton said. "Some activity remains, in particular, in Southeast Asia and India. Strong stories that want capital can get capital whether it's via an IPO or a SPAC."
The bumper year for M&A within China comes as Beijing has cracked down on the country's tech sector and implemented sweeping changes to overhaul its rules for overseas listings by companies who hold personal data for 1 million or more Chinese people. The move has caused a number of Chinese firms to delay or scrap planned initial public offerings in the US.
PwC said this month that the regulatory crackdown also is starting to cool merger activity, with some firms putting deals on hold as the uncertainty surrounding the tech sector weighs on asset pricing.
"Companies are having to look at their structure. They're having to look at their operations. They've having to make strategic decisions in terms of where they allocate their capital. Where should I concentrate my activities to develop and grow my business? Which parts might I want to carve out, spin-out or dispose of to free up capital?," said David Brown, Asia-Pacific deals leader at PwC. "There is quite a lot of transactional activity that gets driven by these kind of strategic decisions and are being accelerated by everything that is happening around [Covid-19] and elsewhere."
At the same time, S&P Global Ratings predicted this month that greater scrutiny on mergers, overseas listings and anticompetitive behaviour in the tech sector in China could intensify competition in the sector, as firms focus on organic growth and greater internal investment over deals.
"I think people will continue to focus on the sectors where outbound [deals] can happen. And private equity focused on China will continue to look for international assets that they can do more with in country," Clayton, the JPMorgan banker said.
"Buyers will continue to look for businesses they feel are wanted and can be highly valued in the domestic market. These will help outbound continue," he said. "Also, there are entities that have purchased businesses internationally and want to divest them - that has been a consistent contributor to the M&A business involving China in the last three or four years and will continue."
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.
Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.
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