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China's M&A deals may rise further after reaching 5-year high in 2020 - experts

Merger and acquisition activity in mainland China may pick up further this year, after reaching a five-year high in 2020 despite the pandemic, experts say.

Ongoing reform of state-owned enterprises, resilient export and domestic consumer demand, the technology-driven industrial upgrade and growing private-equity activity will continue to drive domestic dealmaking in mainland China in 2021, David Brown, deals leader for Asia-Pacific at PricewaterhouseCoopers, told a press conference in Hong Kong Jan. 27.

In 2020, the total value of M&A deals in China, including Hong Kong, rose 30% to US$734 billion, the highest since 2016, according to PwC. Deal count also increased 11% to 10,551 transactions, from 9,483 in 2019. Meanwhile, outbound deals from mainland China dropped 40% to 403 deals with a combined worth of US$42 billion, and outbound deals from Hong Kong dropped 23% to 122 deals , totaling US$6.4 billion.

"We expect some increase in M&A volumes overall in 2021, largely driven by domestic and [private equity] activities," said Brown. There will likely be “more M&A activities around restructuring and distress even as the economy rebounds,” he added.

He also said the buoyant domestic stock market and IPO pipeline have driven asset prices higher, which will bode well for M&A volume and valuations.

The mainland Chinese economy was one of the world's major economies to emerge from the pandemic. The International Monetary Fund has forecasted China's economy to expand 8.1% in 2021. The country's full-year 2020 GDP growth was at 2.3%, driven by an annualized 6.5% growth rate in the fourth quarter of last year.

Technology deals continue to lead

The technology sector was driving some of the large-ticket deals in mainland China in 2020, such as internet company Baidu Inc.'s acquisition of social media company JOYY Inc. and the Tencent Holdings Ltd.-benefitting merger of two livestreaming platforms, DouYu International Holdings Ltd. and HUYA Inc.. The trend will likely continue this year.

"Financial sponsors are actively looking at this [tech and healthcare] space, and corporates are looking for strategic deals and investments in tech enabled businesses," Miranda Zhao, head of mergers & acquisitions, Asia Pacific at Natixis CIB said.

"There is also a lot of activity around privatizations of some of Chinese companies, mostly in the new economy, currently listed in the US – and this is due to regulatory uncertainties and the political tensions between the two countries," Zhao added.

Hannah Ha, a partner in the corporate & securities practice of Mayer Brown in Hong Kong and leads the firm's M&A practice in Asia, added that logistics, high-tech, life sciences, and financial services are also likely to be prime for M&A in mainland China this year.

Mixed outlook of cross-border deals

In terms of cross-border transactions, outbound M&A will likely remain subdued throughout the year, although experts are divided on whether inbound deals will pick up further in 2021.

In 2020, China became the world's biggest recipient of foreign direct investment, overtaking the U.S., according to a Jan. 24 report by the United Nations Conference on Trade and Development.

"I note that the economic recovery in mainland China has been growing from strength to strength since [the fourth quarter of 2020] and I expect there will be an increasing amount of inbound M&A activity due to the determination of China to open up its investment environment to higher levels," said Mayer Brown's Ha.

In contrast, PwC's Brown said that although inbound is on an upward trend, it might not exceed outbound.

"The general trend for inbound M&A will be upwards, but it's difficult to know how quickly we will start to see that coming through," he said. "China is making considerable efforts, certainly under pressure from other parts of the world, to open up its markets for investment."

In December 2020, the European Union and China have begun talks on an investment deal that could expand access to the Chinese market for EU investors, although the details have yet to be confirmed. Although this development is positive, there will be a time lag for overseas markets and companies to recover from the virus before resuming cross-border transactions, Brown said.

Meanwhile, outbound deals may remain subdued in 2021. Natixis's Zhao expects Chinese state-owned enterprises and private firms divest their non-core overseas investments.

"Hopefully as we come through the virus situation, there might be a sort of backlog effect, so we may start to see a strong shift towards the end of the calendar year and going into 2022," PwC's Brown said.