M&A value hits record decline

China’s mergers and acquisitions in the first half of the year posted the largest single-period decline in value over the past decade, according to a private report.

Their value dropped by 18 percent to US$264 billion, mainly due to steep falls in outbound and private equity (PE) deals while mitigated by some rise in domestic M&A, PwC said on Monday.

Deal volumes, however, increased in most sectors including outbound, indicating still reasonable deal flow for smaller transactions, except for PE which fell sharply by 46 percent.

“With outbound opportunities limited and the trade war in play, China’s renewed focus on its domestic economy drove an increase of domestic strategic M&A both in deals value and volume,” said Andrew Li, head of transaction services at PwC China's Mainland and Hong Kong. 

A number of large transactions and reorganizations in the industrial sector were seen in the past six months. In addition, consumer, technology and health care appeared to be active, Li said.

The report indicates an 8-percent increase in the value of domestic strategic M&A with 28 mega deals (compared to 18 in the prior six months) and deal volumes climbing 12 percent. Foreign inbound investments rose by 64 percent in volume but declined by 29 percent in value.

Outbound M&A almost halved in value with large cross-border M&A from Chinese buyers almost drying up. There was, however, a more normal level of smaller sized transactions with the slowdown concentrated at the top end of the market.

“Sector activity was fairly broadly spread, with high technology investments remaining in the No. 1 position in volume terms, as China’s big technology companies were active buyers in this sector,” said Roger Liu, deals advisory national and central clients and markets leader of PwC China. 

“Although the fall-off of investment into the US has been in play for several years already, in the first half year there was a sharp decline in investment into Europe as well, with Asia the only destination region more-or-less holding up at prior norms,” Liu said.

Investment activity of PE/VC and financial buyers fell steeply with 46 percent fewer transactions and a 33-percent decrease in deal value to US$87 billion, albeit these numbers are still comparable with 2017 and the first half of 2016.

Consumer, industrials and high technology related investment activities were the most popular for financial buyers, accounting for more than 50 percent in terms of value in total, according to the report.

PwC expects soft M&A activity will extend to the second half if political and economic uncertainties do not clear. 

Domestic strategic M&A may be the one relative bright spot with China focused on stimulating its domestic economy, the report said, while the subdued activity of financial buyers will continue, due to abundant caution on the buy-side and wait-and-see on the sell side.

“Multiple factors are weighing on outbound M&A from China,” Li said. 

“If there are favorable developments on these factors, we do anticipate some rebound in 2020 as the fundamental drivers of Chinese outbound M&A remain in play. But we think that political scrutiny of large cross-border M&A will persist as nations protect strategic assets and this will reduce the number of mega-deals,” Li said.