Only 1 in 10 Chinese companies plan for acquisitions next year

Find out what is restraining M&A activity among Chinese corporates.

According to Ernst & Young’s latest Capital Confidence Barometer, corporates are focusing on expanding into new markets and products and steering away from acquisitions amid stubbornly high asset prices that have failed to reflect a weaker global economy.

Bob Partridge, Transaction Advisory Services Leader of Greater China at Ernst & Young says, “Chinese companies are substantially less upbeat about the prospects for both the global and local economies, with the majority predicting that markets will remain stable, rather than improve. Just 11% of Chinese companies plan to pursue acquisitions in the next year, compared with 27% of their global counterparts. Instead, many say they are looking to technology to help them exploit new markets and products for existing businesses.”

The overwhelming majority of Chinese respondents say overvalued targets is the main factor restraining M&A activity. And with the U.S. now the top outbound destination for Chinese investors, regulatory impediments are seen as an increasing worry for many.

Chinese companies still benefit from strong capital structure

Chinese companies continue to have enviably low levels of leverage compared with their global counterparts, and they report improving access to credit and little need to refinance debt. Yet, with economic prospects looking more pessimistic, nearly half of Chinese companies in the most recent survey say they would be most likely to use excess cash to pay down debt levels over the next 12 months.

Judy Tsang, Partner of Transaction Advisory Services at Ernst & Young says, “The continuing economic crisis in the Eurozone is also focusing minds in Chinese boardrooms, by highlighting the connection between the Eurozone’s woes and the profitability of Chinese companies. Consequently, many Chinese companies are looking to minimize counterparty default and supply chain risks in the region.”

Chinese corporates learn from experience

Ben Kwan, Partner of Transaction Advisory Services at Ernst & Young says, “Chinese companies appear to be looking critically at previous transactions in order to better prepare themselves for a more favorable deal climate. The importance of a well-planned integration process is one obvious lesson learned, with 41% of Chinese companies citing poor integration execution as the main reason for deals not meeting expectations. Accordingly, we see an increased focus on post-deal integration – domestically and overseas – as a core consideration of future M&A deals.”