9th Greater China Capital Confidence Barometer

Mergers & acquisitions – deal appetite rises modestly

  • Share

Chinese companies are bullish about the outlook for global M&A volumes over the next year.

Sentiment around local volumes is also rising, making China the most upbeat of all the BRIC countries.

Dealmaking fundamentals — from credit availability to economic confidence — have all improved over the past year. Yet this confidence isn’t translating into action as those who plan to do a deal increases only marginally.

Q: What is your expectation for M&A/deal volumes in the next 12 months?

EY - WWhat is your expectation for M&A/deal volumes in the next 12 months?
+ Enlarge

What is your expectation for M&A/deal volumes in the next 12 months?

EY - What is your expectation for M&A/deal volumes in the next 12 months?

Global and local deal volumes seen improving

Chinese respondents are significantly more bullish about the prospects for deal volumes to increase both at home and abroad. Eighty-seven percent see improvement in deal volumes globally, up from 74% six months ago, while 80% are seeing higher deal volumes locally, up from 65% in April.

Modest increase in deal appetite

Despite the apparent optimism in outlook, just 32% say their company plans to pursue acquisitions in the next 12 months, slightly higher than the 29% who said so in April.

Non-BRIC emerging markets increasingly attractive

As the economy slows at home, Chinese companies are increasingly on the lookout for new rapid-growth opportunities, and more are looking outside the BRIC group of emerging markets.

Fifty-eight percent of Chinese respondents are willing to allocate 25% or more of their allocation capital to non-BRIC emerging markets over the next 12 months, compared with just 34% of global respondents.

Just under half of Chinese respondents (47%) say they have a greater focus on non-BRIC emerging markets than they did a year ago, compared with just 20% of global respondents.

Top 5 global destinations:

  • India
  • Brazil
  • China
  • Canada
  • US

Lower confidence in deal quality

While more than two-thirds of Chinese investors say they are confident in the number of acquisition opportunities globally, this falls to just half when respondents are asked about local opportunities.

Some of this reticence appears to stem from pessimism about the potential targets and ease of doing deals in the domestic market. Half of those surveyed expressed confidence in the number of available acquisition opportunities, although this is up from 30% six months ago. But just a third of respondents said they were happy with the quality of acquisition opportunities locally, up from 26% in April.

More than half of Chinese companies cited the regulatory environment as the primary reason for not pursuing acquisitions, compared with nearly a third of Russians, the only other BRIC member listing regulatory issues as the main obstacle to transactions.

Asset prices still seen climbing

Another key factor helping to deter Chinese companies from M&A is their perception of the direction of asset prices. Fifty-three percent expect valuations to continue to rise over the next 12 months, compared to 39% who expected higher prices in April and 43% of global executives who expect price rises.

Perhaps due to these affordability concerns, nearly three-quarters of Chinese executives expect deal sizes of between US$51m and US$500m, up from 62% in April, although the number of respondents predicting deal sizes between US$501m and US$1b has more than doubled over the same period.