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Appeal of M&A declines, with valuations a key concern - Global Capital Confidence Barometer China - October 2012 - EY - China

Global Capital Confidence Barometer China - October 2012

Appeal of M&A declines, with valuations remaining a key concern

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Do you expect your company to pursue acquisitions in the next 12 months?

What do you expect the price/valuation of M&A assets to do over the next 12 months?

What is the primary reason for not pursuing an acquisition in the next 12 months?

For transactions completed recently, what was the most significant issue that contributed to deals not meeting expectations?



The US, Brazil, Indonesia, India and Japan were cited by Chinese executives as their top five investment destinations.

Just 11% of Chinese respondents said they intend to pursue acquisitions in the next 12 months. This is a decline from the previous survey and the lowest figure since the barometer began.

Worries about the global economic situation, skepticism about current asset valuations and concerns about corporate profitability have led to this slide. While the global respondents are also less enthusiastic about M&A, 25% said they intend to pursue acquisitions (Figure 9).

Chinese executives expressed doubts about several aspects of deal-making, most notably in the number of deals available. Fifty-three percent of Chinese respondents said they lack confidence in the availability of suitable global targets, compared with just 21% of their global peers.

These sentiments may be a reflection of a change in the preferred countries for Chinese outbound investors. The US, Brazil, Indonesia, India and Japan were cited by Chinese executives as their top five investment destinations.

Interest in the US and Japan seems to reflect the continued view that assets are likely to be available at more attractive valuations because of the economic stress.

Not surprisingly, Chinese companies continued to focus on emerging markets that have strong consumption and export potential, and that are perceived as having fewer regulatory hurdles for Chinese investors.




11%

of Chinese executives report expect their companies to pursue M&A opportunities in the next 12 months.








Like their global colleagues, Chinese executives again report that their companies are less likely to pursue acquisitions over the next 12 months than they were six months ago.


Valuations remain a key concern

In what has become a recurring theme, Chinese executives remained disappointed with the persistence of high asset prices in the face of global economic weakness. This is clearly the primary impediment to stronger M&A activity.

Sixty-four percent of Chinese executives identified the valuation gap as the primary reason for not pursuing an acquisition in the next 12 months, compared with just 24% of their global counterparts (Figure 11).

A further 22% of Chinese respondents cited regulatory environment as the primary obstacle to M&A activity going forward. That perhaps reflects the choice of the US as Chinese investors’ top destination, and one where regulatory issues involving Chinese companies have recently occurred.

Given the concerns about valuations, it is also not surprising that Chinese respondents identified operating cost synergies and revenue synergies as the most challenging aspects of value creation in recently completed deals.

Chinese corporates learn lessons about value creation

Chinese companies are clearly taking onboard lessons learned from previous deals, a sign of their growing maturation.

When asked about the most significant issues contributing to recent transactions not meeting expectations, 41% of Chinese executives identified poor execution of integration, while 35% chose poor operating cost assumptions (Figure 12).



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