What’s behind the 95 percent drop in Chinese M&A in the US?

There has been an almost 95 percent drop in Chinese firms buying US companies since 2016, according to a report published by M&A experts Mergermarket at the start of January.

‘Against a backdrop of growing socio-political tensions, deal-making continued at an encouraging rate,’ write the authors of Mergermarket’s 2018 Global M&A report. ‘With tariffs, trade wars, the UK’s exit from the European Union and an underlying sense of general economic uncertainty and unease, it may be surprising that figures have held up as they have. Yet activity did suffer in some corners. Chinese buys of US firms fell 94.6 percent to $3 bn from a record $55.3 bn in 2016.’

Activity between the US and China, ‘one of its largest trading partners, has seen a sharp decrease in the past year,’ notes Mergermarket, with the bulk of the decrease coming between 2017 and 2018, when activity fell 65.8 percent in value. In fact, the report adds that ‘the largest Chinese bid for a US company in 2018 did not even break the billion-dollar mark: Bison Capital’s $450 mn bid for US biopharmaceutical firm Xynomic Pharmaceuticals.’

But while the biggest drop in Chinese acquisitions of US firms might have been seen between 2017 and 2018, appetite for these deals was already falling. Elizabeth Lim, Americas research editor at Mergermarket, says a number of factors have contributed to the ‘dramatic drop’ in Chinese M&A in the US since 2016.

‘First, there has been a decrease in Chinese outbound M&A overall since 2016, not just in terms of deals in the US,’ she explains. ‘After a peak in outbound activity in 2016, the Chinese government began trying to stem the flow of capital exiting the country in an attempt to crack down on certain types of high-risk investments. 

‘Second, there has been – of course – the ongoing trade war between the US and China, complete with each country’s regulatory bodies scrutinizing activity related to the other country. We saw that when the White House blocked Broadcom’s bid for Qualcomm and, in turn Chinese regulators in effect blocked Qualcomm’s bid for NXP Semiconductors.’

At the same time, Lim says Mergermarket has seen an increase in US-US deals over the last couple of years: ‘Some of this can be explained by the more protectionist stance the US has taken within that time frame – for example, when the Trump administration introduced tariffs on various goods, not just from China but also from other countries.’ 

But these shifts in M&A activity also indicate wider trends and the impact of technology, she adds: ‘One could also look at where M&A has been flowing in general in recent years, as entire industries have undergone seismic shifts in their corporate strategies due to technological disruptions. And many of the innovative companies that have been prime targets in terms of tech, market share, and so on, have been located in the US. 

‘So not only are foreign companies – beyond just China – interested in acquiring US-based ones, but domestic firms have also been looking to compete in this new age of algorithms, automation and digitization by acquiring fellow US companies.’

China in Latin America

So are there any areas where China is still keen to do cross-border deals? Mergermarket’s report notes that although Chinese firms continue to seek out cheap deals, M&A in Europe – which saw an increase in activity in 2018 but only due to the €23 bn China Three Gorges and EDP transaction – is likely to be subdued in 2019, while activity in Latin America has also fallen.  

Carlos Martinez, senior Latin America correspondent at Mergermarket, explains that as far as Mexico is concerned, ‘the former government of Enrique Peña Nieto hurt the country’s standing with Chinese investors’, cancelling a railway project that had been awarded to a consortium made up of four local companies and three Chinese companies – prompting the Chinese government to demand $600 mn in compensation.

Martinez adds that the announcement by current President Andrés Manuel López Obrador that Mexico would hold no new oil and gas rounds in at least three years has dampened another area that had previously attracted Chinese investors. 

Elsewhere in the region, however, Thiago Barrozo, Latin American editor at Mergermarket, says inbound Chinese investment is likely to pick up – with Brazil likely to appeal. 

‘Latin America’s biggest economy remains an appealing market for Chinese investments in sectors like energy, agribusiness and infrastructure, where Chinese buyers have steadily made acquisitions every year,’ says Barrozo, adding that Chinese investors are expected to play an active role in engineering projects in Brazil’s energy industry, ‘taking the place of local firms that were harshly impacted by the Car Wash corruption scandal’, as well as in the country’s sixth oil and gas round to be held in November and in local renewable energy projects.

Infrastructure, such as the Ferrogrão railway project, is predicted to remain attractive to Chinese investment, as is Brazil’s agribusiness industry, ‘especially during the ongoing US-China trade war, which has led Chinese buyers to seek commodities in places outside of the US,’ notes Barrozo.

‘It is interesting to note that China has increasingly diversified its M&A strategy in Brazil,’ he continues, citing Hubei-based construction and engineering company China Gezhouba’s investment in Brazil’s water supply space in 2017 – a first for a Chinese company.

This diversification is expected to increase, says Barrozo, as ‘more Chinese investors are expected to plough money into sectors in Brazil where they have little or zero presence.’ 

The country’s waste-to-energy sector and water supply and sewage industry should receive their first investments from Chinese players this year, Barrozo adds, while ‘Brazil’s technology industry is also on the radar of Chinese investors, especially in the fields of e-commerce sites, mobile apps and payment solutions.’