Thursday, July 31, 2003
China's burgeoning M&A market poised for growth
Reuters Hong Kong, July 31
The flow of corporate mergers and acquisitions in China is set for a boost from cross-border natural resource tie-ups, helping to kick-start deal activity in the country, a top JP Morgan banker said on Thursday.
China has been a laggard in Asian corporate deals this year, but JP Morgan's head of China mergers and acquisitions (M&A), Liang Meng sees the market picking up as the country's companies explore opportunities at home and abroad.
"For example, we are going to see the trend of Chinese metal and mining companies going overseas to buy the mines and apply their own proprietary technology," Meng told Reuters from the bank's sleek and art-bedecked offices in central Hong Kong.
To date, much of the outbound M&A from China has been in the oil sector, with top offshore producer CNOOC Ltd especially active.
China's chunk of the Asian M&A market slipped in the first half of this year to six per cent from 13 per cent in 2002 as the deadly SARS virus kept bankers at home and deals on hold.
Mainland deals so far this year have been worth more than $6 billion, and JP Morgan ranks 10th in China M&A advisory volume, according to Dealogic. One factor working in the country's favour for a rebound is a backlog of deals that were delayed by the SARS virus outbreak, which peaked in May and has left pent-up demand.
"We are very surprised at the speed of recovery after SARS," said Meng. "Interest by global companies in China has been increasing quite dramatically," he said. "There's confidence in the Chinese leadership and the government's ability to grow the economy."
Asia has become an increasingly important region in the global M&A game, accounting for 20 per cent of worldwide deals so far in 2003, compared with just five per cent in 1998.
"The biggest markets tend to be China, Korea and Taiwan, and I don't think that will change," said JP Morgan's head of Asia Pacific M&A, Todd Marin. "We are going to see a fair amount of activity in financial institution groups across the region," he said. "The other big area is the natural resources base -- like power, oil and gas, metal and mining."
ASSET INJECTIONS
Meng, a Shanghai native with an MBA from the Yale School of Management, joined JP Morgan from Credit Suisse First Boston as part of an effort to recruit bankers with more local ties.
He cited three types of China-related acquisitions: Chinese companies buying firms overseas, domestic purchases and global companies buying into the China market.
Domestic deals include asset injections where state companies spin-off a subsidiary, which after listing buys more assets from the parent.
For example, China Unicom Ltd and China Mobile (Hong Kong), the country's two big mobile phone companies, initially came to market with a handful of provincial networks and later bought additional networks from their parents. "Due to the sheer size of these transactions it is intensely competitive," said Meng.
"Plus there is the benefit of league table status," he said, referring to the rankings of bank M&A advisers. "It's a reality of the marketplace."
The asset-injection model has drawn criticism from some quarters, as it is harder for investors to determine fair value because of the connected transactions. Meng said this was less of a concern as executives of the listed companies were becoming more focused on shareholders.
"There is a growing trend that these transactions are becoming more and more market-based as the parent company and (listed company) management teams are starting to diverge," Meng said.
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