Mergers and acquisitions in China (with special focus on the financial industry)

Table of Contents

  List of graphics  2

  List of tables  2

  List of abbreviations  3

1.  Introduction  4

2.  Mergers Acquisitions  4

3.  Chinese M A market  6

3.1.  Chinese economy  6

3.2.  Overview of Chinese M A market  7

3.3.  M A regulations and restrictions  8

3.4.  M A advisory and Investment Banks  8

4.  Current FDI and M A activity  9

4.1.  Current M A activity in China  9

4.2.  Current FDI activity in China  12

5.  M A and the importance of the stock market  14

6.  Industry Example: Financial industry  16

6.1.  Overview and problems  16

6.2.  Reasons for foreign investors  17

6.3.  M A activity and evaluation  18

7.  Conclusion  22

  Bibliography  23

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  List of graphics  

  Graphic 1 : Tender offer vs. merger  4

  Graphic 2 : The world’s largest economies  7

  Graphic 3 : Approval Authorities  8

  Graphic 4 : Selected Outbound Deals  11

  Graphic 5 : M A deals  12

  Graphic 6 : FDI Confidence Index  13

  Graphic 7 : Size of equity market  14

  Graphic 8 : Reduction of NPL  17

  Graphic 9 : Growth of Chinese banking industry  18

  Graphic 10 : World’s largest IPOs  20

  List of tables  

Table 1  : Inbound and Outbound Deals  7

Table 2  : FDI  8

Table 3  : M A activity  10

Table 4  : Foreign investments in the Big Four commercial banks in China  19

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List of abbreviations

BOCI Bank of China Investment Bank CICC China International Capital Corporation CIFH CITIC International Financial Holding CNOOC China National Offshore Oil Company CNPC China National Petroleum Corp EU European Union FDI Foreign Direct Investment GDP Gross Domestic Product ICBC Industrial and Commercial Bank of China IPO Initial Public Offering M&A Mergers and Acquisitions NPL non-performing loans US$ United States Dollar WTO World Trade Organization

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1. Introduction

This paper is the final paper for the course Chinese Financial System. China is a fast growing economy. Therefore a lot of companies intend to enter this market. Mergers & Acquisitions (M&A) are a useful tool to do so.

First of all, it is important to understand the key principles of M&A. Therefore chapter 2 gives a summary of the most important aspects of mergers and acquisitions in general. Chapter 3 gives an introduction to the Chinese M&A market, while chapter 4 will focus on the current situation of M&A activity and foreign direct investment (FDI) in China. FDI is another method for entering a market and is a competing tool to M&A. Chapter 5 deals with the importance of the stock market for M&A activity. After that, the most important aspects of M&A activities in the Chinese financial industry will be shown. The paper will end with a conclusion in chapter 7.

2. Mergers & Acquisitions

Generally, M&As refer to traditional mergers and acquisitions, takeovers, corporate restructuring, corporate control and changes in the ownership structure of companies in general. It is usually distinguished between mergers and tender offers respectively:

Mergers are negotiated deals between the members of the two boards of the companies, while tender offers are direct offers to the shareholders of the target company (the company, which makes the offer is called bidder) and are usually hostile. These offers can either be conditional (bidder requires a minimum amount of shares) or unconditional and restricted (bidder says a maximum amount of shares he is willing to buy) or unrestricted. It could be a two-tier offer, where the bidder first buys a bit more than 50% of the target company to get control and buys the rest later on. Another possibility is a three-piece suitor, which is similar to a two-tier-offer, however, before buying 50%, the bidder just buys a few shares to get a toehold.

M&As are generally made because of strategic and financial objectives and are driven by several forces, which usually work together. Technology (e.g. internet), globalization (e.g. WTO, EU) and deregulations (e.g. liberalisation in European postal markets) may be the most important ones. Mergers can be horizontal, vertical or conglomerate. Horizontal mergers occur between companies in the same business activity, in order to reach synergies and economies of scale and scope. As these kinds of mergers could result in a loss of competition, governmental antitrust regulations have to be considered. Vertical mergers occur between companies in different stages of production, like for example the acquisition of a supplier. These kinds of mergers happen due to increasing information and transaction efficiency, as information can flow quicker within a company after a merger and no time for contracting is being wasted any more. Conglomerate mergers are mergers between companies in unrelated types of businesses.

There are lots of regulations and laws concerning M&As (like rights for minority shareholders, insider trading, antitrust policy etc.), which will not be covered in this paper. Several reasons for M&As exist. Managers assume better efficiency through economies of scale (a decline of average costs when producing more), economies of scope (e.g. using the waste of one product as the input for another product), organization capital (i.e. the ability to produce at lower costs), organization reputation and human capital resources. In general, M&As are useful, when the two companies together are performing better than the two companies on their own (2 + 2 = 5). This is usually reached through synergies, like increased efficiency, as mentioned above. Other points could be better growth opportunities, a reduction in the variability of cash flows or tax advantages.

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As a result of globalization and technology (technology is portable and can be transferred to other countries easily) more and more international takeovers take place. This is because companies want to combine complementary capabilities, find new markets and achieve critical mass. In cross boarder M&As exchange rates play an important role and managing risks concerning this topic is essential.

Like for every other investment a M&A is favourable if it has a positive net present value. To reach this, it is important for management not to overpay and to integrate the acquired company. The post-merger phase is the most important part of any M&A, especially different company cultures can lead to problems.

3. Chinese M&A market

3.1. Chinese economy

China is one of the world’s fastest-growing economies. The GDP growth rate is at about 10 per cent. After the accession to the WTO, Chinese government has undertaken reforms. Especially the banking system is going to be reformed in order to reduce non-performing loans. Furthermore China is investing in infrastructure, which should boost productivity. As seen in graphic 2, China is the second largest economy in the world using purchasing power parity. In 2020 it is expected that China will be the world’s largest economy.

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