An Analysis of the M&A Market in Mainland China

Table of Contents

List of Figures

List of Tables

List of Abbreviations

I Introduction
I.I Research Problem
I.II Methodology

II Definition of M&A

III Rationale for M&A in Mainland China
III.I Value Generation of Cross-Border Transactions
III.II Pros and Cons for M&A in China
III.II.I Pros
III.II.II Cons
III.III Summary

IV FDI
IV.I Inbound FDI to China
IV.II The Importance of M&A Transactions
IV.III Summary

V The Chinese M&A market
V.I Numbers from Literature Review
V.II An Analysis of the Chinese M&A Market from 2000 until 2004
V.II.I The Overall Market
V.II.II Sector Segmentation
V.II.III Geographic Segmentation
V.III The Future of M&A in China
V.IV Summary

VI Available Investment Entities for Foreign Investors
VI.I Foreign Investment Enterprises
VI.I.I Joint Ventures
VI.I.II Wholly Foreign Owned Enterprises
VI.I.III Foreign Investment Companies - Limited by Shares
VI.I.IV Shares of Chinese Listed Joint-Stock Companies
VI.II Summary

VII Transaction Forms
VII.I Transaction Classes
VII.I.I Asset Deals
VII.I.II Share Deals
VII.I.III Mergers
VII.II Summary
VII.III Transaction Structures
VII.III.I Direct Acquisitions – Onshore
VII.III.II Direct Acquisitions – Offshore
VII.III.III Indirect Acquisitions – Onshore
VII.III.IV Indirect Acquisitions – Offshore
VII.IV Summary

VIII Legal Environment
VIII.I Key Government Agencies
VIII.II Recent Legislation
VIII.III Land Use Rights
VIII.IV Summary

IX Peculiarities of the M&A Transactions in China
IX.I Cross-Border Issues
IX.II Government Approvals
IX.II.I Sector Regulation
IX.II.II Antitrust Review
IX.II.III Valuation Procedure
IX.II.IV Summary
IX.III Due Diligence
IX.III.I Financial
IX.III.II Legal
IX.III.III Tax
IX.III.IV Summary
IX.IV Documentation
IX.IV.I Letter of Intent
IX.IV.II Covenants
IX.IV.III Representations and Warranties
IX.V Other Issues
IX.V.I Taxation
IX.V.II Management Incentives
IX.V.III Financing
IX.V.IV Consideration
IX.V.V Exit Options
IX.VI Summary

X Case Study
X.I Legal Environment for M&A Transactions Involving Banks
X.II The Acquirer and the Target Firm
X.II.I The Acquiror
X.II.II The Target
X.III The Transaction
X.IV Rationale and Analysis

XI Evaluation of Findings
XI.I Conclusion

References

Sources

Statutory Declaration

List of Figures

Figure 1: Types of M&A Transactions

Figure 2: Expected Modes of Investment 2004-2005

Figure 3: Sectoral Distribution by Value and Volume

Figure 4: Geographic Distribution by Value and Volume

Figure 5: The Voyage from JV to M&A in China

Figure 6: Investment Forms

Figure 7: Available Investment Entities for Foreign Investors

Figure 8: Structure of a Merger

Figure 9: Structure before Offshore Transaction

Figure 10: Structure after Offshore Transaction

Figure 11: Investment Categories

Figure 12: Information-Economical Difficulties

Figure 13: Shareholding Structure as of 31/12/03 and 31/08/04

List of Tables

Table 1: Real GDP Growth in China

Table 2: Utilised FDI to and from China

Table 3: Favoured Countries for FDI

Table 4: Cross-Border M&A in China between year 1985 and 2006

Table 5: Source of Funds per Country

Table 6: Cross-Border M&A in China between year 1988 and 2003

Table 7: M&A in China between year 2000 and 2004

Table 8: Foundation Requirements for FIE

Table 9: Advantages and Disadvantages of a JV

Table 10: Advantages and Disadvantages of a WFOE

Table 11: Classes of Shares and Exchanges

Table 12: Acquisition Targets

Table 13: Advantages and Disadvantages of Asset Deals

Table 14: Advantages and Disadvantages of Acquisitions

Table 15: Advantages and Disadvantages of Mergers

Table 16: Overview about Legal Regulations

Table 17: Sector Regulation Overview

Table 18: Enforceable non-compete clauses

Table 19: Liability for Severance Payments

List of Abbreviations

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I Introduction

The Master Thesis An Analysis of the M&A Market in Mainland China gives an introduction into the Mergers & Acquisitions (M&A) business and analyses the M&A market in the Mainland of the People’s Republic of China (China). Thereby the Thesis focuses on the development of cross-border transactions within recent years and the relevant intra and extra Chinese influence factors.

I.I Research Problem

After the publication of recent M&A transactions data in October 2004 it is clear that the M&A market in China gains importance in a rapid manner. Within the first nine month of 2004 the Chinese market triplicated from about 10USDbn in the previous year’s period to 35USDbn. With a total of 695 announced domestic and cross-border transactions – in comparison to 730 transaction with a value of 52USDbn in Germany (cp. w/o author, 2004b and w/o author, 2004a) – China comes close to the sixth position of Germany in worldwide M&A volume.

This rapid growth supports the common acceptation in the Investment Banking environment that China will be one of the most attractive markets for Corporate Finance services in the following years. Therefore the Master-Thesis should give an insight into the historic development of M&A transactions with Chinese involvement and the current market situation. Thereby the paper will focus on country specific influence factors that have significant importance to M&A transactions.

I.II Methodology

To better understand the problem set firstly a brief insight into the M&A business will provide definitions and define the relevant transactions which should be analysed in this paper. Following that the rationale for M&A transactions involving Chinese businesses and the Pros and Cons of such investments will be described. Thereby general aspects of the Chinese economy will not be discussed in detail as related information is already available in other sources.

The Thesis will then present Foreign Direct Investment (FDI) data of the last two decades to show the development of FDI and the changes in the investment modes. After clarifying global FDI trends the evolution of the Chinese M&A market will be analysed using external sources and conducting an own study using standard databases relevant to the sector.

In the following factors specific to the Chinese M&A market will be described. Those are qualified in respect of the particular legal form of the Chinese target firm and focussed on the most relevant influence factors concerning Chinese market regulation.

Peculiarities during the due diligence process, issues in respect of documentation and a set of other issues are described to illustrate most important pitfalls of M&A transactions in China.

This knowledge will then be applied to a case study covering the Chinese banking sector, which is one of the business sectors facing strongest regulation. The acquisition of a minority stake in Bank of Communications (BoCom) from HSBC Holdings plc (HSBC) in 2004 will be used to illustrate this. Further on the rationale for the transaction will be discussed, referring back to the earlier chapter about Pros and Cons of investments in China via M&A.

Finally the previous findings will be analysed and the perspectives of the Chinese M&A market will be qualified, concluding with a statement whether the optimism of the market is legitimate or not.

II Definition of M&A

The term Mergers & Acquisitions generically refers to any combination of two or more enterprises. Mergers and acquisitions are two different legal transactions in many jurisdictions, including the Chinese legal environment.

Thereby a merger is defined as the legal combination of two independent economic entities where the target company is dissolved into the acquiring company. By legal classification the acquirer assumes all the assets and liabilities of both entities. The procedures for executing a merger transaction tend to be fairly straightforward (cp. Marren, 1993). On the downside, mergers often require the approval of both the acquiring and target firm's shareholders and the acquiring firm assumes all of the target's liabilities (cp. Milman, 1999).

An acquisition is defined as the purchase of all or part of the assets or shares of an economic entity by another entity. As result of this both entities survive after the transaction.

The acquisition of equity interests of another firm can also lead to the creation of a Joint Venture (JV), in this case an Equity Joint Venture (EJV). Under the umbrella of M&A transactions also JV in the form of Contractual Joint Ventures (CJV) can be summarised as drafting of the JV contract may require the same expertise as a conventional M&A transaction.

The table below illustrates the different forms of M&A transactions and classifies them according to the Intensity of Relationship and the distinction between a “Make or Buy” decision.

Figure 1: Types of M&A Transactions

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Sources: Staude, 2000; Intensity of Relationship according to Büchel, 1997

Over the past several years Foreign Direct Investment in China has taken all mentioned acquisition modes described above (cp. Capener, 1998) and - in the meantime - those structures are also covered under the Chinese juridical system. More details are provided later in that paper after the rationale for M&A in China has been discussed and the development of the FDI and M&A market is outlined.

III Rationale for M&A in Mainland China

Globalization, deregulation and continuous technological breakthroughs have pushed worldwide M&A activities to a record high. Around the world, the eagerness to seek new markets, gain market power, enhance operational efficiency and improve returns are driving firms to consider M&A as one of the critical growth engines to realize these goals.

Within recent years corporations are beginning to endorse M&A in China as a creative and strategic mean to grow, compete and enhance shareholder values. The following chapter will provide a deeper insight into the general and country specific success factors for cross-border transactions.

Firstly the general success probability of such transactions will be outlined briefly as discussed in relevant literature. Secondly the country specific Pros and Cons are discussed to provide a basis for a better understanding of the Chinese M&A market and its strong development in recent years.

III.I Value Generation of Cross-Border Transactions

As this paper does not want to evaluate whether M&A transactions involving Chinese entities are value generating or not, only a short overview about the different positions in literature is given below.

Generally it can be said that the analysis of whether cross-border M&A transactions are value generating returns diverse results and do not provide a clear answer.

While Harris and Ravenscraft (cp. 1991) in a study found out that especially cross-border transactions are beneficial in the case that distressed firms are acquired, other sources say that M&A transactions in general often destroy value, especially if the projected synergies among the merged firms do not materialise or their corporate cultures clash (cp. Ghemawat and Ghadar, 2000).

While it is not possible to provide a clear answer whether cross-border M&A are value generating, it can be said that M&A transactions can bring general “long-term benefits when they are accompanied by policies to facilitate competition and improve corporate governance” (Mody, 2001).

III.II Pros and Cons for M&A in China

The Chinese market with more than 1.2bn people offers grand cultural, political and legal challenges as well as opportunities to multinational corporations.

In the following, country specific Pros and Cons for M&A transactions involving Chinese targets will be listed. Most of the specified issues will be discussed later in that paper as they are relevant influence factors to M&A transactions.

III.II.I Pros

- The development of real Gross Domestic Product (GDP) in China since 2001 - as provided in the table below -, and the positive assumptions for the future development of the economy provide a basis for further FDI and M&A transactions.

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Table 1: Real GDP Growth in China

Sources: IIF, 2004a and Huang, 2005

- Even if analysts (cp. Huang, 2005 and Xie, 2005) today get more sceptical about a soft landing of the Chinese economy they generally remain optimistic. Further measures to cool down the economy should prevent a collapse and provide a stable basis for further GDP growth, probably lower than in recent years but more sustainable.
- The lessening of restrictions on foreign investment in certain strategic areas that were initiated with China's entry into the WTO (cp. Kracht, 2002; Markel, 2004 and WTO, 2001a/b/c), is increasing the market attractiveness for foreign investors.
- Often foreign investors lack experience in and knowledge of China, thus an already existing entity with all relevant approvals provides a swift entry to the Chinese market (cp. Hui, w/o year). Further on the establishment of a country wide branch structure may take to long to fully benefit from the fast development of the Chinese economy.
- In some cases the relevant approval authorities do not any longer grant approval for the establishment of new FIEs in certain industries. In that case the acquisition of an existing enterprise is the only opportunity to enter the market (cp. Cheung, 2001)

III.II.II Cons

- The regulatory regime for foreign investments and M&A transactions is not developed according to international standards and especially in recent years in permanent change. This situation complicates investments and increases the risk that a transaction eventually fails.
- The banking system is not advanced enough to provide long-term funding in local currency, which especially hinders smaller strategic investments and financial investors.
- Especially for financial investors, inadequate exit alternatives increase the investment risk as common exits after four to seven years may not be possible.
- The business culture in China is still fundamentally different to the Western culture which may complicate the transaction and the later integration into the international operations of the acquirer. A major difference to Western countries is the importance of Guanxi, the personal network of individuals. It influences most of the political and economical decisions and may also determine the result of court decisions (cp. Strick, 2002). As it is hard for foreigners to look behind the scenes this significantly increases the investment risk.
- A number of other issues like triangle debts, vague land use rights, and overstaffing are existent on a broad scale and can not be overcome in short time.

III.III Summary

It seems that Pros exceed Cons from an investors’ perspective, as the volume and value of M&A transactions involving Chinese targets increased significantly within the last years.

A study conducted by Deloitte turned out that of 165 German producing industry companies with revenues between 100-1,000EURm and an export share of at least 20 per cent, 87 per cent either already have a “China Strategy” or a preparing one. The readiness of the German “Mittelstand” and the M&A market potential is supported by the fact that 37 per cent think that acquisitions in China are a “good” or “very good” method for market entry in China (cp. Pohl, 2004).

Those figures clarify that possible future investors are ready for investments in China and consider M&A transactions as a suitable method to realise their strategic goals.

A detailed analysis of FDI and the development of M&A transactions is provided in the following chapters.

IV FDI

Since 1979, when the Equity Joint Venture law was passed and under the leadership of Deng Xiaoping, China introduced market policies (cp. Khan, 1997) and slowly opened the market to foreign investors. The recent successful re-accession of Hong Kong and China's entry to the World Trade Organization (WTO) opens China even more and will further increase the attractiveness for Foreign Direct Investment and M&A transactions.

The development of FDI is possibly the best economical measure to analyse the opening of the Chinese economy to foreign investors. Whether these investments are conducted through greenfield approaches, M&A transactions or other forms of investments, cannot be identified but at least the development of FDI documents the attractiveness of the market.

IV.I Inbound FDI to China

Long term FDI statistics provided by the United Nations Conference on Trade and Development (UNCTAD) clearly indicate the tremendous development from the opening of the Chinese economy (and the first available figures) in 1985 until today. The table below shows utilised FDI to and from China from January 1985 to November 2004. To better illustrate the strong growth and focus on the last years FDI figures from 1985 until 1995 are shown as an average and the years 1996 until 1997 are left out. For year 2004 figures from January to November 2004 where available at the time of writing.

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Table 2: Utilised FDI to and from China

Sources: UNCTAD, 2003; UNCTAD, 2004a; Anderson, 2004

Available data as presented above suggests that the development of FDI from 1985 until 1995 was relatively fast in terms of percentage growth but low in absolute numbers. After the Asian Financial Crises, China recovered quickly and from 2000 onwards led the FDI boom towards developing economies in Asia.

After a slump in the third quarter of 2003, FDI recovered and have since then bounced back and showed year over year growth of more than 15per cent in May 2004 which should lead to double digit growth for full year 2004.

According to economists at UNCTAD (cp. UNCTAD, 2004d) the future development of FDI depends on a number of micro and macro economic factors, policy developments, as well as on the impact of specific events on investors’ plans outlined below:

- Macroeconomic growth rates measured by GDP are expected to accelerate.
- The level of global interest rates is expected to remain relatively low, keeping the cost of corporate financing for investment low.
- Domestic investment and industrial output are both expected to increase.
- Most companies are reporting increasing profits again, strengthening their capacity to invest.
- The rise in stock valuations is expected to boost the value of cross-border M&A deals as asset values of individual target companies increase, even if the number of M&A transactions remains unchanged.
- Intensified policy efforts at national and international levels may facilitate additional FDI flows.

A combined analysis of those factors indicates a growth of worldwide FDI within the short and medium term.

The attractiveness of China as a target country for future FDI was evaluated recently in the survey Prospects for Foreign Direct Investment and the Strategies of Transnational Corporations (TNCs) , 2004-2007, where more than 300 TNCs from all over the world where asked for their favourite FDI target countries from 2004 to 2007. The survey from UNCTAD (UNCTAD, 2004c and UNCTAD, 2004d) turned out that China is the leading location in terms of FDI prospects and opportunities not only in the Asia/ Pacific region but also on a global basis as stated in the Global Ranking of the table below.

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Table 3: Favoured Countries for FDI

Sources: UNCTAD, 2004c and UNCTAD, 2004d

This in mind and the fact that the largest recipients of FDI are expected to continue to be the most likely destinations of FDI in the future (cp. UNCTAD, 2004c) China is able to intensively benefit from the predicted development.

Analysts at UBS Investment Research predict monthly utilised FDI at around 6USDbn per month until December 2005 which would again lead to a double digit growth for year 2005 (cp. Anderson, 2004).

It has to be also in mind that contracted FDI is much higher and growing faster than utilised FDI and thus provides additional growth opportunities for the future (ibid.). The figures provided above may also be tampered as they do not necessarily include local borrowing of foreign enterprises in China which is rising significantly. Taking that into consideration foreign investment in China may have grown even faster in the past than indicated by available data (cp. Simpfendorfer, 2004).

IV.II The Importance of M&A Transactions

FDI from OECD countries increased from 220USDbn in 1989 to 768USDbn in 1999, showing a compound annual growth rate (CAGR) of close to 15 per cent (cp. OECD, 2001a). The growth was accompanied by notable changes in the structure of FDI. Cross-border M&A and joint ventures (JVs) outbalanced greenfield investments in importance.

Worldwide cross-border M&A transactions by this time dominated foreign direct investment activity. The M&A transaction value world-wide increased with CAGR of more than 20 per cent from 1990 to 1999, rising from 153USDbn to 792USDbn (cp. OECD, 2001b).

The M&A boom was fuelled by the services sector, where most of the M&A transactions took place, helping also to shift the FDI pattern towards services. From 36 per cent of global cross-border M&A transaction value during 1987-1990, their share rose consistently during the 1990s, peaking at around 63 per cent during 1996 and 2000. Finally they remained at a similarly high level during the subsequent economic downturn. The share of services in cross-border M&A was slightly higher in developing (64 per cent) than in developed countries (57per cent) during the period 1987-2003 taken as a whole. It was also partly due to privatization programmes open to FDI, which peaked in many countries during the 1990s, adding to the number of cross-border M&As and will also further positively influence the development in China (cp. UNCTAD, 2004b).

In 2003, more than 9,300 greenfield and expansion FDI projects worldwide were announced, with an estimated value of approximately 440USDbn. China was the leading location for such projects, followed by the United States, India, the Russian Federation, the United Kingdom and Brazil. For comparison, the number of cross-border M&A transactions in 2003 was, with more than 4,500 deals, significantly lower than the number of greenfield projects (cp. UNCTAD, 2004c).

Apart from M&A transactions and greenfield projects, international strategic alliances emerged as a major form of globalisation during the 1990s. These kind of alliances may range from relatively non-committal short-term, project-based cooperation to long-term equity-based structures. Equity-based engagements include joint ventures, minority equity investments and equity swaps. Non-equity engagements include a host of co-operative agreements involving research and development, co-production, technology-sharing, supply arrangements, marketing agreements, and various types of co-operative consortia (cp. OECD, 2002).

The before mentioned survey Prospects for Foreign Direct Investment and the Strategies of Transnational Corporations, 2004-2007 further showed that both greenfield approaches and M&A are the preferred investment modes for 2004 and 2005 in the developed world.

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Figure 2: Expected Modes of Investment 2004-2005

Source: UNCTAD, 2004d

The table above shows that greenfield investments will presumably remain the dominant mode of investment in years 2004 and 2005 in Asia, followed closely by M&A transactions and other. According to the survey options other than greenfield investments and M&A transactions have a more significant importance in Asia than in developed economies (cp. UNCTAD, 2004d).

IV.III Summary

The analysis of FDI to China clearly indicated that the country managed to become one of the most important FDI receiver countries in the world and will probably be able to defend this leading position or even expand it.

The development of the investment mode structure of FDI showed that within the 10 remaining years the structure changed significantly towards M&A transactions. This changed was fuelled by a trend to transactions in the services sector and a growing number of large privatisations in developed and developing countries.

Having that in mind it can be concluded that China attracts an increasing number of inbound cross-border M&A transactions. Whether this is true and how the statistics developed within the last years should be examined in the following chapter.

V The Chinese M&A market

As previously described China became a popular target for foreign direct investment over the past decade and a half, with the Chinese investment environment undergoing a gradual transformation. With a matured investment climate in China, both foreign and domestic investors' needs and strategic plans are changing and M&A transactions move to the focus of international investors (cp. Capener, 1998).

At the beginning of the opening process of the Chinese economy not the M&A market but the opening of the stock market was in focus of the government and pilot projects were started in the late 1980s. At the same time limitations in the availability of Chinese shares restricted foreigners from investing in Chinese enterprises as described later in this paper (cp. Gu, 2004). The opening process in the 1990s further developed and the rules governing business relationships have become both more settled and somewhat more sophisticated what is further discussed in chapter VIII – Legal Environment.

Recently the “Global Deal Monitor 2004”, a query of 100 international companies by KPMG (KPMG, 2004) turned out that China will be - by far - the most preferred target for FDI by M&A in the following three years. 67per cent of the queried management boards are optimistic for the M&A market in the near future.

Analysing the market by exact numbers reveals a significant problem as M&A data from various sources is often not accordant; datasets are not complete or not available at all. This issue can be observed reviewing literature as well as in the analysis of the M&A market which was conducted independently by the author.

V.I Numbers from Literature Review

In 1999 Milman conducted a survey which covers the Chinese M&A market from the beginning of year 1985 to the end of 1996. The survey, based on figures from the Securities Data Company (SDC) deal database delivers some helpful insights into the early development of the Chinese M&A market.

In the period under observation 180 M&A transactions including financials with a total value of over 5.3USDbn were reported with target firms in China. Foreign companies were responsible for over 62per cent of these transactions. Even though 346 transactions were enclosed in the database, only 180 of these reported the value and further details of the transaction.

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Table 4 Cross-Border M&A in China between year 1985 and 2006

Source: Milman, 1999; based on data from Securities Data Company’s (SDC)

Apart from the significant growth of the M&A market which was observed by the study some other valuable insights in respect of sectoral and geographical distribution were generated.

The sectoral analysis showed that just under half of all M&A activity was concentrated in the manufacturing sector. It was followed by the financial sector (18.9per cent) and services (17.7per cent). This reflects the current situation of the Chinese economy which is still dominated by SOEs and manufacturing enterprises.

From a geographic focus the value of domestic deals, with more than 37per cent, was the most significant driver for M&A transaction value. As shown in the table below the acquirer’s nationality - ex-China - was dominated by Hong Kong and United States based firms which accounted for over 33per cent of the M&A transactions until year 1996. (cp. Milman, 1999).

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Table 5: Source of Funds per Country

Source: Milman, 1999; based on data from Securities Data Company (SDC)

From the study it can be finally concluded that from the beginning of the opening process of China the M&A market developed quickly and was attractive for overseas investors.

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The findings of Milman can be compared with data published by UNCTAD in the World Investment Report 2004. The time-series ranging from year 1988 until 2003 reveals a CAGR of more than 60per cent between year 1990 and 2003. At the same time the percentage share of Chinese inbound related M&A volume in comparison to world volume increased from 0per cent to 1.3per cent.

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Table 6: Cross-Border M&A in China between year 1988 and 2003

Source: UNCTAD, 2004b

The difference in values between Milman and UNCTAD cannot be explained as both surveys collect data under equal assumptions. Anyway both sources impressively illustrate the strong growth path of M&A transactions involving Chinese targets.

To provide a more thorough and detailed analysis of the recent five year period between 2000 and 2004 in the following an independent study was conducted.

V.II An Analysis of the Chinese M&A Market from 2000 until 2004

The following quantitative analysis of the Chinese M&A market is based on the Zephyr Deal Database, provided by Bureau van Dijk. As also the Mergermarket database was available, both databases were compared and the one with more data available was selected.

In the following analysis all M&A transactions with a target company in China and date of completion between 01 January 2000 and 31 December 2004 were included. As already described above the availability of data is a significant problem. In less than half of the transactions available, the equity value (Deal Value) of the transaction was enclosed. This may lead to a situation were the dataset does not fully provide a true and fair view of the Chinese M&A market. Nevertheless the data provides interesting insides into the market and the trend is in line with other data available, e.g. the World Investment Report 2004 (UNCTAD, 2004b) above or recent newspaper articles (cp. w/o author, 2004b).

In the following an insight into the development of overall deal value and volume (number of M&A transactions) is provided and in addition sectoral and geographical segmentation by value and volume are analysed.

V.II.I The Overall Market

The table below visualises the impressive development of the Chinese M&A market. Even if the provided deal value may be misleading because of the availability of financial data, the deal volume clearly shows the impressive growth over the year. The data is in line with data from Börsenzeitung (cp.w/o author, 2004b) as especially in the last quarter of year 2004 the deal value increased significantly especially due to two large transactions in the energy sector which represented more than 118USDbn.

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Table 7: M&A in China between year 2000 and 2004

Source: own calculations, based on Zephyr database

In the following an analysis by industry sectors and the country of the acquirer was conducted which provides deeper insights into the Chinese M&A market.

V.II.II Sector Segmentation

The analysis of the segmentation by industry sectors according to US SIC codes reflects the current trend to large transactions in the energy sector.

As shown in the left figure below, Oil & Gas Extraction and Petroleum Refining reflect more than 50per cent of the deal value of all M&A transactions from year 2000 until 2004.

When segmentation is ordered according to deal volume, as shown in the right figure below, the sector segmentation is fundamentally different. With less than 10per cent of the transaction volume Business Services is the largest sector, followed by Electronic & Electronic Equipment with about seven per cent. A number of other sectors reach also about fiveper cent or more and does not show a clear focus towards any main industry sector.

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Figure 3: Sectoral Distribution by Value and Volume

Source: own calculations, based on Zephyr database

V.II.III Geographic Segmentation

The analysis of the segmentation by country of origin of the acquirer reveals that domestic deals had a major market share from year 2000 until 2004.

As shown in the figures below Chinese and Hong Kong - Chinese buyers dominate the market. With the large share of Unknown or Other countries this is less strong when the segmentation is performed with deal value, but well-defined if transaction volume is chosen as the descriptive variable.

In addition both figures show that apart from domestic transactions, acquirers from the United States of America and the United Kingdom have a considerable market share. Especially the right figure may give a wrong impression of the influence of EU countries. If their transaction volume is combined they reach about the volume of the United States, demonstrating that these markets both put attention to the market opportunities in China and have comparable size.

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Figure 4: Geographic Distribution by Value and Volume

Source: own calculations, based on Zephyr database

V.III The Future of M&A in China

As described above especially the inbound Chinese M&A market has shown impressive growth rates and is already one of the world’s major M&A markets.

The continuous trend to further globalisation suggests that multinational corporations will constantly seek to restructure their business, to improve efficiency and profitability. This process will probably be followed by an increasing number of cross-border transactions but can only be successful if transactions are closed quickly and reliable procedures are in place. As discussed later in this paper the business environment in China, in respect of regulation and other issues, has not been transformed yet to international standards.

But recent changes in M&A relevant legislation and the WTO entry in December 2001 (WTO, 2001a/b/c) fasten the transformation process and move China towards a structure that accommodates the requirements of international corporations.

Kracht (cp. 2002) named a number of other factors for the M&A market in China, like privatisation, and availability of financing that will influence the market. All of these factors are discussed separately in this paper and recapitulating it can be already said that those will have a positive effect on the Chinese M&A market.

Apart from inbound M&A also the value of outbound transactions is expected to increase. The Chinese government started to open the cross-border M&A market for Chinese firms recently and as one of the first recognised deals involving a German target insolvent Schneider Electronics AG found a Chinese buyer. In 2002 TCL Holdings Co. Ltd.. - for 8.2EURm - acquired not only a production facility but was especially interested in the recognised German brands Schneider and Dual (cp. Mergermarket, 2002). Recently - in December 2004 - the announced acquisition of the IBM PC division by Chinese Lenovo Group for a transaction value of 1.75USDbn attracted international attention (cp. Kanellos, 2004). It again shows that Chinese acquirers try to enhance their business of already well-developed production facilities by internationally recognised brands. For the near future it can be expected that cross-border M&A transactions not only involving China and Germany intensify and more Chinese investments occur (cp. Keller et al., 2004).

In addition to M&A transactions an increasing number of Chinese enterprises realised an IPO on Wall Street in New York, mostly technology or internet firms like Ctrip.com, Linktone or Tom Online. The collected funds will presumably not only be used for internal but also for external growth.

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