M&A Outlook 2013: Economic Recovery Spurs M&A Activity

In 2012, the keywords of global economy are “European debt crisis” and “economic recovery”. In this context, all major economies in the world suffered a series of hardship, and even China which created “the miracle of growth” has once been unable to withstand the economic downward pressure. Therefore, Chinese M&A market failed to continue the strong development trend over previous two years and slid slightly compared with 2011 under such a trend which turned cold first and then warmed up. As relevant countries implemented economic stimulus policies in succession, the “recovery” was unveiled slowly. The year 2013 is on the basis of the “recovery”. Through the summary of the year 2012 and forecasts about future development, Zero2IPO Research Center, a well-known VC/PE research institution in Greater China, made the following outlooks:

I. Global M&A market may post disappointing growth, while emerging markets will take the spotlight
In the year of 2012, the European Central Bank (ECB) lent a hand decisively in times of crisis and announced ECB would secure Euro at all costs, greatly stabilizing the market sentiment. Thereafter, EU made efforts for a second time to enable the ESM to take effect formally. Various measures helped alleviate the European debt crisis gradually. In the U.S., the rollout of QE3 and the fall of unemployment rate in late Q3 had once brought a good outlook of “recovery acceleration”. However, the advent of the fiscal cliff undoubtedly overshadowed the recovery outlook which was very promising originally. Though the emergence of QE improved the money supply once again, the recovery pace that was moderate previously would also not be quickened significantly, and even the US was likely to return to recession due to the fiscal cliff. Compared with the staggering pace of Europe and the US, the growth momentum of emerging markets will be better in 2013. Among the BRIC, according to the market estimates, China, India and Russia will accelerate their economic growth in 2012, while Brazil will be more likely see a rapid GDP growth from less than 2% in 2012 to more than 4% in 2013.

The US M&A market slid substantially in 2012. It is estimated that the overall situation of the US M&A markets will remain unchanged, while it will be also difficult for the European M&A market to leave the historical low. Additionally, at the time of a downturn in M&A deals in Europe and the US, the growth of M&As in emerging markets will certainly increase its global proportion, which will become the highlight of global M&A market in 2013.

II. As domestic macro-economy recovers from the bottom, China’s M&A market is expected to make another breakthrough

In recent years, Chinese M&A market has achieved considerable development, showing a rapid growth in both activity and size of market. China’s M&A market experienced three times of “blowouts” in succession in 2009, 2010 and 2011, and created the historically best record in 2011. In 2012, the negative forecast for China’s macro-economy was gradually increased: firstly, export underperformed; secondly, GDP growth rate in Q2 exceeded 8% for the first time; thirdly, PMI dropped below the confidence index of entrepreneurs. It seemed that all data indicated the deteriorating economic environment. Impacted by this, China’s M&A market continued its downturn trend from the high in Q1 to the big contraction in the total amount of M&As on a year-on-year basis in Q3. Thereafter, a series of government regulations gave a new impetus to economic growth. The information about export recovery and the rise in PMI indicated that China’s economy would walk out of the downturn, and therefore China’s M&A market would warm up once more. Considering the situations in the previous 11 months, it is estimated that in 2012, Chinese M&A market fever would remain at a historical high, showing a slight drop compared with 2011, but not very much. Under such stimulus of the accelerated growth of China’s economy in 2013, Chinese M&A market is expected to make a new breakthrough and create a new record.

III. Outbound M&As remain strong momentum but need warn against political risks

Although Chinese M&A market turned cold as a whole in 2012 and lost the growth trend of 2011, the size of outbound M&As made by Chinese enterprises still grew slightly. According to the statistics from Zero2IPO Research Center, in the first 11 months of 2012, the outbound M&As made by Chinese enterprises involved a transaction amount of US$26.59B in total, up by 13.5% on a year-on-year basis, while the targets were mainly distributed in the US and Europe. The counter-trend growth of outbound M&As scale indicated the robust demand and sound internal and external environments. On the one hand, in 2013, it is estimated there would be a slow recovery in the international economy   and a slight but limited rise in the assets price, which will continue create favorable external environment for Chinese enterprises’ outbound M&As. On the other hand, China’s economy is full of growth power after the short-term downturn, adding the loose monetary policy and excellent internal environment; under the circumstances of both excellent internal and external environments, Chinese enterprises will accelerate the pace of their outbound investment strategies and be expected to create a new high in outbound M&As in 2013.

From the perspective of geographical distribution of outbound M&As, in 2013, the targets will be distributed in Europe, Australia and North America. Europe is still an excellent “bottom fishing” area due to its low assets price, a large number of potential targets and good market prospect. Australia is an ideal resource-based M&A target region due to its abundant mineral resources. North America has always been the most important and most active area for global M&A markets, because the area integrates multiple advantages together, such as energies, technologies, brands and channels. 

In 2013, it’s hard to ignore the changes of political environment in field of outbound M&As. The political risks for Europe and Austria-oriented outbound M&As won’t change dramatically. However, the US and Canada in North America might slightly deteriorate in political environment. Although Canada has just approved of the extensive transaction of CNOOC's takeover of Nexen, there are still many opposing voices against resource-based M&As of state-owned enterprises in Canada. Balanced by multiple factors, at time of announcing the approval of CNOOC’s M&A deal, Canadian Prime Minister Stephen Harper has also expressed the governmental view of “Just This Once” on such M&As, which will certainly produce negative forecasts on resource-based M&As of Chinese state-owned enterprises in Canada. However, the US’ position is very tricky. Though Mr. Obama ordered a ban on Ralls Corp, a Sany associate, and vowed to get tough on China’s trade policies before American presidential election, it does not eliminate the possibility of influences exerted by American presidential election in special times. Above all, the US is trapped in the fiscal cliff, so Obama Government might modify relevant policies depending on the effects of fiscal cliff on American economy. On the one hand, motivated by desire for a rise in unemployment rate, the US government may adopt protective measures to ensure employment rate in terms of international trade; on the other hand, the US government may be more flexible in terms of approval of outbound investment. If the US economy underperforms, the US government may appropriately relax relevant approvals to inject new vitality to its economy by making use of foreign investment. If the US economy outperforms expectation, the US government is likely to strictly control Chinese enterprises’ M&As in specific fields on the grounds of “state security”.

IV. VC/PE Investments accumulate, while M&A exits attract the most attention

Fundraising, investment, management and exit are the core for businesses of the VC/PE firms. In recent years, the investment fever has made a significant increase in accumulated amount of fundraising and total number of investment deals for VC/PE firms. However, the growth of exits fails to keep up with the pace of the former. As shown in Figure 1: compared with the number of exit deals, the number of investment deals was more than 603 in 2008, 391 in 2009, 625 in 2010, 1594 in 2011 and 1204 in first 11 months of 2012. For years, the number of investment deals for the VC/PE institutions has always been more than the number of exit deals and hit more than 4,000 deals in last five years, making the exit demands of the VC/PE institutions become more and more pressing. Under the circumstance of limited IPO exit options, as the most important exit option for PEs in Europe and the US, M&A exit has naturally become the focal point of VC/PE markets in China. However, the rise in M&A exits can not only improve the proportion to exit option but also significantly increase the scale and activities of Chinese M&A market.
　Figure 1 VC/PE Investments and Exits in 2008 – Jan-Nov 2012
 

V. Rapid growth of Buyout funds promote real economy to accelerate integration

As a mainstream of funds in the western PE markets, M&A exit has developed for years and become relatively mature in investment strategies and operation modes. After the nationwide PE fever, China faces serious homogeneous competition in PEs and has an urgent need to develop new investment orientation and strategies. As one of the best options, buyout fund naturally attracts people’s attention. In 2012, China saw a sudden acceleration in the development of buyout funds, including CITIC Buyout Fund——the first buyout fund among brokers, Shanghai Municipal government-backed Shanghai International Buyout Fund and GF Industrial Buyout Fund, which are larger in scale and market influence. In 2013, the first year of investment, it is believed that such buyout funds would outperform in Chinese M&A market and help China’s economy complete the strategic objective of “adjusting structure” by means of participating in industrial integration.