Chinese Companies' USD75 Billion Worth of Overseas Mergers and Acquisitions Failed Last Year
Yicai Global
/SOURCE : Yicai
Chinese Companies' USD75 Billion Worth of Overseas Mergers and Acquisitions Failed Last Year

(Yicai Global) Feb. 6 -- The value of failed overseas acquisition attempts by Chinese companies jumped last year, while foreign investments made by China doubled. Stopped takeovers are indicative of tightening restrictions in China and abroad.

The total value of canceled overseas deals by Chinese firms exceeded USD75 billion last year, up from about USD10 billion in 2015, according to the Financial Times. More than 30 acquisitions of European and American companies were forced to 'abort' due to regulatory and foreign exchange restrictions.

Chinese investors made a total of 7,961 non-financial foreign direct investments worth USD170.11 billion in 164 countries and regions in 2016, an annual increase of 44.1 percent, according to data released by China's Commerce Ministry on Jan. 16. Baker & McKenzie and Rhodium's analyses show that China's direct investment in the US and Europe more than doubled in 2016, with a record value of USD94.2 billion.

Domestic Supervision Tightened

Chinese enterprises' failed acquisitions are the result of tightened supervision at home and increased restrictions and fears in foreign investment destination countries, Ni Jianlin, a senior partner at SG & CO PRC Lawyers, who specialize in free trade area and cross-border mergers and acquisitions, told Yicai Global.

"In the second half of 2016, China's supervision and restrictions on foreign exchange for export tightened obviously, and now there is no sign of relaxation," Ni said. In 2016, in addition to intensifying scrutiny over acquisitions of more than USD1 billion beyond the core business of investors, relevant departments increased restrictions on cross-border deals in land, hotels, film and television production and entertainment assets. Anbang Insurance's failure to buy Starwood Hotels and Resorts for USD14 billion is a case in point.

A significant proportion of overseas investment filings may struggle to be passed this year, Ni said. "It will be difficult for the trading volume (of overseas acquisitions) to increase in 2017. Some of our clients have temporarily given up their investment intentions because their overseas investment does not meet the new regulatory requirement. In addition, we heard that some enterprises had signed acquisition agreement, but their plans were also forced to 'abort' due to the strict control of capital outflows."

The Financial Times reported that a person involved in cross-border transactions in China believes that when the country enhanced supervision and regulation, asset sellers from Europe and the US became concerned about making large-scale transactions with Chinese buyers. "Chinese become more and more professional, but sellers will give priority to potential buyers outside China because of the capital controls," said another person who deals with buyers from mainland China.

Nearly 80 Percent of Canceled Transactions Were From the US

China has overtaken the US to become the largest overseas assets acquirer in the world. European and American markets have exercised prudence when reviewing Chinese company's merger and acquisition plans. Reasons like 'national security' and 'governmental interests' have frequently been used as excuses for countries to enhance checks or reject M&As.

In the US, 10 Chinese companies' acquisitions worth USD59 billion were halted last year, which is nearly 80 percent of the total canceled amount (USD75 billion), according to the Financial Times. A Chinese-capital financial group tried to purchase the American lighting equipment division of Holland-based Philips for USD3 billion. The attempt was blocked by the Committee on Foreign Investment in the United States (CFIUS), which is subordinate to US Department of the Treasury. Recently, CFIUS investigations have been concentrated on companies from China.

Last year, China's home appliance maker Midea acquired KUKA, a German robot manufacturer, triggering public attention and pushback from German politicians, who tried to limit the acquisition of Chinese enterprises and lobbied the European Union to restrict overseas M&As. 20 European transactions, worth USD16.3 billion, were cancelled last year.

Though it is true that trade protectionism has begun to rise in overseas markets, said Wang Wei, partner at PricewaterhouseCoopers's European M&A business, "the so-called national security review in Germany or even the whole European Union is friendly on the whole in stark contrast to the strictness in the US."

China-based Fujian Grand Chip Investment Fund LP (FGC) bid to acquire German chip manufacturer Aixtron, for EUR670 million. Wang said this project was not declined by the German Government. The German Economic Ministry canceled a permit based on 'new information' about national security offered by CFIUS, which decided to re-examine the deal. Ultimately, the Chinese investor quit the deal.

"From the perspective of my own working schedule, now we are launching and advancing certain businesses. It is predicted that we will sign a contract in the third quarter this year, and the project progress is going on normally now. Enterprises hold the common opinion that the government will not employ the same measures to M&A deals concerning strategic industries without flexibility," said Wang to Yicai Global. "The world will see changes in 2017, for Germany, France, and Italy will be faced by the election of their congresses and leaderships. Nevertheless, there will not be essential variations in their attitudes towards foreign capitals' investing in their local companies. In other words, they have something more urgent to do."

With Trump as president, trade conflicts between China and the US have been a mainstream media topic. The Trump administration is protectionist in its trade policies, and its policies towards foreign investment are still undefined. Trump's election speeches and behavior suggest he will consider American interests first, Ni said.

"The US government has always been worried about the fact that Chinese enterprises may poach key technologies via M&As, especially in the IT sector and assets touching the so-called national security," Ni said. Ni suggested that enterprises heading to the US for investments pay close attention to the new trend of the Trump administration's foreign investment policies. They should be careful about what can pass CFIUS' examinations in sensitive industries.

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