As political and trade relations between the world’s two largest economies have deteriorated over the past year or so, cross-border mergers and acquisitions (M&A) activity between the United States and China has declined as a result. Nonetheless, China remained a top 10 foreign acquirer of U.S. assets in 2018, as measured by transaction value, with $9 billion in total spread across 48 announced transactions, according to Dealogic.
China, likewise, remains a popular destination for American acquirers. For U.S. companies in most industries, China is a market that cannot be ignored. While large acquisitions in China have always been rare, many U.S. companies continue to recognize that small- to medium-sized China deals — or, in some cases, the establishment of Sino-foreign joint ventures — are critical to gaining market access and establishing scale in China.
In general, despite the ongoing trade war, and short of a complete meltdown in the bilateral relationship, I see reason for optimism for U.S.-China M&A.
M&A From China
As a result of its meteoric economic rise, China has become one of the world’s most active outbound acquirers. Nonetheless, it still has a long way to go to if it wants to achieve an overall level of foreign investment equivalent to that of the world’s other large economies. China’s ratio of foreign direct investment stock to gross domestic product is a small fraction of that of some developed western economies. China has a stated goal of closing this gap; one official projection foresaw overseas investing on the order of $750 billion between 2018 and 2022.
China prioritizes outbound acquisitions in technology, a strategy that often finds it at odds with protectionist U.S. regulators, notably the Committee on Foreign Investment in the United States. (CFIUS’ original mandate was to review the U.S. national security implications of foreign investment into U.S. companies. Its mandate was broadened (registration required) last year to include the review of investments in certain “critical technology” sectors. The result has been U.S. regulatory rejection of several proposed Chinese acquisitions of U.S. technology companies.)
The good news is that China also prioritizes deals in other, less-sensitive sectors, including health care and traditional industry. In addition, Chinese companies continue to venture into investments in U.S. consumer companies, such as GE’s appliance division and pork producer Smithfield Foods, to name a couple. Overall, I expect Chinese M&A deal flows into the United States to easily remain among the highest from any single country.
M&A Into China
As a country nearing a fifth of the world’s population, China somehow remains outside the top 10 target geographies for U.S. cross-border M&A. Simply put, China is the world’s largest untapped M&A market.
Historically, Chinese regulators have been known for maintaining a protectionist stance on foreign investment in domestic Chinese companies. In the 1990s, for example, foreign companies in virtually every industry were required to enter China through a joint venture with a local partner. These regulations have been eased dramatically since then. In most sectors, there is currently no regulation that precludes even the outright acquisition of Chinese companies by foreign companies.
I’m strongly encouraged to see that, despite the trade war, China, at least so far, seems to be determined to continue to honor its promise to ease restrictions on foreign companies in even some of the most highly regulated sectors. China continues to implement measures to raise caps limiting foreign equity shareholding percentages in companies in the automotive, banking, securities and insurance industries.
Adding further fuel to the U.S.-into-China M&A fire is the fact that many U.S. companies believe they are behind in China. These companies continue to have a healthy appetite for Chinese acquisitions and partnerships.
One of my colleagues at my company’s partner firm in China reminds me regularly that there are great deals to be done in China. While plenty of foreign companies have made mistakes in the past in executing M&A in the Middle Kingdom, I believe well-advised companies that do their homework can continue to find lucrative opportunities.
