Fledgling M&A market to bloom in five years

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Last updated at: (Beijing Time) Monday, November 24, 2003

Fledgling M&A market to bloom in five years

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China's merger and acquisition (M&A) market, boasting a bright future, vast volume and fragile infrastructure, will mature in the next five to ten years and become one of the world's most flourishing M&A markets.

Hu Zuliu, managing director of Goldman Sachs (Asia), felt encouraged as the view was echoed by many participants at the International Mergers & Acquisitions Summit Beijing 2003, held here earlier this week.

Large-scale mergers among companies and industries such as in Europe and North America are not likely to occur in China in the near future, he said.

He explained that relevant polices, like how the state will hold the state-owned enterprises (SOEs), has become clear only recently, and China's legal structure in M&A is unclear or incomplete, especially the law on taxing mergers.

Moreover, China's capital market is small and with many limitations, which lead to the expensive cash trade of most mergers in China, he said, noting that this is the main factor hindering large-scale mergers.

Statistics show that more than 90 percent of international mergers rely on a huge capital market with free liquidity and separate equity.

Wang Wei, secretary general of Global M&A Research Center, said that in China at present, the government still tightly controls the key fields of the national economy, and mergers by private or foreign companies are still restricted to unimportant industry sectors.

Mergers in China remain at the early stage because of a lack of a sound credit system, unclear property rights and administrative interference in the nation's M&A market, he said.

Under the current restrictions, Chinese business people usuallyfeel powerless and frustrated at seeing the flourishing business of global mergers, Wang said.

"The prelude to China's merger era will not be come until SOEs that directly control nearly 1 billion yuan (120 million US dollars) worth of assets enter the M&A market," he said, noting that the State-owned Assets Supervision and Administration Commission (SASAC) hosting the international M&A summit means SOEs,as the mainstay of China's economy, have begun to step into the M&A market.

SOEs and the state economy remain the bottleneck of China's drive for economic growth, and SASAC reiterated recently that M&A and regrouping would be the major way to the strategic restructuring of the state economy.

Consulting agencies seem to be more sensitive to business opportunities in China. Deloitte Touche Tohmatsu, the world's No. 1 accounting corporation, has decided to invest 1.5 billion to 2 billion US dollars in China in the next five years, and send knowledgeable experts to China to "help the government in SOE transformation and international mergers," said the corporation's global chief executive officer William G. Parret.

"China's huge market and low total cost attract many of our clients, so we should go there to help them and maintain our world-first status," said Parret.

In the near future, investors more familiar with China, such asthose from Hong Kong, will be actively acquiring equity from listed companies, while foreign investors may enter China's M&A market in a tentative manner, predicted Xu Lijun, fund manger with Guotai Junan Securities Company.

Sectors with more M&A opportunities include finance, public service, communication, the automotive industry, tourism, aviation,energy transportation, infrastructure and household appliances, Xusaid.

While the Chinese government is moving policy obstacles for international mergers, Dimitri de Boer, program assistant with the United Nations Industrial Development Organization, reminded investors of the government's prudence.

"The government separates mergers with the stock market, and carefully restrict mergers into a controllable scope while actively establishing a legal structure," he said.

To most business people, Boer said, "even though the Chinese market is littered with problems and challenges, its potential is just too big not to be there."

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