Merger and acquisition (M&A) activities will continue to see strong growth in 2008, especially in the local market, analysts said.

The overall state of economic growth facilitates an active M&A market as companies look to restructure, grow in scale and develop new markets. But equity markets, internally generated funds and bank loans will continue to provide ample liquidity for financing M&A deals.

Domestic M&As will remain the theme in 2008 due to government support and State-owned enterprise (SOE) restructuring, analysts said.

A recent report released by local brokerage Hongyuan Securities listed the industries expected to see more domestic M&A deals in 2008.

These include steel manufacturing, cement and equipment manufacturing, which will see integrations in line with the national energy saving and pollution reduction policy.

The report also lists the IT, electronic equipment, biotechnology and retail industries, for which M&As are necessary to boost competitiveness, especially on the international market.

The national defense industry - which will restructure and go public according to last year's Commission of Science Technology and Industry for National Defense guideline - is also tipped for more M&As this year.

Overall M&A deal volumes (excluding outbound transactions) in the first 11 months of 2007 increased 18 percent in volume to more than 1,700 transactions, and 25 percent in value to over $80 billion, PricewaterhouseCoopers (PwC) said.

The financial services, real estate, manufacturing and mining sectors had the strongest M&A growth in 2007. There were industry-specific factors at play last year, such as the restructuring and capital replenishment of securities companies.

The domestic sector pulled well clear of foreign activity with a growth of 45 percent by volume (to 987 transactions) and 53 percent by value (to $50.6 billion). In 2007, domestic deal activity was twice as high as foreign-backed M&A activity, according to PwC.

"Domestic activity will continue to benefit from three principal drivers: market opportunity, liquidity and government support," PwC said.

Increased domestic deals this year will continue the trend that emerged in 2006. Previously, foreign direct investment had been the key driver of M&A growth.

Private equity deals

Industry analysts said private equity, another main driver of M&A activities, will continue to push deals.

The first 11 months of 2007 saw 140 announced transactions by private equity firms, compared with 110 in 2006, PwC said.

Overall deal values rose from $5.7 billion to $10.6 billion on the back of a number of multimillion dollar transactions including Permira's $840 million acquisition of a 20 percent stake in Galaxy Entertainment's Macao casino development and Blackstone's $600 million acquisition of a 20 percent stake in China National Bluestar. Despite the increases, private equity remains less than 15 percent of the total deals.

"Private equity is as interested in China as it has ever been. The biggest deals in 2007 have been pulled off by PE houses who are relatively new to the region, and we continue to see new funds arriving," said David Brown of Hong Kong-based PwC Transactions.

The US subprime-induced credit crunch barely produced a pause in private equity activity in China. As Brown explained: "Private equity deals in China, as compared with more developed markets in the US and Europe, tend to be smaller and less aggressively geared, and local banks, including Chinese banks, are happy to step up to provide financing. Looking at the impact of the credit crunch going into 2008, if anything, we predict an increase in private equity activity as US PE funds direct money and human resources toward Asia in response to less activity in their home geographies."

As PwC has previously predicted, private equity investors have focused on taking minority stakes, and this trend is expected to continue in the near future.

Outbound investment

In the past two years, China has seen more outbound investment and is starting to see higher-value transactions.

The value of outbound transactions more than doubled in 2007 to $16.4 billion, although acquisitions from the mainland were all minority stakes. They included ICBC's $5.4 billion investment in Standard Bank, China Development Bank's $3 billion investment in Barclays and China Investment Corp's $3 billion investment in Blackstone.

"Generally speaking, it's difficult to speculate whether Chinese companies have the confidence or the need to take controlling stakes in their overseas competitors. We anticipate the outbound scene will be choppy over the next 12 months, but we can expect to see one or two very big deals, and we stand by our earlier five-year forecast that the level of outbound activity will grow to 10 times the 2006 levels by 2011," Brown said.

(China Daily February 21, 2008)