Although the number of deals increased, the value of mergers and acquisitions (M&As) in China in 2012 decreased in line with global trends. Chinese M&A volume remained small at approximately 5 percent of total global activity, while more than two thirds of the transactions were domestic. There were large differences across sectors, with important activity occurring in medical devices, auto components and food, and little or none in logistics, hospitals and travel services.

However, as we make our way through 2013, we expect this situation to change. In addition, we are at the initial stages of a protracted consolidation process which will play out over the next 5 to 10 years at different levels of intensity and speed depending on the specific sector. This consolidation process will provide enormous opportunities for growth, but also will create challenges for survival in an increasingly competitive market where size will become of greater important.

The survey results below depict how some of the leading companies in China view the M&A opportunities created by this consolidation process and how they go about their acquisitions.

The Survey Results Are In

During May to September 2012, InterChina surveyed 52 multinational corporations, of which 61 percent were U.S. based and 35 percent European based. Most of these companies have a long experience in China, are relatively large, among the leading companies in their segment, and have prior experience in acquiring companies in China.

As a result, our sample is biased toward companies which are well established in China, and we believe that given the leadership position of most of these companies in their respective sectors in China, this survey provides a sound picture of what the trendsetters in China are doing and what the benchmark is for other companies.

Company Strategy in China: M&As Increasingly Important

The majority (94 percent) of respondents either strongly agree or agree that inorganic growth is part of their growth strategy in China. This is a marked increase over a few years ago, and reflects that acquisitions have moved to the top of their corporate agenda. Thirty-five percent of respondents closed five or more transactions over the last five years, which is a high level of activity and appears to indicate there are many serial acquirers in China.

We consider this to be a substantial change to the environment as compared to a few years ago when acquisitions were one of several growth options, and often not the preferred one. Coincidentally, domestic Chinese companies (particularly listed companies) also increasingly use acquisition as part of their growth strategy. The implication is that we face a more competitive deal environment on one hand, and better exit channels for companies which want to be sold on the other hand. Given the increased competitive environment, acquisitions may be the only catalysts for a game change strategy to build a relevant revenue and product portfolio in China.

In terms of the acquisition objectives, there is a relatively equal distribution between platform acquisitions (acquiring a platform in China from which to grow further), bolt-ons (additions to existing business in China) and the acquisition of local brands. The high number of companies considering minority investments (43 percent) probably reflect the increasing acceptance of not having complete control, in the case of strong targets who do not accept a majority. Sometimes minority investments also are due to regulatory or approval requirements. Not surprisingly, the vast majority of acquisitions are directly related to the core business, and we expect this trend to continue as the competitive pressure in China further increases.

More Resources Dedicated to M&As in China

Given the increase in activity, more companies are dedicating resources to their M&A activities in China. Just over 50 percent of respondents have a dedicated corporate development team in China. Although the teams are currently small, most less than 6 people, we have reason to expect more dedicated resources as companies focus expansion strategies in China. 

The challenge is to retain and find experienced corporate development professionals.

The other half of respondents do not have a dedicated corporate development team in China and maintain their M&A function centralized in headquarters. In all cases the transaction execution is handled by the in-house team (global and China based if available) and outside advisors, although the mix can be very different depending on the available resources. The key reason for corporations to staff the M&A function in China is to be close to where the activities are located.

The challenge is to retain and find experienced corporate development professionals. Multinationals also have to weigh the issue of fixed vs. variable costs (in case there is no constant deal flow). Therefore, leveraging external resources is still considered as key to success, and more cost effective in many cases.

Internal Network Is Most Popular for Deal Sourcing

The most popular method for deal sourcing is in-house, which includes information from existing clients, industry leads, networking, strategic marketing, etc. Success here is, of course, dependent on the availability of quality in-house resources. Knowing the market and the right contacts greatly increase the likelihood of successfully sourcing deals.

However, sourcing targets remain a primary challenge for multinationals. This indicates the limitation of solely relying on internal network for sourcing deals. The absence of sale-side channels and opportunities also restrict one of the more popular deal sourcing channels of mature markets. Therefore, using third party advisory firms can be a great compliment to achieve efficient deal sourcing.

Excessive valuation expectations and unacceptable business practices are considered the main obstacles in identifying good targets. However size and availability (willingness to sell) are contributing factors to the difficulty in finding the right targets, which remains a top challenge when conducting transactions in China. Finding sizable targets used to be one of the main obstacles for inorganic growth in China, but our survey responses may reflect the growing acceptance of companies to acquire smaller targets or particular business lines with potential to grow.

Key Transaction Challenges

Key challenges are evenly spread among finding the right targets, valuation, and due diligence. Also, internal buy-in seems to be more challenging than external approvals, which are not seen as a key obstacle.

The top reason for deals failing during is disagreement in terms, followed closely by due diligence results.

Another significant finding is that the deal cycle is typically less than two years, and in nearly 30 percent of the cases, less than 12 months. This confirms our experience that the transaction cycle is getting shorter. In addition, the probability of closing a transaction significantly diminishes if negotiations go beyond two years. More Chinese targets demand specific timelines and sometimes require “monetary commitments” during or before critical deal milestones, such as due diligence.

The top reason for deals failing during the negotiation process is disagreement in terms, followed closely by due diligence results. Once moving into the definitive agreement stage, the odds are generally good for deal completion. Once the deal is completed, integration goes well in 75 percent of the cases, which is significantly higher than the international average, although acquisition objectives are not always achieved (only in 60 percent of the cases).

Increasing Consolidation

The majority of respondents believe their sectors will become more consolidated in the next five years as their industries become more sophisticated and ‘easy money’ less likely becomes readily available. However, there also is a recognition, depending on the sector, that a certain degree of fragmentation will remain and that there are likely to be new entrants. Most of the surveyed companies therefore expect increased competition in general, and also in the M&A field for the attractive targets available in the industry.


The InterChina survey results presented in this article confirm the rapid changes taking place in the Chinese M&A market. And against a background of faster consolidation, inorganic growth is increasingly becoming a feasible option, as well as a key part of the strategy for companies with growth plans in China.

In turn, many companies are dedicating resources in China to benefit from this trend, as well as becoming more aggressive in pursuing acquisitions there. Additionally, there is an increasing acceptance of minority transactions, which was not the case a few years ago.

The nature of the acquisition process also is changing and, overall, becoming less difficult to obtain approvals. However, many obstacles remain, such as finding the right targets, valuation and due diligence.

We consider these results a reliable indication of anticipated trends in China.

Deal length, a key concern until recently, is getting shorter. Negotiating deal terms (often due to valuation issues or risk-related issues), and unexpected due diligence findings, have now become major challenges to successfully conclude a transaction. Most companies surveyed also believe that consolidation will speed up within their sector.

We consider these results a reliable indication of anticipated trends in China and highly relevant for all foreign companies with a presence there. In order to maintain or strengthen one’s competitive position in China, inorganic growth will no longer be just an option, but a necessity.

This will open a wide range of new challenges and opportunities for Chinese and foreign companies alike, for which few are prepared. As detailed in previous InterChina articles, strong locally-based leadership, existing operational capabilities, direct dedication from top management, and a well planned and proactive acquisition approach, will be the keys to success in the consolidation process.

Jan Borgonjon, Partner and President, InterChina Consulting, Barry Chen, M&A Advisory Practice Managing Director, InterChina Consulting Shanghai, and Jennifer Wong, Associate, InterChina Consulting, contributed to this article.

InterChina Consulting
About The Author InterChina Consulting
InterChina Consulting’s team of 60 professionals has conducted over 500 strategy projects and closed over 160 transactions. With offices throughout China, the U.S. and Europe, InterChina Consulting has continued to deliver the highest quality services to clients for 20 years.

You don't have permission to view or post comments.

Quick Search

Stock Watch

FREE Impact Analysis

Get an inside perspective and stay on top of the most important issues in today's Global Economic Arena. Subscribe to The Manzella Report's FREE Impact Analysis Newsletter today!