M&As surge on SOE push after COVID recovery

PwC report says pandemic's waning boosts new development paradigm, corporate deals

The value of China's merger and acquisition deals rose 30 percent year-on-year to $733.8 billion in 2020, the highest level since 2016, the latest PwC report said.

"The increase in M&A deal value was driven by strong participation of State-owned enterprises in both domestic strategic and financial-buyer deals," said Roger Liu, leader of PwC's practice relating to private equity in the Chinese mainland and Hong Kong.

Among the total, the value of domestic strategic deals increased 27 percent on a yearly basis to $349.4 billion last year, a result of China's recovery from the COVID-19 pandemic, its push for a new dual-circulation development pattern and the vigorous flow of SOE and local government funds into the M&A market.

Private equity deals in 2020 were even more active, with their value rising 59 percent to $332.4 billion. This came on the back of a stock market that was strengthened by the STAR Market in Shanghai as well as the registration-based IPO system.

The new IPO system is used on the STAR Market and the Nasdaq-style ChiNext board of the Shenzhen Stock Exchange, providing an important channel for private equity funds to exit investments, Liu said.

PE deal values hit record highs in industrials, technology, financial services, consumer and healthcare sectors. In volume terms, PE firms were also active in high-tech, industrials and consumer sectors. This trend was in line with various government initiatives in those sectors.

Last year, there were 93 mega-deals, or transactions whose value exceeded $1 billion each, up from 80 in 2019. The increase shows the acceleration of the SOE reform and government-led capital injections into the financial sector, in response to economic turbulence relating to the COVID-19 pandemic, the report said.

Liu said: "China's M&A market is likely to continue to have a domestic theme this year, supported by SOE reform, the dual-circulation development pattern and the strategy of industrial upgrading. We expect to see some increase in overall M&A deal volume this year, driven largely by PE and financial-buyer activities.

"Hot IPO markets and high asset prices will also drive M&As, and we expect to see more M&A activity around corporate financial distress and debt restructuring even as the economy rebounds."

The signing of the Regional Comprehensive Economic Partnership agreement in November will promote further cooperation among economies in the region and may encourage M&A activity among members for the purpose of industrial distribution and upgrading, he added.

China accounted for 29.1 percent share of the Asia-Pacific region's M&A volume during the fourth quarter of 2020, according to GlobalData, a data and analytics company based in London.

"There has been a clear divergence in M&A activities between China and other APAC countries. Apart from domestic M&A, China also managed to see sizable inbound acquisitions with foreign players investing in acquiring Chinese assets," said Aurojyoti Bose, lead analyst at GlobalData.

While Chinese companies such as Xuzhou State Investment & Environmental Protection Energy Co Ltd made domestic acquisitions during the fourth quarter, foreign companies such as SK Hynix and Peak Fintech Group Inc were seen eyeing Chinese assets, GlobalData said.