Bain & Co sees prospects in China's M&A market

Despite headwinds buffeting the global mergers and acquisitions market due to US Federal Reserve interest rate spikes and the grim medium-term outlook for the global economy, M&A recovery can still be expected this year, especially in China, as more long-term gains can be made at times of uncertainty, a report from Bain & Company, a global consulting firm, said on Wednesday.

The total value of M&A deals registered in China came in at $304 billion in 2022, down 34 percent year-on-year, and in line with the trend worldwide. The value of global strategic M&A stood at $2.6 trillion last year.

Bain & Co partner Zhou Hao, who is also in charge of the consultancy's private equity and M&A practice in China, said the global M&A market had returned to the pre-pandemic level by May last year. But the aggressive Fed interest rate hikes later led to risk-aversion in credit markets, hurting M&A market sentiment.

The increasingly tighter regulatory grip worldwide, especially on large-scale M&A deals, geopolitical instability and talk of economic recession, have also had an impact on the global M&A market, which may continue this year, said Zhou.

The number of M&A deals in China, however, increased steadily from September to December, said Zhou. Chinese medicine, technology and consumption companies, whose valuations fell significantly last year, are likely to rebound strongly, thanks to the expected economic recovery in China this year.

Therefore, M&A activity is likely to recover significantly in the three industries this year, in terms of both deal size and number, he said.

On top of that, implementation of the registration-based IPO mechanism across the entire A-share market this year will have a positive impact on the M&A market over the long run, said Zhou.

With the new mechanism, quality companies will be able to attract more capital for future deals. Also, more small-scale enterprises will be willing to merge into larger corporations as an IPO is no longer the best exit channel for early investors, he said.

Based on Bain & Co's insights from past economic cycles, this year appears to have the potential to present plenty of opportunities for well-prepared acquirers to make bold and strategic moves, said Les Baird, head of the firm's Global M&A and Divestitures practice.

"In the face of uncertainty, proactive, deeper due diligence can deliver a competitive advantage in the speed and quality of deals done," he said.

Zhou said investment during economic downcycles, like the global financial crisis of 2008-09, tends to be more profitable in terms of earnings contributed to the acquirer. Companies that made M&A deals during that period reported compound annual growth rates of 5.9 percent between 2007 and 2017, higher than that of firms that did not strike any M&A deals.

Meanwhile, the pricing of M&As has been returning to a rational range as companies' valuations declined last year. This will present good opportunities for cash-rich acquirers, Zhou said.