By Zheng Lifei (China Daily)
Updated: 2007-11-12 09:02

Tightening rules

The government has been actively trying to avert such outcomes since US buyout firm Carlyle Group's high-profile bid to take 85 percent of China's biggest construction equipment maker Xugong Group Construction Machinery in 2005. Carlyle has since scaled down its original 85 percent bid to 45 percent, but the deal is still pending approval.

China issued Provisions on Acquisition of Domestic Enterprises by Foreign Investors last year in a bid to regulate foreign M&A activities in the country. In August, the Anti-Monopoly Law was enacted and will take effect next August. The new rules require any major foreign M&A deal to be examined and supervised for national economic and industrial security reasons by relevant government bodies.

But the tightening regulatory environment, experts say, will not deter or scale back foreign M&A activities. "The interest among foreign investors is still overwhelming despite their concerns about regulatory uncertainties," Heller Ehrman's Li says.

The number of M&A deals involving foreign capital decreased slightly to 296 in the first half of this year, down from 316 in the first half of 2006, according to data complied by industry journal M&A Asia. The slump was mainly due to the bull stock market, which has pushed up share prices and transaction costs, and the uncertainty about regulatory approval procedures, experts say.

The situation is likely to continue in the second half of this year until valuation expectations subside, and financial investors are likely to remain focused on minority positions in larger transactions until they sense a change in the regulatory landscape, says Gabriel Wong, a corporate finance partner of international accounting firm PricewaterhouseCoopers (PwC).

"The slowed pace is mainly due to the increasingly complicated approval procedures, which may also vary from one locality to another," Li says. "It (the tightened rules) would prolong the approval time and make deals more difficult to structure, but would not deter foreign investors from chasing M&As."

Some experts say the recent government moves to regulate foreign M&A activities will make China more attractive for foreign investors in the long run.

"A more transparent M&A regulatory mechanism, which reduces uncertainties, will benefit all parties in this game," says Feng Lei, a researcher with the Chinese Academy of Social Sciences.

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