When mergermarket first began talking to the proud owners of privately-held Chinese business three years ago, we asked them "Would you consider selling?" And the question was met with the same outrage one might have expected if we had suggested selling an only child.

Having worked hard to build up a business, establish a brand, or run an enterprise, no one wanted to hand over the reigns and a sale was certainly not an option.

Fortunately, for M&A practitioners with an eye on the booming Chinese market, attitudes are changing.

Indeed, when speaking to the same executives today, three years later, reporters are frequently told that companies are open to talks with any type of investors, keen to cooperate with parties that aid development and even view an outright sale as an option.

So what had brought about this shift in stance? A closer look at Chinese market uncovers a number of explanations.

A powerful enticement to a sale option can be found in the pre-IPO investments by private equity (PE) players such as Warburg Pincus and Bain. Adding a high profile investor to the shareholder registry pushes up the valuation of the business in the short term and ultimately - and perhaps of greater interest overall - leads to a higher IPO price. The underlying reason for this boost is the feeling among investors that the very presence of a private equity investor indicates that the company has been carefully vetted and any problems in operations will be ironed out.

Increased industry pressure has also contributed to the changing attitude. Revised labor laws have had a significant impact, particularly on smaller business, many of which feel it is time for an exit. Business owners have come to realize that unless their companies are among the top five in their sector, tough times lie ahead. Cashing out now, or engaging a foreign strategic investor, seems to be an attractive exit option for many before the pressure gets too high or valuations decline.

Unfortunately for deal makers, this altered standpoint may not immediately result in an increased deal flow. Market observers speak of a delay of 12 to 18 months before a new attitude towards M&A among privately owned businesses will impact deal flow. "The great thing is that now we are seeing private companies approaching advisors to work on deals," one deal maker said, "this for me the clearest sign that times are changing."

Those sectors expected to be most affected are the highly competitive or extremely fragmented areas, many related to foods - such as packaged Chinese foods, chocolates and food packaging.

It seems fair to assume that Chinese M&A will continue to be dominated by the sale of state-owned enterprises. But exciting times draw near as an increasing number of privately owned businesses engage in M&A-related activity. mergermarket expects an increase in pre-IPO investment, largely driven by shrewd private equity investors. And despite the global downturn in the equities markets, plenty of privately owned businesses will opt for IPOs.

The author is an editor of mergermarket.

(HK Edition 05/29/2008 page3)