14 October, 2019
- China M&A is forecasted to drop 17.6% to USD 248 billion in 2019, while Hong Kong M&A drop 2% to USD 43 billion.
- Global slowdown and geopolitical uncertainty sees deal activity in Hong Kong and Mainland China to further slowdown in 2020.
- Deal activity expects to rebound in 2021 amid a more supportive global trade backdrop and favourable market valuations.
- China outbound investments is shifting towards Asia, amid US and the European Union's heightened scrutiny of foreign investments.
Hong Kong, China, 14 October 2019 – M&A and IPO deal activities in Hong Kong and Mainland China are likely to remain cooled in 2019 and 2020 amid the re-escalation of trade tensions with the US, as well as the country's slower economic growth. This is according to the fifth annual Global Transactions Forecast, produced by global law firm Baker McKenzie in conjunction with economic consultancy Oxford Economics.
The report, based on forecast macroeconomic indicators from Oxford Economics along with insights from Baker McKenzie partners in 42 markets worldwide, projects that global deal-making will experience a continued hangover in 2020 because of ongoing worldwide economic uncertainty and the risk of global recession.
M&A globally is projected to decline from USD 2.8 trillion in 2019 to USD 2.1 trillion in 2020. A similar downward trend in IPO proceeds is also expected, pulling back from USD 152 billion in 2019 to USD 116 billion.
Due to a significant slowdown particularly in cross-border activity, Asia-Pacific deal-making has fallen from highs in 2018. The US-China trade dispute was clearly evident, as well as sluggish Chinese outbound deals due to Chinese government restrictions on outward investment. China M&A activity (inbound and domestic) is expected to drop to USD 248 billion in 2019 (a year-on-year decline of 17.6%), with an estimated 3,108 deals transacted. China IPO activity in 2019 is predicted to be on par with 2018 level, reaching USD 16.4 billion, with domestic IPO continuing to be the main driver of equity capital raising activities. On the Hong Kong front, total M&A is expected to trend down to USD 43.2 billion while IPO value is forecasted to drop to USD 15.9 billion this year.
Deal drivers
Amid the global slowdown in the transactions pipeline, there are three main deal drivers for activity in the foreseeable future:
- Technological disruption: Across all sectors, companies will seek to acquire advanced digital capabilities that they cannot replicate in-house in order to remain competitive.
- Activist funds and stakeholder capitalism: Activist investors and a heightened emphasis on stakeholder capitalism will keep pressure on boards to re-structure and respond accordingly with strategic changes.
- Private equity ‘dry powder’: Private equity investors may seize upon the opportunities created by market volatility and keep transaction volumes afloat.
“Make no mistake — deals are getting done, but the current slowdown is inevitable considering the continuing uncertainty around trade and regulation,” said Ai Ai Wong, Chair of Baker McKenzie’s Global Transactional Group. “We know that around the world, there are many investors and companies with capital on the sidelines, waiting to move forward with domestic and cross-border deals.”
Hong Kong as the world's no.1 M&A and IPO transactions hub
For five consecutive years, Hong Kong ranks #1 among all economies globally in terms of attractiveness for conducting transactions. The Transaction Attractiveness Indicator is an overall score that reflects the attractiveness of an economy’s current environment for M&A and IPO activity. It is based on past transaction activity in that economy, as well as on data on key economic, financial and regulatory factors that drive M&A and IPO activity, such as sovereign credit risk, level of trade restrictions, and ease of doing business rating by the World Bank.
Deal-making outlook
Looking ahead, the Forecast predicts China domestic and inbound M&A activity to slump further in 2020 to USD 218 billion (2,772 deals), but rebound to USD 287.8 billion (3,118 deals) in 2021 and USD 338.4 billion (3,176 deals) in 2022, attributed to a more supportive global trade backdrop and favorable market valuations. On the IPO front, China IPO deals are likely to rise by 42% in 2021 to USD 22.2 billion, and a further 17.6% in 2022 to USD 26.1 billion.
Moving to Hong Kong, domestic and inbound M&As are likely to further drop to USD 32.2 billion in 2020 (300 deals), but back to an upward trajectory again in 2021 with deal activity increasing to USD 44.2 billion (349 deals), and to USD 49.3 billion (373 deals) in 2022. Saudi Aramco, if it chooses to list in Hong Kong, will help boost the city's IPO value to USD 39.2 billion in 2020.
Commenting on IPO momentum in Hong Kong, Ivy Wong, Asia Pacific chair of Baker McKenzie's Capital Markets Practice, said, "It is always much more difficult to price and launch a deal in turbulent and uncertain market conditions. Just like many other stock markets, we had a much slower start at the beginning and earlier part of the year compared to last year. However, to this day, we have not encountered issuers luring away. We encounter issuers adopting different approaches – some are still gearing at full speed for listing in Hong Kong, while others are on stand-by, waiting for the next window to relaunch their deals.”
On the latest developments, Ivy said: “As difficult as it is to price and launch a deal these days, we have seen more activities in the HK IPO markets in this last quarter of the year. Some sizeable deals that paused earlier in the year are now relaunching and getting listed in Hong Kong, including Budweiser’s HK IPO that is the second largest IPO in the world so far this year and other sizeable deals that are expected to resume and list by year end or in the next quarter."
Commenting on the M&A deal-making landscape, Tracy Wut, head of M&A Practice for Greater China, said: "We are seeing a slowdown in inbound M&As into China, which in part is a reflection of buyers' cautious sentiment, but also good targets have always been difficult to find, particularly as seller's expectation of valuations still stand high. International buyers are also facing strong competition from major domestic players.
"With relaxation of foreign investment restrictions in certain sectors such as financial services, we will expect to see increased deal activities. Foreign investors that already have investments in China are also restructuring their businesses and we have seen an increase of alliances and joint ventures," Tracy added.
As for Chinese outbound investment, particularly to Europe and North America, the deal pipeline does not give rise to much optimism for the second half of 2019. According to research produced by Baker McKenzie in partnership with Rhodium Group, USD 4.6 billion of pending Chinese M&A transactions in North America and USD 2 billion of pending transactions in Europe were recorded as of June 2019.
Tracy continued: "Chinese investment in Europe and North America is likely to stay at current low levels, amid the rising regulatory scrutiny of foreign investments by CFIUS and the new EU-wide investment screening framework. Brexit continues to sow uncertainties with companies putting their M&A transactions that involve the UK or EU on hold, until the situation becomes clearer. What we are seeing instead is Chinese companies are shifting their investments from Europe to Asia and Belt and Road countries. Strategic deals are still being done, particularly in sectors such as TMT, life sciences, consumer products, energy, infrastructure, mining and metals."
For the full report, please click here.
For further information, please contact:
Milton W. M. Cheng, Partner, Baker & McKenzie
milton.cheng@bakermckenzie.com
