Chinese enterprises have frequently conducted overseas mergers and acquisitions (M&A) in recent years. Statistics showed that such overseas M&A in the last five years has posted a compound annual growth rate of 20 percent, with the trend hitting the peak in 2016.
In the light of some Chinese enterprises excessively undertaking M&A unrelated to their main business, the central government has tightened examination and control over capital outflow.
"Since the tightening of M&A supervision system, the structure of Chinese enterprises' overseas M&A has been optimized, with irrational investment posting a sharp drop," said Wei Lidong, president of the China Mergers & Acquisitions Association (CMAA) on August 31.
"In Germany, for example, renewable energy, electric power and automation are increasingly becoming the focus of Chinese investors," said Anna, head of the Rödl & Partner China, adding that Chinese enterprises' overseas M&A is expected to become more active in the second half of 2017. CMAA also expected that China's capital strength will become "tremendous."
B&R to boost overseas M&A
Wei said that the Belt and Road (B&R) Initiative will boost overseas M&A by Chinese enterprises.
Statistics showed that of the countries along the B&R, all those with high national savings are where Chinese enterprises conduct massive overseas M&A. In terms of industry, infrastructure and energy are primary targets of M&A, while finance and high-technology are also hot sectors.
Chinese enterprises' M&A in the countries along the B&R is conducive to the output of China's superior industries, such as high-speed railways, nuclear and solar power. At the same time, the countries in these regions, especially southeast Asian countries, are rich in energy and natural resources. This facilitates Chinese enterprises' acquisition of cheap energy and natural resources, said Wei. He predicted that Chinese enterprises will have a lot of investment opportunities in the Central and Eastern Europe Countries (CEEC) and Association of Southeast Asian Countries (ASEAN), especially in the area of infrastructural construction.
Dilemma of overseas M&A
However, Chinese enterprises are facing some problems that cannot be solved by capital.
Challenges faced by overseas Chinese enterprises involve the followings, including their ability to adapt to the corporate culture, unification of strategic goals, talent absorption and loss. The integration of the cultures and teams of the acquirers and acquirees is very hard, as both sides are unwilling to change their original culture.
He suggested that Chinese enterprises should build diversified and inclusive teams in the process of going global, so as to accomplish globalized business management and growth. At the same time, they should acquire or merge with high-quality assets.
Apart from the problem like cultural fusion, Chinese enterprises often neglect issues related to taxation. According to Song Ning, president of CTAC Group, Chinese enterprises often neglect the important issue of taxation in overseas M&A, which can lead to a surge in the tax cost.
"For example, some Chinese enterprises often conduct simple due diligence in overseas M&A and their overseas investment structures are irrational. In addition, M&A agreements disregard taxes and parent companies fail to conduct effective management on overseas tax issues after M&A. Without proper tax due diligence, Chinese enterprises are likely to suffer heavy losses in overseas M&A," said Song. He suggested that Chinese enterprises should fully identify tax risks arising in the daily tax declaration and pay attention to the estimation and quantification of tax-related risks.