Caution is needed for Chinese firms to make overseas aquisitions
M&A reflect business choices, shouldn't be politicized: experts
Published: May 06, 2020 06:13 PM

Robots of German robot maker Kuka displayed at China International Industrial Exposition. Kuka was acquired by Chinese home appliance manufacturer Midea in 2016. File photo: VCG

Chinese companies are unlikely to hunt for acquisition deals overseas amid the ongoing COVID-19 pandemic, and they will be cautious about foreign investment as the outbreak has added difficulties to valuing target companies and assessing their businesses, industry insiders say.

Corporate mergers and acquisitions are normal market operations among businesses, experts say. China is likely to drive global economic recovery thanks to its effective measures to bring coronavirus under firm control.

A senior Trump administration official recently warned Israel about Chinese investors making acquisition deals there, saying that "Israel is among the countries that need better screening of foreign investment to guard against having their companies turn toward China during the economic downturn sparked by the pandemic," according to a Bloomberg report on Monday.

"One of the preliminary takeaways from this crisis is that we have to be more cautious in our dealings with China," US Assistant Secretary of State for Near Eastern Affairs David Schenker said, according to the report.

While rebuking the argument, experts said although the pandemic may have created opportunities for Chinese enterprises to go abroad for M&A deals, as some overseas firms are struggling with liquidity problems.

For example, it is difficult to gauge how long the outbreak will last and how much impact it will have on the business of a target company. In addition, overseas M&A deals require a competition investigation, including interviews with management. But such steps have been delayed or even cancelled due to restrictions on air travel in Europe and the US, Alan Wang, a Partner at Freshfields Bruckhaus Deringer, told the Global Times on Wednesday.

Wang said that Chinese companies eyeing overseas targets should make an accurate judgment of the market value of the seller's business and the impact of the epidemic, rather than ascertaining the company is now cheap. The important thing is the sustainable development of a target company. 

"If the deal is likely to be rejected or the local government does not approve it, the risk is large, and then the merger should be carefully rendered," said Wang.

Some foreign governments have strengthened legal supervision of deals since the end of last year, and further strengthened regulations after the pandemic hit. Many are sensitive about China's investment in key sectors, such as advanced technology, communications, medicine and food, which makes major acquisitions by Chinese investors impossible.

The EU has launched rules for screening proposed takeovers on security grounds. Canada is also among countries stepping up scrutiny of foreign investment amid the public health crisis.

"More intense scrutiny is likely to last for some time, and Chinese companies need to consider their investment strategies overseas - for instance, opting for more direct investment rather than M&A deals," He Weiwen, a former senior trade official and an executive council member of the China Society for World Trade Organization Studies, told the Global Times on Wednesday.

China's economy is now recovering as the pandemic ebbs, and China has a better investment environment than many other markets, so more high-tech companies from Israel and elsewhere will be likely to invest in or they will establish research centers in China, He noted. 

First-quarter global M&A deals fell 35.3 percent from the previous quarter by value, the largest one-quarter decline in seven years, according to domestic news site Economic Information Daily, citing an industry report.