Asia, including China, Declines as an M&A Target

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By Che Odom

April 14 — U.S. companies are not shopping for businesses to buy in Asia as much as they were two years ago, which may be a result of current economic conditions rather than a long-term shift from China.

“I think it’s essentially the flip-side of the significant increase we’re seeing in outbound Chinese M&A activity,” Brian Wheeler, a transactional attorney and partner in DLA Piper's Silicon Valley office, told Bloomberg BNA in an e-mail.

A recent review of data by Bloomberg BNA's Corporate & Transactional Editorial Team showed that Asia was the second-most popular market for U.S. acquirers, behind Europe. The number of cross-border deals in Asia valued at more than $100 million and publicly reported slid nearly 45 percent from 27 in 2013 to 15 last year.

The review of acquisitions included takeovers but excluded asset-purchase transactions and minority investments.

The People's Republic of China, the world's second-largest economic market behind the U.S., has experienced volatility in its capital markets over the past year, Wheeler said. Economic growth is expected to continue slowing, and the yuan is expected to further decline, he said.

These factors are “leading Chinese companies to look to deploy capital overseas, and I think are similarly leading U.S. companies to shy away from acquisitions in China,” he said.

A recent study by JPMorgan Chase & Co. that looked back over the last five years revealed that Asian companies continue to engage in “intra-regional M&A.” The study named mainland China, Indonesia, India and Vietnam as the most frequent target markets, but also identified the U.S. as a key target area.

US Acquirers maintain european focus

Target: China

As China develops and wages and prices increase, China's low-cost advantage is diminishing, which may have a longer-term effect on U.S. companies buying Chinese firms, Wheeler said.

“But while that may affect companies looking to acquire production facilities in China, it will not be much of a factor for companies looking to access China’s growing consumer class,” he said.

Meanwhile, China's regulatory process continues to be difficult to maneuver. China restricts foreign ownership of companies and their assets in formal ways—such as through the Guiding Catalogue of Foreign Investment Industries—and informal ways, Wheeler said.

In addition, foreign investment can require numerous regulatory approvals, including antitrust approvals, approvals for the acquisition of state-owned assets, securities law approvals and numerous local approvals, he added.

“Because many of the laws governing these review processes are vague and subject to interpretation, the regulatory authorities wield significant power, and these approvals can also be a hurdle to U.S. companies acquiring companies or assets in the PRC,” Wheeler said.

However, the attorney said that while a hurdle, the regulatory process is not likely a significant factor in the recent decline in U.S. investments in China.

Interest in Europe

According to the Bloomberg BNA data, U.S. companies continue to be interested in European acquisition targets.

U.S. firms closed on 82 purchases of European companies valued at more than $100 million in 2014 and again in 2015, up from 56 in 2013.

U.S. companies seeking foreign targets invested more in Europe than they did in all other global regions combined.

They invested more than $90 billion in non-U.S. targets during 2015, with $65 billion going to Europe, $10.6 billion to Asia, $6.1 billion to North America, $8 billion to Latin America and $3.1 billion to the Middle East and Africa.

For the purposes of the Bloomberg BNA review, Latin America includes Mexico and the Caribbean, while North America comprises Canada and Bermuda.

To contact the reporter on this story: Che Odom in Washington at codom@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com