In Asia, Chinese companies have so far been relatively less active in M&A. But that could change, Credit Suisse investment banker Joseph Gallagher says in an exclusive interview with finews.asia.
Mr. Gallagher, during the heady days of the Japanese bubble period Japan Inc embarked on a high profile M&A feast. How is the Chinese story different?
In the late 1980’s and 1990’s the United States experienced a Japanese acquisition boom. The China outbound mergers and acquisitions (M&A) story we’re seeing today appears to be much deeper and broader, with Chinese buyers playing an increasing role in global M&A activity. In 2016 year-to-date (YTD), China outbound M&A volume reached approximately $186 billion, an increase of nearly 80 percent from $103 billion in 2015.
Chinese public and private companies are seeking targets which either fit strategically into their businesses, in terms of providing access to new technology and new markets, or which help to further a long term national agenda to build out domestic capabilities in certain priority sectors. The sectors that are a focus for Chinese outbound M&A activity have shifted from energy and natural resources to technology and consumption related, in line with the maturing of the Chinese economy.
«Chinese companies have not only been active in the U.S., as the Japanese were during the bubble»
As the domestic economy slows, Chinese companies are also looking for newer engines of inorganic growth. From an acquirer perspective, the drivers of activity have been diverse, ranging from serial acquirers to smaller buyers venturing overseas for the first time. And finally, Chinese companies have not only been active in the U.S., as the Japanese were during the bubble period, they are also venturing to markets in Europe and Latin America. For example, Switzerland, Germany and Brazil, in addition to the U.S., have been the top destinations for China outbound M&A in 2016 YTD.
Is the current stream of liquidity out of China merely the beginning, and if so, where do you see Chinese M&A in five years’ time?
We expect China’s M&A activity to continue to maintain strong momentum. Privately-owned and listed companies, including state-owned enterprises, will continue to be active as they look to overseas for technology, expertise and strong brands to bring back to China.
«The strength from our APAC business model has been a valuable competitive advantage»
As long as certain conditions exist – such as lower valuations for assets abroad, ample access to competitive financing, the need to hedge against the yuan, and supportive government directives such as One Belt One Road – we can expect the current robust wave of activity to continue in the foreseeable future.
Is Credit Suisse well placed to continue to capture a large share of this business?
The strength that comes from our APAC business model has been a valuable competitive advantage for us, especially in terms of winning advisory roles on transformational, strategically important M&A transactions.
Our uniquely integrated platform spanning our investment bank and private bank is something which very much appeals to clients, including corporates and entrepreneurs alike, because we can leverage expertise across the bank’s products as well as structure innovative and bespoke financing solutions.
The U.S., Europe and Australia have been M&A targets for China. Do you see Chinese companies becoming more active across Asia, or will political sensitivities prevent this?
To the extent that the desire to build access to technology, know-how and strong consumer brands has driven much of the China outbound activity, developed markets such as U.S., Europe and Australia have made more natural sense in terms of target destinations.
«Chinese companies are often willing to pay a relatively higher premium for assets»
Chinese companies have so far been relatively less active in Asia but that could change depending on a number of factors such as attractiveness of assets and valuations, as well as political sensitivities.
What sectors do you see being the most important to Chinese firms? If overseas firms know that the mainland companies are after their business, does this add a «Chinese premium» onto the deal pricing?
As China transforms from a manufacturing-based economy to one that is focused on consumption, access to know-how and high-value brands becomes increasingly critical. As such, Chinese buyers are snapping up targets from a diverse range of sectors, from technology to entertainment to other consumer-facing segments, where they are looking to move up the value chain.
Given the strategic drivers behind their buying spree, Chinese companies typically take a longer term view when evaluating a potential acquisition, and therefore are often willing to pay a relatively higher premium for assets that offer a compelling strategic rationale. For global sell sides, including Chinese buyers in the process is important for ensuring maximization of value.
Joseph D. Gallagher is Vice Chairman and Managing Director of Investment Banking and Capital Markets and Head of Mergers and Acquisitions for Asia Pacific for Credit Suisse, based in Hong Kong. He has over 30 years of experience working for Credit Suisse including executive management positions in both the investment banking and investment management businesses. His experience includes over 20 years of investment banking in Asia and including three years of heading the investment banking in the region.
Prior to his roles in Investment Banking and Capital Markets, Gallagher held several senior executive positions at Credit Suisse Asset Management CSAM). These positions included CEO – CSAM America 2003 to 2004, CEO – CSAM Europe 2000 to 2002 and CSAM Global CFO – 1999 to 2004. He joined Credit Suisse First Boston (CSFB) in 1985 as an investment banker based in New York specializing in financial institutions and mergers and acquisitions.
