M&A deals with Chinese investors

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What are the risks and uncertainties in corporate transactions with investors from China? We look back at 2022 and provide an outlook for the rest of this year.

Although 2022 cross-border M&A transactions by Chinese companies reported a new all-time low, Chinese companies are seeing an improvement in the macro-economic market environment for M&A transactions abroad after the COVID-19 pandemic. 

After Asia, Europe is the most popular destination for M&A investments by Chinese companies, and Germany continues to be very popular as a destination for (one example is the stake in the port of Hamburg acquired by the Chinese state-owned enterprise Cosco).

The report of the 20th Party Congress in China points out that high-quality development – on all levels – is the most important task in building a modern socialist country. In this new stage of development, M&A as well as restructuring (the typical area for the allocation of resources on markets) become an important means of ‘supply-side structural reform’ and play an indispensable role in promoting the improvement in quality of listed Chinese enterprises, in particular.
With this demand on publicly listed companies to grow through M&A deals, the Chinese supervisory authority has again sent out a strong signal. Under the recently adopted ‘dual circulation economic strategy’, the focus in the coming years will be more on internal growth than on exports and global trade. In light of this, the ‘external circulation’ of the economy must serve domestic growth (e.g. by means of foreign investments and cross-border mergers and takeovers). Transactions to acquire international brands and advanced technologies are most probably promoted and supported by the domestic regulators as long as they bring more investments, consumption and employment to the country.

We assume that Chinese companies will experience some upswing in cross-border M&A transactions and expect a moderate increase in the volume of transactions in the second half of 2023 compared to the first.

The following aspects in M&A transactions could be important both to German enterprises (e.g. as the sell-side) and Chinese ones (e.g. as the buy-side):

  • More and more companies are tending to employ professional consultants for M&A activities in order to identify risks early on and avoid them as much as possible and to carry out the transaction efficiently. Besides M&A advisory, the greatest part of professional transaction advisory is for due diligence (particularly financial, tax, legal, operational, commercial due diligence, etc.).
  • Chinese investors are subject to the procedures of numerous government supervisory authorities abroad and in their own country, such as the NDRC (National Development and Reform Commission) and the Ministry of Commerce. It is a good idea to include the successful conclusion of procedures by government supervisory authorities as one of the closing conditions in the purchase agreement.
  • At a later stage of the transaction, it will be necessary for the buyer to consider acquisition structuring from a tax point of view (i.e. tax structuring).