Mainland firms cautious on M&As: Ernst & Young

The Chinese national flag flies outside the Cnooc Ltd headquarters in Beijing. More mainland big companies like Cnooc are taking cautious attitude towards M&A in the coming year, according to an Ernst & Young survey. Nelson Ching / Bloomberg

More mainland companies are turning cautious toward mergers and acquisitions in the coming year due to high valuation of targeted overseas companies and regulatory environment hurdles, according an Ernst & Young survey.

According to the survey, only 11 percent of the surveyed mainland companies indicated their intention to pursue acquisitions in the coming year, down from the 22 percent surveyed in March this year. By contrast, 25 percent of the global executives expected to pursue acquisitions next year.

Regarding the factors hindering the mainland companies' expectations of undertaking more M&As, 64 percent of the respondents said that the targeted overseas companies' valuation is too high. Hence, they preferred to stay on the sidelines in the global M&A market next year as they hoped that the global economic uncertainty might lead to even lower business valuations.

The "Capital Confidence Barometer" survey was carried out in August and September by the Economist Intelligence Unit, which had been commissioned by Ernest & Young. The survey involved interviews with more than 1,500 global senior business executives (102 mainland respondents) from 41 countries that cover 24 industry sectors.

The survey also revealed that 22 percent of respondents cited regulatory environment hurdles in making M&A deals, perhaps reflecting the USA where regulatory issues had arisen with recent deals involving mainland companies. The USA is the top destination for mainland investors.

In the survey, about 41 percent of the mainland companies identified their poor execution capabilities in integration after making M&A deals. Another 35 percent of the respondents said that they had made poor assumptions regarding operating cost expectations.

The survey also showed that more mainland companies are also turning increasingly pessimistic toward the global economy in the coming year, as only 6 percent of the mainland respondents perceived the global economy will improve, down drastically from the 69 percent recorded in the March survey.

"As the global economy is more uncertain, mainland companies are focusing more on reassessing counterparty risk, operational efficiency and transforming their businesses around supply chain risk, with M&A taking the fourth place," Ernst & Young Transaction Advisory Services Managing Director Judy Tsang said at the Thursday press conference.

"Despite the various impediments, mainland corporations are making progress in making M&A deals," said Ben Kwan, another managing director at Ernst & Young Transaction Advisory Services. "More mainland companies will still target those overseas resources, consumption and industrial companies for acquisitions in the future. Some of the deal size may amount to over 10 billion yuan."

"The mainland companies are aware of their lack of quality personnel in integrating the business after the M&A deals. They are also aware of their relative poor performance in retaining existing customers after making the M&A deals. They will hire more international experts to improve the situation," said Kwan.

The report also showed that the mainland companies, with low financial leverage, preferred to utilize cash to pay debts and focused on organic growth rather than opportunistic M&As.

oswald@chinadailyhk.com