China's outbound M&As set to expand

Focus on post-deal management as companies seek to reap benefits from overseas acquisitions

Outbound mergers and acquisitions by Chinese companies are set to grow, with more private companies buying overseas as they need to expand business globally, according to a report by consulting firm McKinsey & Co.

The total volume of outbound M&As has grown dramatically in recent years, from $49 billion (46 billion euros; ￡38.9 billion) in 2010 to $227 billion last year, and China is still at a relatively early stage of a long-term growth trend, the report said.

According to McKinsey research data, Chinese companies spent about 0.9 percent of the 2015 GPD on outbound acquisitions, compared with 2 percent of GDP by European Union companies, and 1.3 percent by United States companies.

In recent months, Chinese outbound buying has cooled for several reasons, including tightened management on capital outflows.

The slowdown of outbound buying is likely to be a short-term correction, while the long-term growth trend in outward M&As is expected to continue to gain momentum.

"It is important to break the myth that Chinese outbound buying is mainly government-driven, done by state-owned enterprises, and big-sized deals with cheap funding. In fact, the rationale behind many outbound buyings are Chinese companies' internal demands to expand their global presence. And besides, the big deals that drew public attention, most of the deals were mid-sized or smaller," says Paul Gao, senior partner and head of McKinsey's automotive practice in Asia.

David Cogman, a partner who leads McKinsey's China globalization service line, says that over the next decade, the volume of deals will be a multiple of what was spent in the past.

"But extracting value from acquisitions and successfully integrating them will require Chinese companies to build a range of new capabilities they didn't have before. Post-deal management is quite important for success," says Cogman.

Many deals received "hands-off" management after the deal, particularly minority investments, and the results for those were less than impressive, while deals where the acquirer took a more active approach in integrating the asset had a much higher success rate, according to the report.

Using third-party services for management and consultancy will be increasingly popular among small and mid-sized enterprises, since it may be costly to establish an internal department for global expansion at an early stage for a privately owned enterprise, according to the China Overseas Development Association.

Matthias Debroyer, economic and commercial consul at Brussels Invest & Export, at the Consulate General of Belgium in Shanghai, says Chinese companies are advised to use more professional services for post-deal management.

wuyiyao@chinadaily.com.cn