M&A deals in China decline

China's merger and acquisition activity dropped significantly in the first half of 2012, mainly because of the still sputtering global economy, especially in Europe, according to the midyear M&A review released by PricewaterhouseCoopers on Tuesday.

The review showed a 33 percent decline in announced deals and a marked 10 percent decline in deal value.

Domestic deal activity in China recorded 25 percent fewer transactions compared with the same period last year.

Foreign buyers' strategic inbound deals in China have been affected as well, showing a decline of 42 percent compared with the first half of 2011.

There is good news too, however: Global difficulties have not greatly affected China's appetite for doing deals abroad.

Chinese outbound deal values managed to maintain their levels close to 2011, and in fact, the values have tripled compared with the rather low first half of 2011 and are on track to exceed 2011 full-year numbers.

"Chinese companies are taking advantage of buying opportunities to acquire resources and industrial technology-focused businesses in overseas markets," said Roger Liu, PwC China Transaction Services Partner.

Deals in the resources and energy sectors continued to dominate, making up 44 percent of the total number of outbound transactions in the first half of 2012 on a combined basis, compared with 36 percent in the first half of 2011.

"These trends are likely to continue, with the number and size of transactions growing and being driven by a number of factors, including the increasing experience and confidence of the participants" Liu said.

Liu added that increasing support from Chinese domestic financial institutions as well as the private equity industry will also enable buyers to take advantage of opportunities as vendors respond to difficult conditions in their home markets.

While private equity deals worth more than $10 million have dropped sharply, by 39 percent, partly because deal processes have slowed in anticipation of declining prices, private equity funds remain highly liquid and eager to enter the market.

Liu said he believes there will be a recovery in the number of PE deals in the second half of 2012, judging by the PE industry's level of unspent funds and the general demand for growth capital in China's private sector.

Relatively high deal numbers are being recorded in consumer sectors as well as healthcare and technology sectors.

"Despite the challenges, these are exciting times for the PE industry in China, as regulators continue to open up the PE sector to institutional money and as record levels of capital are available for investment by the PE industry in China," Liu said.

A strong recovery in China-related M&A deals is expected, the timing of which will depend upon the resolution of global difficulties.

"Continued strategic demand for resources, technology and buying opportunities abroad will most probably result in a record year for China's outbound M&A," said Gabriel Wong, PwC China corporate finance leader.

Wong added that China's appetite for outbound deals will likely buck the trend of an overall decline in the Chinese M&A market in 2012.

Despite the drop in PE deals in the first half of 2012, PwC still expects a pickup in PE activity in the second half.

"We expect the second half of this year is going to show an improvement on the private equity deals with the increasing demands for growth capital in China's private sector," Wong said.