M&A plans limited over next 3 years

Businesses turn cautious because of growing concerns over finance: Report

Very few Chinese businesses have merger and acquisition plans in the next three years because of increasing concerns over financing, a report by international accounting firm Grant Thornton showed on Thursday, suggesting a more cautious attitude toward business expansion.

According to the report, only 10 percent of the Chinese businesses have M&A plans, a drop of 18 percentage points over last year.

Because of uncertain economic and policy conditions, M&A activity in the China market saw a weaker performance in the first quarter of 2014.

Statistics from China Venture revealed that 372 acquisitions took place in the first quarter, falling by 45.13 percent over the previous quarter and dropping by 43.81 percent over the same period of last year.

Financing difficulties and rising costs are still considered to be the most important factors constraining businesses' M&A plans, particularly for small and medium-sized enterprises, according to Xu Hua, chief executive officer of Grant Thornton.

According to the survey, 46 percent of China businesses believe retained earnings remain the primary financing source for M&As in the next three years, a rise by 10 percent from last year.

In the meantime, Chinese businesses' expectations from financial channels including bank finance (22 percent), initial public offerings (15 percent) and private equity (8 percent) are lower than last year.

Despite steady economic development this year, the potential pressure of an economic downturn in China should not be neglected, according to Xu.

M&A plans limited over next 3 years"The production and operation of Chinese businesses are still troubled by lack of orders, rising costs of labor and capital shortages, which result in more conservative planning regarding M&A activities," said Xu.

However, the government has indicated that measures will be implemented to reduce financing costs for businesses.

The survey reveals that among Chinese businesses with acquisition plans, only 29 percent show interest in cross-border transactions, declining from 47 percent last year. The developed economies in Europe and the United States have stronger growth momentum, and the requirements for investors there are stricter, which affects the willingness of Chinese businesses to undertake cross-border M&A activities.

"As global markets recover from the downturn, Chinese businesses are being more rational over cross-border transactions compared with the last two years, when they were rushing out to buy on the dips," said Xu.

Meanwhile, the recovering economy and more fluidity in debt and equity markets will lead to an increasing appetite to exit among those who have been holding assets through the economic downturn.

The exit activity of businesses through M&A is increasing globally, with 11 percent of business owners expecting to sell up in the next three years, higher than last year by 3 percentage points.

Businesses from Australia are much more upbeat about the potential to sell than last year, rising by 10 percentage points in number. Australian businesses are more inclined to sell to management. A total of 25 percent expect to exit via private equity and 22 percent would like to undertake a transaction with a trade buyer, the survey showed.

When Chinese businesses' appetite for overseas M&A weakens, the desire of global businesses for cross-border acquisitions increases.

The survey showed that 31 percent of the businesses globally expect to grow through M&As over the next three years, up from 28 percent last year, suggesting the recovery is on a firmer footing and the focus of businesses is moving away from simply staying afloat toward a growth agenda.

As the developed economies slowly recover from the financial crisis, there is an evident increase in M&A expectations, said Xu.

The M&A expectation of businesses across the G7 group of economies climbed to 36 percent from 29 percent last year. However, the emerging economies see a weaker M&A expectation given the slowing down of economic growth. The M&A prospects of BRIC nations (Brazil, Russia, India and China) dropped by 8 percentage points from last year to 19 percent, the survey showed.

Looking at business sector numbers, professional services are most likely to grow through acquisitions in the next three years with 47 percent of the enterprises having such a plan.

Other sectors, including mining and quarrying, financial services, agriculture, hunting, forestry, fishing and technology, also boasted relatively high M&A expectations, according to the survey.