China's outbound M&A drive not without setbacks

Companies must watch for legal, business obstacles

Chinese outbound investment has risen sharply over recent months. Even with one quarter unaccounted for, some have already labeled 2014 as the biggest and best year ever for Chinese mergers and acquisitions (M&A). Indeed, looking at recent overseas spending data, as well as renewed government efforts to encourage outbound investment, one could easily get the impression that Chinese companies are busily snapping up many of the world's most valuable assets.

According to recent figures from PricewaterhouseCoopers (PwC), Chinese enterprises took part in 176 overseas M&A deals during the first three quarters of 2014, up 31 percent from the same period a year earlier. In value terms, these deals involved a disclosed amount of some $40.8 billion, with more than 14 transactions valued at more than $1 billion each, according to PwC data. Private enterprises were at the vanguard of this overseas push. Such companies completed 120 transactions, more than double the number completed by their State-backed peers. Looking ahead, it's believed that government supports and improving conditions in China's financial market will push both the volume and combined value of M&A deals higher over the coming years.

Earlier this year, China's M&A review policies were revamped and deals in non-sensitive areas involving less than $1 billion were exempted from administrative approval requirements, up substantially from a previous ceiling of $100 million. The streamlining process didn't stop there though. Just last Wednesday, the State Council held a news conference to explain a raft of new guidelines and regulations designed to expedite outbound investment. This is indeed a step forward, since many saw the lengthy bureaucratic review process hampering corporate China's abilities to engage with the global M&A market.

Of course, despite some impressive results and a concerted push from authorities, China's overseas M&A ambitions haven't all ended in success. One of the most well-known setbacks came in 2005, when China National Offshore Oil Corporation (CNOOC) made a bid to acquire Unocal Corporation, an American oil company. When all was said and done, CNOOC lost its bid to Chevron Corporation. Later, in 2009, Aluminum Corporation of China failed in its bid for Rio Tinto, despite having a reported $21 billion in loans from the country's biggest banks at its disposal.

At the time, many attributed these derailed deals to overseas political pressure against China, particularly companies involved in the resource sector. But it's important to remember that foreign investment rules in the US and Australia are not meant to target China or any other single market. In actuality, procrastination on the part of authorities and companies played a factor in the loss of these opportunities. What's more, many Chinese companies now realize that it makes more sense to take smaller strategic stakes in a business before acquiring it outright in order to ease concerns in the target country.

Of course, business and legal differences have also gotten in the way of Chinese investment in overseas markets. As they continue to upgrade their business power through technological innovations, Chinese companies should take action as soon as possible to familiarize themselves with industrial and legal norms in their target countries. Unfortunately, some Chinese companies still rush into overseas markets expecting to conduct business as they would in their home country.

Legal concerns deserve particular attention nowadays as more and more businesses come under regulatory scrutiny as they relocate their assets for tax reasons. As PwC pointed out, many countries are now beefing up cooperations on cross-border tax collection and management. Chinese companies thinking about investing overseas would do well to monitor these developments and adhere to evolving tax compliance rules pertaining to their own M&A activities.