US-China M&A activity to increase

August 2013 | FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

According to a new report, the entertainment, advertising and digital media sectors are due to see an increase in cross-border investment and M&A activity between the US and China over the next 12 months.

Produced by law firm Manatt, Phelps & Phillips LLP in association with the Mergermarket Group, the report surveyed 100 leading entertainment, advertising and digital media corporate executives, investment bankers and private equity practitioners in both the US and China. Over two-thirds of respondents predict that deal activity will continue to rise. However, there is a degree of concern and anxiety from executives in both nations regarding government intervention and transparency of information.

Optimism

Following a decline in overall M&A activity between China and the US in the immediate aftermath of the financial crisis, cross-border deal making has recently begun to stabilise, most notably in the entertainment, advertising and digital media sectors, where deal value has increased every year since 2010. In 2012, the total value of Chinese based acquirers purchasing assets in the US peaked at $11.1bn over 17 deals. Other Chinese investment in the US also reached a new high in 2012, up 12 percent to $6.5bn. US-based bidders paid a four year high of $9.6bn over 64 deals for Chinese targets, a 30 percent increase over 2011.

Seventy-eight percent of respondents expect investments from the US into Chinese entertainment, advertising and digital media to increase, whereas 67 percent expect to see an increase in investments going in the opposite direction.

By pursuing opportunities in China and the US, investors in both nations are securing for themselves important access to key areas. US-based investors investing in China gain access to the world’s largest media consumer market by volume. Chinese investors, on the other hand, gain access to technology and mature markets which are able to further expand their own home grown entertainment and media sectors.

Politics and roadblocks

Deal making and investment activity between the US and China will be substantially affected by the two countries’ political relationship. The majority of respondents in both nations agree with this assertion. Yet there is a narrow plurality of respondents in both China and the US who feel that there will be no material change in political relations over the next 12 months. Among those respondents who do foresee a change, 40 percent of US-based analysts expect the relationship to improve, whereas 18 percent expect it to decline. US optimism is predicated on the improving relationship between President Obama and new Chinese President Xi Jinping.

Thirty-four percent of Chinese respondents expect the relationship to deteriorate, citing domestic initiatives regarding the revival of American manufacturing, job creation, currency measures, resource nationalisation, national security and international issues. Only 30 percent of Chinese respondents anticipate an improvement to the relationship over the next 12 months.

Forty-four percent of Chinese respondents felt that US regulatory approval was the most significant obstacle to their investment. Thirty-four percent of respondents felt that disclosure requirements were the most significant hindrance for Chinese bidders. One respondent noted that “disclosure requirements in the US are not acceptable for Chinese companies, and the standards seem unnecessarily high. Sources of financing and long-term strategies are very confidential and when this information is sought, deals tend to fail”.

Deal types

Fifty-five percent of American executives surveyed noted that they intend to focus on small or family-owned companies and assets valued at $250m or less. In 2012, 89 percent of American deals were valued at $250m or less. These smaller deals are often pursued by US firms as part of a wider strategy aimed at both Chinese and global expansion. These types of deals are often easier to pursue as the smaller targets are not state-owned companies. US firms are largely expected to pursue minority stakes or joint ventures, whereas respondents in both nations expect Chinese firms to pursue controlling stakes in American companies, government regulations permitting. Many US based investors are focusing on movie theatres as investment opportunities, citing the expansion of the Chinese middle class and their overall levels of disposable income. Chinese box office revenue is expected to reach $5bn by 2015, rising from $1.5bn.

Chinese investors reported that social media and multimedia distribution are the two most attractive sectors for investment over the next 12 months. Mirroring the US, theatre topped the entertainment sector, with 44 percent of respondents seeking opportunities in this area. Smaller businesses were also the most attractive targets for 45 percent of Chinese investors, with 37 percent expecting to pursue deals in the $250m to $500m range.

Conclusion

It is clear that there will be a number of economic, cultural and governmental challenges to US-Chinese investment and deal making in the next 12 months. However, by fostering open and honest communication at all times, and by demonstrating patience and cultural sensitivity, it is possible for both American and Chinese investors to benefit from the coming expansion.

Richard Summerfield