Inbound activity remains strong in China

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As China’s economic influence continues to grow, inbound M&A activity has surged over the past 12 months with signs indicating deal flow will remain strong. However, international bidders and Chinese companies are both increasingly aware of the importance of in-depth due diligence.

In 2010, China’s inbound M&A volume was up by 20% compared to 2009. In the 12 months ended 30 September 2011, total inbound deal volume and value surged by 5% and 50% respectively, compared to the same period in the previous year. December 2010, March and July 2011 were the most active months.

Hong Kong and US bidders were most active in acquiring Chinese companies, accounting for 41% and 20% of China’s total inbound deal volume, respectively, in the 12 months ended 30 September 2011. Apart from Asian bidders in Singapore, Japan and South Korea, European companies have been seeking opportunities in China and the trend is expected to continue.

“The data clearly points to sustained interest from international investors for M&A targets in China,” said Violet Ho, managing director, Kroll Greater China. “We always urge potential investors to take a step back and carefully examine a target company and its key people. Experience shows that dishonest or corrupt individuals can be a cancer that spreads through an organization, and bidders must vet the relationships of these individuals with key government officials because today’s ‘political assets’ can quickly become tomorrow’s ‘political liabilities’.”

“Recent Chinese government measures to curb fraudulent activity appear to be having good effect, but for M&A bidders, it comes down to finding ways of adapting in the changing environment,” said Ho.

While China’s M&A market has been dominated by corporate bidders, private equity investors have taken a more active approach in the market over the 12-month period. More recently, volatility in global financial markets and fraud scandals involving Chinese companies have caused many private equity firms to revisit their investment strategies in the PRC.

Although the industrials and chemicals sector recorded the highest M&A transactions volume and value, emerging sectors including pharmaceutical, medical and biotech and leisure also experienced an increase in deal activity.