China’s Overseas M&A Spree Comes at Lowest Costs Since 2012by and
Chinese firms announce record $157 billion of outbound deals
Outbound acquisitions cost 30% less than domestic purchases
As Chinese companies go on a record $157 billion overseas buying binge, they’re collecting their corporate trophies at the cheapest levels in four years.
The median price they’re paying this year amounts to 14 times the Ebitda -- or earnings before interest, taxes, depreciation and amortization -- of the target companies, down from a multiple of 16 in 2015, according to data compiled by Bloomberg. That’s a 30 percent discount to domestic mergers and acquisitions.
Under Premier Li Keqiang’s “going out” policy, companies including China National Chemical Corp. and Anbang Insurance Group Co. are scooping up overseas targets. Lower M&A costs show that Chinese firms are becoming savvier at international dealmaking, according to Siva Yam, president of the U.S.-China Chamber of Commerce in Chicago.
Chinese firms “are not going to pay a huge number for no reason,” Yam said by phone. “They have become more sophisticated. They buy companies with a brand or distribution channel, and lots of them are profitable.”
The increase in outbound investment reflects Chinese companies’ ambition to expand globally as the country’s weakest economic expansion in a quarter century limits domestic opportunities. It is also becoming more cost-effective as the 38 percent increase in the benchmark Shanghai Composite Index over the past two years pushed up the cost of acquiring local companies.
The median Ebitda multiples for local transactions increased to about 20 this year, from 19 in 2015, data compiled by Bloomberg show. In the previous dozen years through 2015, the measure for domestic deals averaged 8.6, compared with 12 for overseas transactions.
“You have pretty high valuations in China right now,” said Patrick Chovanec, the chief strategist at Silvercrest Asset Management in New York. “It is just a function of where the market is. If you are going to make an acquisition in China, you are dealing with a high valuation bar.”
Jason Rynbeck, head of Asia-Pacific mergers and acquisitions at HSBC Holdings Plc, said that while the pace of Chinese overseas purchases may slow in coming months, they will play an even bigger role along with their Asian peers in global M&A deals in the long run.
“Chinese corporate M&A appetite has migrated from being concentrated on the natural resources industry into the current ‘game-on’ across every sector,” Rynbeck said from Hong Kong. “Chinese companies are using M&A as part of a broad corporate strategy to expand.”