Two years ago, Results International was ahead of the trend of placing US and UK based marketing communications firms with Chinese investors and strategic acquirers following BlueFocus’ acquisition of We Are Social. The narrative since then has been that Chinese marketing and technology buyers will pay up for a western presence in a strong market. Other notable transactions that followed this formula include Spearhead Integrated Marketing Communications acquiring Smaato, and Chinese private equity firm Orient Hontai Capital acquiring AppLovin. This capital outflow is not isolated to communications, and has led to changes from Beijing.
Recent discussions with two financial buyers based in China provided some color on where things stand. It is clear that China’s currency regulator – The State Administration of Foreign Exchange (SAFE) – is keen on curbing the country’s Foreign Direct Investment (FDI) deficit.
2015 and 2016 saw record levels of non-financial outbound investments from China of $121 billion and $146 billion (first ten months), respectively. The renminbi fell almost 7% against the dollar in 2016. At the same time China was selling dollars from its foreign exchange reserves to curb downward pressure on the currency. Chinese reserves fell below the visually potent $3 trillion mark in January for the first time in almost six years. China burned through about $320 billion of reserves in 2016 after a record 2015 year losing $513 billion in reserves.
What this means for middle-market M&A in the context of Chinese buyers:
Beijing has clamped down on outbound M&A in an effort to reduce the FDI deficit. Publicly, The State Council claims they are most concerned with acquisitions worth more than $10 billion. SAFE declined to comment on reports that they would begin scrutinizing cross-border money transfers worth $5 million or more, compared with what used to be a $50 million trigger.
We learned from our China-based counter parties that the review process could now include an interview of the selling party conducted by officials in Beijing. It remains to be seen whether these interview requirements will actually materialize, what level of scrutiny they will entail, and whether sellers will actually agree to a Beijing run interview to sell their business. We will update this post as more information develops to provide additional insight on what the actual impact is on Chinese acquirers’ ability to consummate transactions abroad.