This builds on momentum from H2 2013, when 23 inbound deals from Chinese buyers were announced, and is more than twice the number of deals in H1 2012. Prior to the last six months of 2013, there had not been more than 17 inbound deals from China in any half-year period in the last six years.
The value of this investment is also on an upward trend. The US$7.1 billion-worth of deals in H1 2014 was more than three times higher than H2 2013 and the second highest deal value figure for six years. Notable deals include Lenovo Group’s US$2.1 billion acquisition of IBM’s x86 server business, as well as its US$2.9 billion acquisition of Motorola Mobility from technology giant Google.
“While the Chinese have been very active in Asia, I also feel that they believe they can’t afford not to be in the United States as well,” says Brahmst.
The steady increase in Chinese deals into the United States can be attributed to several factors. Firstly, regulations in China have been reformed in order to make it easier for companies to raise money for investment abroad and pursue cross-border deals. Secondly, there is a gradual narrowing of the cultural differences between Chinese and US dealmakers. Chinese investors are adapting to the pace and deal structures in the United States, and US targets are more familiar and comfortable with Chinese acquirers.
Chinese businesses have also recognized the value of establishing a US footprint. “Chinese companies that are investing in the United States are already successful in China and are looking to take the next step and diversify internationally. The United States is an obvious market to move into,” says White & Case partner Francis Zou. “There is a perceived slowdown in Asian economies and companies see opportunities to secure a better return on capital abroad, and the United States is very attractive in that regard.”
With regards to regulation, the Chinese government has relaxed the approvals required for outbound deals of less than US$1 billion and reformed IPO rules in order to make it easier and quicker for issuers to raise money for cross-border deals.
“The ability of Chinese investors to do deals abroad was hindered by regulation. This put acquirers from China at a distinct disadvantage when competing with other bidders who did not have the same constraints,” Latham says.
However, the Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee authorized to review transactions that could impact the national security of the US, does remain a potential obstacle for Chinese deals in the United States.
China is now the country with the highest number of deals being scrutinized over national security concerns and CFIUS has gradually looked at a broader range of sectors, such as food and pharmaceuticals, when determining whether national security is at risk.
But although CFIUS is still an issue in Chinese deals, it is becoming less of a hindrance as four out of five transactions scrutinized do receive clearance.
“In the past, China had quite a few issues with CFIUS,” says Brahmst. “Many companies did not really understand how it worked until about two to three years ago.” For more on CFIUS, see Navigating CFIUS.
From a US target’s point of view, being acquired by a Chinese buyer is not as uncertain or unfamiliar as it used to be, making it easier for Chinese acquirers to get a foot in the door.
“Overall I think there is recognition that China could become the biggest economy in the world and that acquisitions by Chinese businesses will become a fact of life,” Latham says. “Chinese acquirers are not buying assets and then sending over an army of their own people to run them. They are taking a strategic view and looking to form partnerships. Perceptions and fears of Chinese ownership are changing and are now less of a concern.”
Differences in deal culture are also narrowing, and Chinese buyers have recognized the importance of moving faster when pursuing a US target.
“The market is challenging for Chinese buyers, especially newcomers who face a steep learning curve when adjusting to faster auction processes and negotiating strategies,” Zou says. “Those challenges are being overcome, however, as large numbers of Chinese citizens who have studied and lived in the United States join Chinese companies and help to navigate deal processes.”