Posted: 29 Jun. 2020 5 min. read

Deal making with China in our new normal

We interviewed Australian corporate heads of M&A and identified key trends influencing deal activity and the expected impact of COVID-19 to their business in 2020. You can download our full The deal in focus report for data findings from our interviews and actionable insights from our M&A leaders.

Below, we share the highlights from our theme, Responding to COVID-19: Deal making and opportunities for M&A.

 

Following a period of unprecedented M&A activity in 2017 and 2018 buoyed by electricity privatisations and large-scale takeovers, Chinese M&A interest in Australia was subdued in 2019.

Given today’s circumstances, we could be excused for forgetting about the geo-political dynamics, tariff wars, central funding controls and changes to real estate investment conditions that stalled a continuation of this momentum through 2019. Asia is due for yet another turbulent year.

 

Key actions for Chinese investors into Australia

  1. Have a clear Australian growth strategy that spans the M&A cycle and explicitly addresses the protection of Australian jobs and businesses
  2. Understand the Australian way of doing business. Deloitte’s Executive Transition Labs and M&A Deal Room can help international clients understand and navigate our nuances
  3. Have the board’s approval and funds ready for the competitive Australian market
  4. Become known to the regulators and engage in early dialogue with them

 

Key actions for Australian sellers to prepare for inbound investors

  1. Provide sufficient financial and operational information early to assist potential investors evaluate the opportunity and obtain preliminary approvals to meet your timetables 
  2. Know who’s involved: Understand the organisational structure of the bidder’s ultimate decision makers. Embrace technology to build a rapport and understand the deal thesis
  3. Get your back of house in order:  Consider the construct of the data room and information being provided. Deloitte’s M&A Analytics platforms such as iDeal and the Virtual Data Room are helpful enablers to an efficient borderless transaction experience
  4. Get a good adviser to help you navigate the process

 

No growth predicted across Asia, but some will fare better

The International Monetary  Fund (IMF) is now forecasting that the 'severe  and unprecedented' impact of COVID-19 will lead to no economic growth across the region, but it is also predicting the impacts for some countries, such as China, will be less pronounced and shorter than their more developed global neighbours.

A number of key drivers will likely shape the landscape of Chinese investment into Australia over the next 12 months:

  • Recent Foreign Investment Review Board (FIRB) changes run the risk of adding to the cauldron of uncertainty for prospective foreign investors into Australia. A balanced perspective is needed. As often reinforced, Australia remains “open for business” and investment applications “that protect and support Australian business and Australian jobs” will be prioritised. Recent trends suggest that the review of foreign investment applications continue to be timely. Let’s hope that the current geopolitical clouds do not get in the way of investments that are right for our economy 
  • The door is not shut on Chinese investment in Australia. It’s now more important for Chinese investors to demonstrate the value they could bring to a transaction and beyond. Closer scrutiny will be placed on their investment thesis and how it will be accretive to Australia’s national interests. Perhaps more than ever before, transparent dialogue will become key to successful transactions
  • The recalibration of China’s investment mandate, following President Xi Jinping’s 14th five-year plan, pivots toward clean, green, and sustainable investment opportunities. This, coupled with refreshed support for private owned enterprises, may provide further impetus for re-engaging with corporate Australia in a new manner. Joint ventures and other China-Australia corporate alliances that leverage respective strengths may provide new trading opportunities under President Xi’s five-year plan.
  • The existing world of social distancing and travel bans will inevitably throw some interesting challenges toward cross-border transactions. For some cultures, the absence of face-to-face dialogue may prove confronting. But we are an adaptable race. New technology video conferencing and complementary technology, such as Deloitte’s Virtual M&A Deal Room and iDeal (M&A Analytics tool) are practical solutions that have readily addressed some of these potential impediments. 

Notwithstanding the severity of the current economic situation, we see that some green shoots are already emerging. This may just be the catalyst that was required to change the way in which we engage with foreign pools of capital as we embrace the new normal. 

Without doubt, we are due for a bumpy ride in the coming months as we emerge from the shadows of COVID-19 and transition to the ‘new normal’. As natural geographic partners, there should be a continued impetus for Chinese cross-border transactions — Australia has the resources and consumer goods that China requires and China has the foreign capital that Australia needs. The opportunity to harness our interdependence with China for the longer-term benefit of both economies remains significant.

 

Read the next blog in our M&A series on Capital raisings and defensive stratgies during COVID-19.
Or download our full The deal in focus report for data findings and insights from our interviews with ASX200 M&A leaders. 

 

More about the authors

Marc Hofmann

Marc Hofmann

Partner, M&A Transaction Services

Marc is a partner in our Mergers and Acquisitions Transaction Services practice based in Melbourne. He has over 20 years of experience advising local and multinational clients. His primary areas of specialisation are commercial advisory, due diligence, pre-sale/capital raising assistance and SPA advice. Marc leads our IPO readiness market offering and has deep experience in advising on cross border transactions, with a particular emphasis on inbound investment from Asia.