It is an urgent task to tackle excess capacity and promote structural readjustment in background of slowing economic growth this year. The Government Work Report proposed that policy guidance be offered to encourage cross-sector, inter-regional and cross-ownership mergers and acquisitions and promote winnowing power of the market. It is enterprises that actually implement mergers, acquisitions and restructuring. In recent years, there have been a growing number of listed companies with continuous expansion of asset scale and improvement in asset quality. Listed companies, representing leading enterprises, are well equipped to become the driving force for corporate mergers and acquisitions.
Capital markets should serve as important basic platform in this process. First, while providing services for issuers in corporate restructuring, listing and fund-raising, the capital market makes corporate assets liquid. As a result, the capital market plays an irreplaceable role in tapping idle assets, optimizing resource allocation and developing industrial layout. Second, as a market for corporate mergers and acquisitions, the capital market provides price signals for scientific decision-making. It also offers products and tools that greatly reduce cost and diversify risk. In particular, stock-for-stock M&A builds a coordination mechanism for sharing risk and profit, providing a sound basis of joined interests. Furthermore, being highly transparent and sensitive to price signals, the capital markets can effectively enhance the efficacy of policies for mergers and acquisitions and expose problems in a timely manner.
Thanks to long-term rapid economic growth, a large number of high-quality companies have frog-leapt in business growth. At present, China has entered a crucial stage in economic transition. And the same is true for industrial consolidation and corporate mergers and acquisitions. The capital strategy based upon corporate mergers and acquisitions has become increasingly advantageous. And capital markets will play an increasingly important role in facilitating mergers and acquisitions.
There is a great potential for consolidation in competitive industries. Competitive industries in China are highly fragmented with many small firms scattered in different regions. Despite large-scale consolidation in the pharmaceutical industry, the number of firms increased from 3,352 in 2003 to around 6,000 at present. The top 10 pharmaceutical firms account for only 15% of the market share while 70% of pharmaceutical enterprises report less than 30 million yuan (USD 4.8 million) in annual sales revenue.
At the same time, the number of cases involving cross-border mergers and acquisitions has increased. A-share listed companies have implemented more than 370 cross-border mergers and acquisitions since 2000. After the financial crisis, the ability of a number of Chinese enterprises to integrate overseas resources has become even more evident. Thanks to the appreciation of the Renminbi and downward valuation of overseas asset, outbound M&As are increasingly active.
External environment and conditions have become congenial for the capital markets to fully perform its function to facilitate mergers and acquisitions.
At the enterprise level, the Government Work Report points out that China’s productive forces features a multi-level nature and there are potentials for development in all sectors ranging from the traditional to emerging industries, from labor-intensive is capital-intensive businesses. Traditional motives for M&A include economies of scale, access to client base, marketing channels, market access, brand advantage and resources. However in emerging industries such as the Internet, software, biomedical technology, M&As are mainly motivated by pursuits of technology and talents. At the same time, with increasing sophistication in industrial development, competition has intensified. Complacency is no longer sustainable. Size and competitiveness are not only a matter of development but also a survival issue. Private entrepreneurs are becoming more willing to sell stakes.
At the industry level, most competitive industries are experiencing high incidence of M&As. Within these industries, there are an increasing number of companies with abilities to initiate M&As and an increasing number of worthy targets. The general industry-standard is on the increase, providing good opportunities for companies with competitive advantages to expand through M&As .
At the market level: historical studies of overseas M&A indicate that capital market development and financial innovation spawns mergers and acquisitions. Investment banks constitute a core force in cultivating the M&A market. Along with rapid development in the M&A market, domestic investment banks are shifting business focus and product innovation toward the M&A market. In recent years, driven by the diversified channels of equity investment exit, the private equity funds have intensified M&A activity. Statistics indicate that number of VC/PE-related M&As rose from 36 in 2006 to 208 in 2012. Dedicated buyout funds have emerged.
At the institutional level, State Council issued the Opinions on Promoting Corporate Mergers and Acquisitions in 2010 and 12 ministries jointly issued Guidelines on Corporate Mergers and Acquisitions to Accelerate Key Industries early this year. Relevant authorities carried out fruitful work in promoting corporate M&As, eliminating institutional hurdles, enhancing fiscal and taxation policies, expanding financial support, improving land-use administration, facilitating debt restructuring and reemployment of laid-off workers. Since last year, China Securities Regulatory Commission has further stepped up efforts in promoting audit transparency, improving audit efficiency, establishing supportive financing mechanisms for mergers and acquisitions and implementing comprehensive prevention and control measures against insider trading and exploring separated evaluation system for M&As. These efforts have produced very positive effects in the short term. Policy of Institutional Reforms and Functional Fransition of the State Council proposed reduction in centralized control and further delegation of powers. It is hoped that institutional hurdles holding back corporate mergers and acquisitions will be removed.
Capital markets should seize the current favorable opportunity, promote mergers and acquisitions and to build fresh momentum for market development. In reforming supportive policies for capital markets, we should focus on two issues::
Firstly, we should take an accommodative attitude and market-based approach to all types of M&As. We should refrain from setting performance standards for M&As according to a priori or limited experiences. Nor should we decide to “support” certain types of M&As based upon such judgments. The factors determining success of M&As are very complex. Even the same type of M&As may have different results in different enterprises. The key is to emphasize the role of self-restraint mechanism of the capital market and give full play to its efficiency.
Secondly, we should shift our focus from risk prevention to facilitating M&As. Corresponding adjustments need to be made in M&A rules, transaction pricing mechanism, payment instruments, financing tools and information disclosure. In the past, the capital market used to focus on reorganization for the sake of shell preservation. And the regulation used to emphasize safeguarding the interests of the investing public during reorganization. As the situation of M&A changes in the capital market, we should try to strike a balance between risk prevention and efficiency enhancement, facilitating M&A with genuine industrial backgrounds.
Functional improvements of the capital market hinge on legal support and protection.
The current Securities Law and many other related regulations contain provision that are inconsistent with or even hinders M&A development. We must make complete overhauls as soon as possible. During National People's Congress held in March, I had this issue submitted specific proposals that can be summarized in the following points:
- The Securities Law needs to further broaden the scope of M&A definition and include acquisition of assets and common capital-market types of M&A such as restructuring, repurchasing, mergers and spinoffs. Meanwhile, we should research on institutional arrangements of tender offers compatible with China’s national conditions, clarify the legality of the leveraged buyouts, encourage application of convertible bonds, preferred stocks, warrants and other financial instruments as financing, means, improve the institutional arrangements for stock-for-stock M&As and clarify the legal status of buyout funds..
- The Companies Law should reserve sufficient legal space for changes of registered capital due to M&A activities. In accordance with the Companies Law, no less 30% registered capital should be in cash and cases involving M&As are no exception to the rule. This undoubtedly increases the cost and difficulty of M&As.
- The Anti-monopoly Law should include administrative monopolies and regional monopolies impeding M&A into its scope of regulation. In practice, segregated regional and industrial administration not only poses a serious hurdle for cross-sector and inter-regional M&As but also, increases the difficulty of post-merger integration and synergies .
- The Bankruptcy Law should strive to fill the blanks of M&As involving listed companies at the brink of bankruptcy. Among the over 30 judicially approved draft plans for bankruptcy reorganization of listed companies, almost all of them introduced an acquirer,, or new investor. However, there is legislative vacancy in new investor’s legal status and conditions of entry in the course of reorganization. And their rights in the follow-up reorganization lacks of legal protection.
This year, I was honored to join the Guangdong deputies during the NPC and CPPCC sessions. Many of Guangdong deputies and members are from economic community. During conversations, I felt the great M&A demands from Guangdong enterprises, which will, in turn, significantly contribute to the economic structural adjustment in the province. Former Secretary CPC Guangdong Committee Mr. Zhang Dejiang set high expectations for Guangdong to incubate large businesses and well-known brands during the discussion with Guangdong delegation. International experience indicates that large businesses and established brands are formed through continuous acquisitions. Though Guangdong has more than 360 listed companies, the potential of M&A has yet to be developed. We noticed that Zhejiang clarified its support to the large-scale backbone enterprises during a seminar titled “Capital Market Promoting the Economic Transformation and Upgrades of Zhejiang.” So did Guangdong during a symposium with large-scale backbone enterprises. The time has come for the capital market to accelerate M&A service in all fronts, incubating large business, improving brand equity, facilitating economic transformation and strengthening market’s ability to reward investors. Guangdong enjoys a good market environment and high-level economic development. It is well equipped to spearhead M&A. SZSE will make joint efforts with all participants in facilitating M&As through the capital market.