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asia.nikkei.com

US-China trade war to sink M&A

activity for 2 straight years: report -
Nikkei Asian Review
MITSURU OBE, Nikkei staff writer
4-5 minutes

TOKYO -- Global deal values are expected to suffer two

straight years of double-digit falls through next year, as the
protracted U.S.-China trade war sparks recession fears,
according to an annual deal report released on Monday.

The value of global mergers and acquisitions is expected to

fall 15% this year, followed by a drop of 26% next year,
according to the Global Transactions Forecast released by
Baker McKenzie, one of the world's largest law firms.

"We see investors and corporations remaining

cautious during 2020, faced with mounting economic and
geopolitical challenges," the report said. "Economic
uncertainty and the risk of a global recession are likely to
dampen transaction volumes next year."

The report expects 2019 to be "the slowest year" for the global
economy since the financial crisis of 2008-09.

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The report comes after Washington and Beijing resumed trade

talks in Washington last week and reached a deal that averts a
U.S. tariff hike on Chinese goods for now.

But the trade war is not the only drag on the global economy
and deal activity. Growing concern about overstretched market
valuations is another, as testified by a weak initial public
offering of Uber Technologies in May and the postponement of
the IPO by office-sharing startup WeWork in September.

"We see a high risk of a correction in the global equity markets

in coming months, ushering in a period of protracted volatility,"
the report said.

Recovery in M&A activity is expected in 2021, but it is likely to

be gradual, as a technological rivalry between the U.S. and
China is expected to continue, resulting in tighter restrictions
on Chinese companies conducting M&As and technology

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acquisitions in the U.S.

"There is still lack of spending (in China) on deep technology,

very fundamental science that causes big breakthroughs in
technology," said Shaun Roache, chief economist for Asia
Pacific at S&P Global Ratings. "A lot of the R&D in China is on
commercial applications of existing technology... It is still
heavily dependent on foreign technology."

Chinese outbound M&A spiked in 2016 under the Made in

China 2025 vision that calls on Chinese companies to acquire
technology overseas and bring it home. Such M&As have
plummeted under tighter Western restrictions. If China wants
technology, it will have to invest in it itself, which will take
longer and will be more costly.

"Remember that China has been trying to develop its own

semiconductor industry since 1980s and it's still behind the
frontier," Roache said.

A declining current account surplus in China, due to a

slowdown in exports, also makes it difficult for China to make
overseas acquisitions.

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Amid tighter controls on Chinese outbound M&As, investors

are looking at China's domestic market for opportunities, as
Beijing relaxes its controls on foreign investment.

"People are still interested in investing in China," said David

Allen, a partner for private equity and M&A at Baker
McKenzie. "If a market as big as China effectively starts to
liberalize more, that will create an abundance of opportunity
for private-equity investors and strategics."

Allen said he anticipates an increase in inbound M&A deals in

China, especially in sectors such as automotive, health care
and financial services.

There are already signs of such activity. On Sept. 30, PayPal

said it had won Chinese government approval for its
acquisition of GoPay to become the first foreign company to
provide digital payment services in the country.

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China has taken steps to open up its financial services

industry to foreign companies, under pressure from the U.S.

Among foreign banks, UBS, Nomura, Morgan Stanley and

Credit Suisse are poised to take majority control of their
Chinese joint ventures.

"Chinese consumers have emerged so much today and that's

not something the market outside China has done a good job
at in terms of trying to capitalize," Allen said. "There is a real
opportunity there."

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