Amidst a slowdown in IPOs and restricted exits in the primary market, the field of mergers and acquisitions (M&A) is about to receive a policy "drip irrigation".
The China Securities Regulatory Commission (CSRC) released the "Opinions on Deepening the Reform of the Mergers and Acquisitions Market of Listed Companies" (hereinafter referred to as the "M&A Six Articles") on the evening of the 24th, clearly supporting cross-industry mergers and acquisitions, allowing the acquisition of unprofitable assets, and encouraging private equity funds to participate in the mergers and acquisitions of listed companies.
Tian Lihui, Dean of the Institute of Financial Development at Nankai University, told First Financial that the introduction of the new M&A policy is expected to bring about three major impacts: an increase in market vitality, acceleration of corporate transformation and upgrading, and an increase in investment opportunities. Subsequently, there will be more diversified strategies, more active M&A activities among small and medium-sized enterprises, and more investment behaviors focusing on technological innovation and industrial upgrading.
Previously, in the capital market, listed companies were keen on cross-industry mergers and acquisitions, and there were also some companies blindly following the trend of "playing across borders". However, after encountering regulatory inquiries or difficulties in continuing transactions, they "began in chaos and ended in abandonment", leaving behind large goodwill and other sequelae. Wang Jiyue, a senior investment banking professional, said that the risk of cross-industry mergers and acquisitions is very high, and the requirements for the merger and acquisition targets are very high. The cross-industry mergers and acquisitions encouraged by the new regulations this time are also conditional and scoped.
"The 'M&A Six Articles' is a large framework, and there still need to be detailed rules behind it, making detailed provisions on how to operate cross-industry mergers and acquisitions and the acquisition of unprofitable assets," said an investment banking professional.
Support for reasonable cross-industry mergers and acquisitions
The "M&A Six Articles" clearly supports listed companies to transform and upgrade in the direction of new quality productive forces, including: actively supporting listed companies to carry out mergers and acquisitions around strategic emerging industries, future industries, etc., and conducting cross-industry mergers and acquisitions based on transformation and upgrading goals, which are helpful for filling and strengthening the chain and improving key technical levels. The acquisition of unprofitable assets, as well as supporting the "two innovation" plate companies to merge and acquire upstream and downstream assets in the industry chain, etc.
Regarding the direction of cross-industry mergers and acquisitions, the CSRC clearly supports well-operated listed companies to carry out cross-industry mergers and acquisitions that conform to commercial logic around the needs of industrial transformation and upgrading and seeking a second growth curve.
Liu Ping'an, Chairman of Jin Changchuan Capital, told reporters: "We understand that as long as the direction of the merger and acquisition is in line with the trend of economic development, is strongly encouraged and supported by national industrial policy, and the enterprise itself has the ability to complete (the merger and acquisition), it can be done. Of course, supervision will still supervise in aspects such as information disclosure."
"The policy is returning to the essence of mergers and acquisitions, while respecting market laws." Liu Ping'an believes that the new regulations clearly encourage cross-industry mergers and acquisitions, which to some extent are expected to break the original restrictions on mergers and acquisitions in non-related industries, giving more opportunities to traditional industry enterprises.For a long time, the regulatory attitude towards cross-border mergers and acquisitions has been relatively cautious. At the end of last year, the Shanghai Stock Exchange stated that it would carry out prudent regulation of mergers and acquisitions, resolutely prevent disorderly expansion and illegal "wealth creation" through the capital market; through inquiries, it would focus on strengthening the supervision of "three highs," blind cross-border, avoiding reorganization listings, and interest transfer type mergers and acquisitions.
Why has the policy shifted now? Tian Lihui analyzed that as China's economy enters a stage of high-quality development, the demand for innovative enterprises and technology is increasing. Relaxing merger and acquisition policies can encourage more funds to flow into these areas, accelerating industrial upgrading and technological innovation.
"Allowing cross-border mergers and acquisitions and the listing of unprofitable assets may be to encourage the development of innovative enterprises, especially those with high growth potential but not yet profitable, to promote the development of the new economy." He believes.
Zheng Peimin, chairman of Rongzheng Group, believes there are three reasons: First, after the IPO pace slows down, new choices need to be provided for拟上市 enterprises to achieve securitization and investment institutions to exit investments; second, to improve the quality of listed companies, guide listed companies to transform and upgrade to new quality productive forces, and strengthen the chain; third, to enrich the effective market value management means of listed companies, activate the capital market, and improve the level of investment returns.
Some people close to the regulators also said that strict regulation has always been aimed at blind cross-border situations. For reasonable cross-border mergers and acquisitions, there has always been room in policy, and there is indeed a real demand for cross-border mergers and acquisitions.
Can policy rain activate the market?
Can the continuous increase in merger and reorganization policies activate the market, and how will all parties in the market respond?
"Although merger and acquisition transactions are generally market-oriented decisions between buyers and sellers, the new policy has clarified the direction and expectations of transaction supervision in the next stage, and will have a positive impact on the overall market merger and acquisition transactions in the medium and long term." Zheng Peimin said.
From the perspective of enterprises, Zheng Peimin believes that in line with policy guidance, the preference of listed companies for asset mergers and acquisitions in high-tech and strategic emerging industries will be higher. Some companies, driven by goals such as improving the basic situation and increasing market value, will engage in multi-main business operations through mergers and acquisitions. In the economic downturn cycle, horizontal mergers and acquisitions aimed at industrial integration by industry leaders will also gradually increase.
The above investment banking person believes: "At present, the reform direction of the domestic securities market is to reduce the number of listed companies and improve quality. IPOs may still be issued in small quantities over a short period, and mergers and reorganizations are also aimed at reducing the number of existing companies, which may be led by central enterprises."From an institutional perspective, Tian Lihui believes that financial institutions will develop more financial products and services related to mergers and acquisitions (M&A) and restructuring. Investors will pay more attention to companies with M&A potential, thereby adjusting their investment portfolios.
Wang Jiyue believes that there are differences in the operations of investment banks regarding IPOs and M&A. "The key to an IPO is to fully understand and comply with regulatory requirements, conduct due diligence and disclosure, and respond to regulatory inquiries; the essence of M&A is the transaction itself, how the deal is reached and how the interests of both parties are balanced is the most critical." He said that if the parties involved in the M&A transaction have preliminarily reached a consensus, the investment bank mainly plays the role of a conduit.
"The activity of M&A will have a certain promotional effect on institutions, but the scale and intensity are expected to be relatively limited," Zheng Peimin believes. He analyzes that, first, investment institutions are not controlling shareholders and generally find it difficult to influence the decisions of the selling party, and they need to address the issue of the willingness of the controlling shareholders to sell their controlling rights in the M&A exit; second, the valuation expectations of the primary and secondary markets have not yet converged, and overvaluation of investments increases the difficulty of M&A transaction negotiations, transaction structure design can solve some valuation issues, but there is still an expectation gap; finally, the ability of listed companies to pay a large amount of cash as consideration is generally limited, and the uncertainty of the expected returns from equity payment consideration exit will also reduce the willingness of investment institutions to exit through M&A.
It is worth mentioning that the "M&A Six Articles" also proposed to encourage private equity funds to actively participate in M&A.
Liu Ping'an said that private equity funds play an intermediary role as financial advisors in the M&A and restructuring process of listed companies, playing a role in facilitating transactions, including helping enterprises find high-quality targets, designing transaction structures, assisting in the achievement of transactions, and realizing post-transaction management and business integration; on the other hand, they can assist listed companies in establishing industry investment M&A funds, building industry resource integration platforms, and helping them build industry ecosystems to quickly achieve the integration of industry resources.
What are the risks and how to solve the difficulties?
Since the tightening of the IPO phase last August, companies planning to go public and investment institutions have turned their attention to the M&A field, with some companies that failed to go public turning into M&A targets, and investment institutions also hope to exit through M&A.
However, reaching an M&A agreement is not easy, and cross-border M&A is even more difficult, with many companies attempting cross-border M&A failing.
Dengyun Shares' second cross-border M&A ended in failure. In mid-April of this year, Dengyun Shares disclosed a transaction plan, stating that it was planning to acquire the controlling rights of Su Du Technology. The company mainly engages in the research and development, production, and sales of a series of products for the intake and exhaust valves of automotive engines, and entered the gold mining and selection and other related fields in 2021 by acquiring Beijing Huanglong Jintai Mining Co., Ltd.; Su Du Technology is a comprehensive solution service provider for spatiotemporal big data.
The M&A case was abandoned only three months after it was disclosed. In mid-July, Dengyun Shares stated that it would terminate the acquisition of 74.97% of the shares of Su Du Technology, citing significant changes in the market environment since the beginning of the transaction planning, and the uncertainty of continuing the transaction at this stage is relatively large. After协商 with the actual controller of the target company, it was decided to terminate this major asset restructuring matter.*ST Jinshi's cross-border merger and acquisition also came and went in a hurry. On March 25th, the company announced its intention to acquire the controlling stake of Qingdao Zhancheng. The latter's main business is backend design services for integrated circuits, while *ST Jinshi's main business is the research and development, production, and sales of packaging printing products such as cigarette labels.
In response, the Shenzhen Stock Exchange required the company to explain the reasons for entering a new business field, and how to achieve synergistic effects when there is a significant difference between the target business and the company's existing main business. Ultimately, only a few days after the disclosure of the acquisition plan, on April 2nd, *ST Jinshi announced the termination of this significant asset restructuring.
"In the past, most cross-border mergers and acquisitions did not meet expectations, and many even ended up in a mess, causing significant losses and negative impacts on listed companies and shareholders," said Zheng Peimin. He believes that the impact of mergers and acquisitions on the stock prices of listed companies has weakened, and investors and listed companies have become more rational about cross-border mergers and acquisitions. The regulatory level will also substantially control the compliance and rationality. The next stage of cross-border mergers and acquisitions is expected to be cautious and orderly, with the quality of the target assets being the core focus.
Tian Lihui believes that compared to the past, the new round of cross-border mergers and acquisitions will pay more attention to rationality and compliance, rather than simple asset expansion. Under the new regulations, cross-industry mergers and acquisitions integration will be those aimed at promoting industrial transformation and upgrading, and exploring new business fields. These mergers and acquisitions are usually based on a clear strategic plan and can bring long-term value-added to the company.
In his view, even with new policy support, cross-border mergers and acquisitions still face some challenges, such as post-merger integration management, cultural conflicts, and potential market bubble risks. To avoid these issues, companies should conduct a detailed due diligence to ensure that the merger and acquisition targets match their own development strategy and prepare a comprehensive integration plan.
Regarding some ambiguities that may still exist in actual operations, such as how to define merger and acquisition activities that "comply with business logic," Tian Lihui suggested: "It is very necessary to introduce more specific guidelines to clarify the scope, conditions, and regulatory standards of mergers and acquisitions. In addition, strengthening information disclosure requirements and ensuring transaction transparency are also key measures to prevent risks."
"When the motive for mergers and acquisitions is only to boost stock prices or allow insiders to exit, if the regulators do not strictly control such mergers and acquisitions, investors will bear the consequences," Wang Jiyue also suggested that the information disclosure and risk warnings in mergers and acquisitions should be controlled, allowing ordinary investors to fully understand the risks of merger and acquisition transactions, and strengthening the supervision of various violations in merger and acquisition transactions.