China M&A: Seeking long-term growth in TMT

China M&A: Seeking long-term growth in TMT

Eric Lau shares his views on the latest China outbound M&A trends surrounding the TMT sector


China’s transition to a service-oriented economy has had a profound impact on the TMT sector as companies are seeking to acquire bolt-on services in order to satisfy an increasingly sophisticated and demanding Chinese consumer base.

The TMT sector has been an attractive destination for China outbound acquisitions in recent years as Chinese companies come to grips with the country’s economic transformation from a manufacturing powerhouse to a consumer and service focused economy.

This transformation has already had and will continue to have a big impact in the way businesses operate in China. Companies are trying all they can to adapt to an increasingly sophisticated and demanding consumer base, while a competitive domestic market is prompting more of them to acquire bolt-on services overseas.

A change in the structure of China outbound M&A activity in recent years is a reflection of this as there has been a noticeable shift towards acquisitions aimed to import advanced technology and management philosophies, build brands, and expand global market share.

This is a trend that is likely to stay for the foreseeable in particular for the TMT sector where R&D and innovation continues to gain momentum. Here are some of the hot sectors within TMT:

  • Artificial Intelligence (AI) – China is expected to play a key role in AI. This is expected to be driven by the likes of Alibaba, Baidu and Tencent, which continue to invest as well as benefit from the data available to them.
  • Virtual Reality (VR) – The VR market in China has seen a number of partnerships, ventures and investments both locally and internationally. Alibaba, Baidu and Tencent are all working with content partners, while the US-based content producer Jaunt has formed Jaunt China with plans to develop 500 VR productions in the next two years.
  • E-commerce – As the consumer behaviour continues to evolve in the new age of digitalisation, Chinese e-commerce firms continue to grow their platforms and expand into the international arena. Alibaba, for example, acquired Singapore’s largest online electronics retailer Lazada last year.
  • E-sports/Gaming – With a rapid increase in the number of gaming users, this continues to attract interest from media and sponsors. China is at the forefront of this and is driving the growth of the sector. Alibaba (Ali Sports) and Tencent are investing heavily in these areas.

There are developments in the global environment that could affect cross-border M&A deal flows, which market participants need to be aware of.

The Organisation for Economic Cooperation and Development’s (OECD), for example, is encouraging global cooperation to address tax base erosion and profit shifting (BEPS). In response, many local governments are modifying their domestic tax laws to implement BEPS measures.

This is likely to have an impact on China outbound M&A as companies will need to consider whether the development of BEPS projects in a particular country is going to create additional expenses to an acquisition. If BEPS exposures are identified, it is important for both the acquiring company and the target company to determine the best course of action.

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