The changing landscape of cross-border M&A

DC Edge | Issue 5

Inbound mid-market M&A activity from China, Japan and the USA posted the highest ever twelve-monthly figures at the end of H1 2014. For the first time ever, the number of deals reached 50+ for four consecutive quarters.

The elevated figures were caused by the convergence of record volumes from each individual nation, which were in turn brought on by changes in each economic landscape.

Mid-market M&A into Europe
Annually to end of H1

  • 17 Transactions

  • 28 Transactions

  • 175 Transactions


DC Edge will help you understand the




*Mid-market transactions defined as €50m-€1bn
All data in DC Edge Issue 5 is sourced from Mergermarket, unless otherwise stated.

1 The changing 

Millions of people in China have been lifted out of poverty over the last 30 years and its middle class population is growing rapidly. But

the country now faces challenges created by increased consumerism;

pollution and energy use have risen while China’s resources are being depleted.

Aimed at curbing these trends, in 2011 the China’s National People’s Congress approved its 12th Five-Year Plan. In 2014, we are in its fourth year.

The twelfth plan marked a shift in attitudes as focus moved away from the rapid high-growth pursued in the previous three decades and towards higher quality growth (with a reduced GDP target of 7% until 2015) aimed at ensuring long-term prosperity.

  • Economic Focus
  • Domestic consumption
  • Wealth disparity
  • Environmental protection
  • Industrial focus on the following undustries
  • New energy
  • Energy conservation
  • New materials
  • Biotechnology
  • IT
  • Gigh-end equipment manufacturing
  • Clean energy vehicles


News Flash

The prospective annual figures are boosted by the National Development and Reform Commission’s decision to relax restrictions on cross-border acquisitions of less than $1bn which came into place in May 2014. The new rules mean that Chinese firms are now only required to notify the NDRC that a transaction is taking place and not seek approval for it.

2 What are Chinese
investors buying?

China is dedicated to acquiring the necessary technology and intellectual ‘know-how’ from overseas countries to build and reinforce its social infrastructure and domestic consumption. Rather than seeking to disseminate brands and increase market share in Europe, Chinese investors are looking for assets and brands which will translate well to Asian markets.

While other overseas markets are seeing an increase in energy & resources, agriculture and mining sector transactions from China, for the European mid-market there is a clear focus on IP&S, with Leisure & Retail a distant second. This sector dichotomy reflects both the mandate from the Five-Year Plan and the requirements for China’s growing middle class population who are demanding higher-end products and whose consumption habits are evolving. Their purchasing power is evidenced by demand for more advanced and faster gadgets and increased interest in European luxury brands.

European mid-market deals with a Chinese acquirer
(LTM to June 2014):

in processes

  • Approval- led

    There is usually a single senior decision-maker to whom the transaction team must defer, but Chinese investors also tend to involve a large number of stakeholders in the M&A process. This means numerous attendees can be expected for diligence meetings ahead of an extensive list of clarification points and consequent questions.

  • Approval processes may affect timelines

    Chinese investors are subject to a regulatory approval process for cross-border acquisitions. In addition to dealing with NDRC approval or notification, State-Owned Enterprises (SOEs) must also seek approval from the relevant SASAC before placing any binding offers. The process and timeline for gaining SASAC approval is opaque and varies between companies. As it is a government body, a clear case needs to be presented as to why and how the transaction fits into the government’s strategic objectives. After signing the SPA, a further two rounds of approvals must be sought (MOFCOM & SAFE).

  • Focus on different financial metrics

    The Chinese approach valuation from a different angle to Europeans: Equity Value takes precedence over Enterprise Value; Net Income as opposed to EBITDA; and P/E (Price over Earnings) rather than EV / EBITDA. Understanding how the debt element will transfer to the new buyer can also be misinterpreted.

  • Uncommon requests

    Early on in the M&A process, before even placing a non-binding bid, it is not unusual for Chinese bidders to insist on site visits, samples and meetings with management that European investors would only consider at a much later stage. Once convinced of the investment case, Chinese bidders will resolutely pursue it and often aim to secure exclusivity.

NDRC = National Development and Reform Commission
SASAC = State-owned Assets Supervision and Administration Commission of the State Council
MOFCOM = Ministry of Commerce
SAFE = State Administration of Foreign Exchange

of Asian PE

Asian private equity funds are sitting on $130 billion of dry powder and many are looking to spend it in Europe

Recent private equity investments in Punch Powertrain, Cath Kidston and Pizza Express reveal a growing appetite among Asian investors (specifically Chinese) for European businesses, prompted by the accumulation of $230 billion of funds since 2009 and a simultaneous deceleration in domestic private equity deal activity.

1The changing

‘Three arrows’ is a reference to a Japanese legend in which a clan leader hands each of his three sons an arrow and asks each to snap it.

After they do so, he hands them three arrows and tells them to snap all three at once, which they are unable to do. A single arrow could be broken but three arrows together could not.

The lesson to be learned was that the three sons should work together for the benefit of their clan.

Since the Japanese asset price bubble burst in the early 1990s, numerous attempts by a series of Japanese governments have tried and failed to get the stagnating Japanese economy back on track.

When Shinzō Abe came to power for the second time in December 2012 as head of the Democratic Party of Japan (DPJ), it was on the promise of large scale, all-encompassing reform. He immediately unveiled his radical plan for economic revival, now known under the sobriquet ‘Abenomics’.



  • A

    The start of the Eurozone crisis strengthens the Yen’s exchange rate and makes acquisitions into Europe very good value for money. Japan’s export market suffers.

  • B

    In 2012 the Yen reaches its strongest point; B outbound M&A reaches its peak

  • C

    Shinzō Abe comes to power and sets out ‘three arrows’. Immediately unleashes first two: (¥10.3 trillion) stimulus bill & appointment of new head of the Bank of Japan whose target is to generate 2% inflation through quantitative easing

  • D

    The Japanese market floods with Yen and exports once again take off due to renewed cheap manufacturing costs

  • E

    Outbound M&A volumes temporarily decrease as Abenomics starts to take effect

  • F

    Abe’s approval rating reaches 70%. Japanese stock market 55% higher than before his appointment

  • G

    Outbound M&A posts an increase on 2013 levels while Japan’s economy contracts 1.7%. The Bank of Japan puts dip in GDP down to a sales tax hike introduced in April and insists the recovery is still on track


As the Yen weakened during 2013, so Japan’s spending spree was halted and mid-market M&A activity into Europe tumbled.

However this was a temporary deceleration and it was absolutely expected. In 2014 buoyant stock markets combined with renewed confidence are proving that the long-term recovery plan is on track.”

Tosh Kojima Managing Director, Japan & Asia Group London

Low bond yield and the surge in the value of the domestic stock market are driving fundraising and re-igniting the interest in overseas M&A. In tandem, Abe’s government has approved a new and revised ‘third arrow’ (24 June 2014) aimed at promoting private sector investment, measures including:


Japanese stockmarkets
Market value owned by foreigners (%)

Source: Tokyo Stock Exchange

The plans are bullish and, perhaps most importantly, far more thorough in terms of their depth and breadth than anything that has been attempted before. However, thanks to the increasing presence of foreigners on the Japanese stock market, the need for reform is understood better than ever and their influence will be a helping hand for the implementation of Abenomics.

That Abe’s approval ratings remain so high despite tackling many contentious topics is testament to the fact that the public sees the need for such tough reforms and is willing to embrace the changes. If successful, the third arrow will create an entrepreneurial Japanese society with a more global and less insular vision for the future, which in turn, will continue to drive cross-border M&A.

3 What are Japanese
investors buying?

Abenomics has reinvigorated the manufacturing sector and while Japanese appetite for European industrials assets has always been high - accounting for 58% of mid-market deals over the last decade, it rose to 71% in H1 2014.

European mid-market deals with a Japanese acquirer
(LTM to June 2014):


Japan’s large infrastructure assets (airports, toll-roads, etc.) are still, for the most part, government-owned, low profit-margin businesses. Abenomics is encouraging their privatisation, with the goal of transforming them into leaner, more profitable businesses. Bringing foreign know-how into Japan via M&A will play an essential part in effecting the third arrow’s reform and, as a result, we would expect

to see an increase in infrastructure M&A activity in Japan going forward. The origins of this trend are already starting to show, with three mid-market infrastructure deals having taken place since Abe’s appointment in 2012 - compared to only two in the previous decade - and many more in the pipeline.

Case Study

DC Advisory and Daiwa Securities advised Panasonic on the sale of its Wireless Network Business to Nokia.

Panasonic’s Wireless Network Business is a market leading manufacturer of 3G and LTE mobile telecommunication base station systems and related wireless equipment. Its customer base is predominantly comprised of Japanese mobile operators and the business’s annual sales are in excess of c.JPY20 billion.

Nokia is a global specialist in mobile broadband focused on the provision of network infrastructure software, hardware and services.

The agreement to transfer the business to Nokia was signed by both parties in October 2014.

The transaction illustrates how Japanese companies are re-assessing and making bold decisions in order to make themselves more competitive on a global scale.

in processes

  • Relative inexperience

    Japanese corporates are often unfamiliar with European processes and, due to both the frequency of internal re-shuffles and the breadth of the departments involved, a number of the M&A team are likely to be first-timers when it comes to transacting.

  • Consensus- led

    Japanese M&A processes usually involve participants from all departments and seniority levels, and sign off for each major decision may be required at a number of different levels behind the scenes. The project team may appear non-committal or slow to respond which can create the impression of a lack of interest. However, this is usually a result of extensive consultation and consensus building taking place behind closed doors.

  • Focus on minutiae

    Detailed commercial and operational analysis is sought before signalling even an indicative commitment and preparatory work may be undertaken far in advance of a process being launched. In addition, a lengthy list of confirmatory questions, many of which will seem insignificant or irrelevant, is standard practice during the due diligence process.

  • Aim for management retention

    Japanese acquirers understand that cultural differences and local market knowledge make existing management teams the best people to manage the overseas target. Retaining the senior team and allowing a degree of local autonomy are usually the ideal solution.

European inbound M&A by quarter (volume of transactions)

1The changing

The US has always been the largest inbound acquirer of European assets close economic links and - particularly within the UK - fewer cultural and linguistic barriers have helped to drive this. An understanding that growth, international expansion and synergies have also kept them firmly at the top of the international acquirers list.

Notably, however, the four quarters to end of June 2014 saw the highest ever inbound mid-market deal volumes from the US over a 12 month period. It was also the first time that four successive quarters had reached 40+ transactions, indicating that the volumes are stabilising in the low-to-mid forties.

A shift in US buyers’ attitudes regarding the perceived stability in target regions could be driving this increase. Emerging market economies such as Brazil, Russia, India and China, whose GDP forecasts were so compelling in 2010, have now slowed and geopolitical turmoil in closely linked territories (Brazil / Ukraine / North Africa) is deterring investors and muddying the outlook.

The fear of the unknown in these territories makes the Eurozone appear a surer bet. Risk-averse investors may prefer a higher certainty of lower returns over potentially more profitable, but speculative, opportunities.

All BRIC nations’ GDP forecasts have been revised down:

And mid-market investment from the US into BRIC nations has decreased
(volume of deals):

Additionally, European assets are often subject to industry regulation and more likely to be legally sound than companies in less developed markets, making them appealing for US acquirers; the possibility of having to navigate a foreign country’s complex legal system in an alien language is understandably a deterrent.

2 What are US
investors buying?

The Industrials sector accounts for the largest percentage of deals as acquirers continue to seek out products they can sell globally and access to international markets (e.g. Stryker Corporation / Berchtold and Koch Industries / Flint Group). The TMT sector has

European mid-market deals with a US acquirer
(LTM to June 2014):

long held second place as the West Coast's global software providers seek out digital technologies to enhance their own existing platforms. Sectors such as Services and Leisure & Retail whose products and services are typically more localised or brand-reliant have less of a cross-border rationale.

Case Study

DC Advisory advised the shareholder of BERCHTOLD Holding AG on the sale of 100% of its share capital to US-listed Stryker Corporation.

BERCHTOLD is a family-run business established over 90 years ago which provides customer-centric healthcare equipment for the modern operating room. It manufactures and distributes operating room lights, tables and power booms intended to maximise efficiency and safety in hospital operating rooms and ICUs globally. The company employs c.400 people.

Stryker is a leading global provider of innovative medical technologies including reconstructive, medical and surgical, neurotechnology and spine products. The company is headquartered in Michigan and employs c. 25,000 people.

The acquisition allowed Stryker to incorporate BERCHTOLD’s unique market-leading German technologies with Stryker Endoscopy’s existing operating room equipment portfolio and to create a comprehensive, quality-focused offering which can be rolled out across Stryker's global customer-base.

in processes

  • Experienced

    As prolific and long-standing acquirers of European businesses, US buyers naturally have an advantage over regions with less experience. Many larger US-headquartered consolidators have an in-house M&A team whose primary responsibility is to seek out suitable acquisition targets and as such, they have become adept at transacting.

  • Focused on financials

    Traditionally the initial focus for US acquirers has been financial metrics such as profits and gross margins, with strategic rationale and product alignment becoming a consideration after financial performance is substantiated. However, US buyers are beginning to take a longer term view, focusing on product synergies earlier in the process or in tandem with the financials.

  • Fast movers

    Many US corporates came out of the recession as leaner, higher-margin businesses, having derisked their balance sheets and streamlined operations. These businesses now have substantial cash reserves, coupled with some of the most buoyant and liquid debt markets the US has ever seen, and can afford to be bullish in auctions, paying a premium and moving quickly for a business where the strategic fit is sufficiently strong.

  • Cautious

    Due to the litigious nature of the US, a red flag such as exposure to environmental hazards (e.g. asbestos) or links to questionable or politically sensitive areas (e.g. countries in conflict) can immediately count them out of a process where bidders from other territories may not be deterred.