Hong Kong to remain attractive to M&A

The US-China tensions made HK particularly attractive to Chinese companies, report says.

Hong Kong followed suit with the global trend in merger and acquisition (M&A) activity in 2020, beginning with a slow start to the year, and then enjoying a slight rebound in the second half.

A report by the International Financial Review (IFLR) noted that Hong Kong was hit with several challenges as the COVID-19 pandemic raged, from logistical difficulties to geopolitical tensions. These have led to longer deal timetables and market uncertainty.

But as parts of the world slowly recovering from the pandemic, Simon Cooke, deputy managing partner for Asia of Latham & Watkins, says Hong Kong has the potential to become an M&A hub. Latham & Watkins were contributors to the IFLR report.

“As the world gradually emerges from Covid-19 pandemic, Hong Kong remains an attractive hub for investors and the firm continues to see a solid appetite for both Greater China and broader regional M&A deals in the market,” Cooke said in an interview with Hong Kong Business. 

“Despite a mild slowing of activity in the middle half of last year, both private and public M&A transactions rebounded towards the end of 2020 and this trend has largely continued in the first half of this year, driven partly by private equity funds which have significant amounts of dry powder to deploy on acquisition opportunities.”

Trade tensions between the US and China have made Hong Kong particularly attractive to Chinese companies that do not wish to deal with regulatory pressures from the US.

The legislation governing public takeovers in Hong Kong is the Code of Takeovers and Mergers; and is administered by the Securities and Futures Commission, Securities and Futures ordinance, and Listing Rules.

In 2020, a new legislation called the Limited Partnership Fund Ordinance enabled the formation of limited partnerships to be registered in Hong Kong, to attract private equity and venture capital funds.

“Hong Kong SAR’s merger control legislation currently only applies to M&A transactions that involve an undertaking that directly or indirectly holds a carrier license within the meaning of the Telecommunications Ordinance. The Competition Commission is thought to be reviewing the existing framework of its broader anti-competition regime; however, whether the merger regime will expand to other sectors remains to be seen,” the IFLR report read.

It added that Hong Kong’s legislation on M&A transactions is still based on English law, as opposed to Mainland China’s civil law regime.

If anything made its mark on how M&A deals were executed last year, it was the pandemic. Cooke noted that it became difficult to conduct on-the-ground due diligence, with potential buyers wary about the impact COVID-19 would have on their target businesses.

Cooke added that certain sectors, like logistics, data centres, and healthcare, have benefited from the disruption surrounding the pandemic. Coupled with the scarcity in high-quality assets, valuation expectations of sellers have remained high and auctions competitive.

“The strength of the equity capital markets in Hong Kong and the US has also provided a genuine exit alternative for many sellers, further supporting the high valuations in the market. On a practical level, the global experiment in remote working has also opened up opportunities for new technologies to enhance the deal-making process, with electronic signing and online management platforms now considered more the norm than the exception,” Cooke said.

Investors are still cautious as the pandemic continues, but Hong Kong’s vaccination progress and measures to keep the pandemic at bay helps manage jitters.

“While investors will remain cautious amidst ongoing market uncertainty, the firm sees a continuing strong pipeline of M&A deal flow in Hong Kong in the second half of 2021 as the gradual economic recovery and roll out of worldwide vaccination programmes encourages businesses to reassess their position,” Cooke said.

Hong Kong has been strictly implementing vaccinations and quarantine as the pandemic continues to hit nearby nations.

Whilst it has, along with Mainland China, managed to contain the pandemic so far, the world as a whole has yet to recover from the volatility caused by COVID-19.

China 2020 M&A growth to remain domestic in 2021

According to a PWC report, M&As for China as a whole increased by 30% to US$733.8b in 2020, the highest since 2016.

Deal values rose by 11%, driven by private equity M&As, offset by a decrease in cross-border deals, which became challenging during the pandemic.

According to PwC, there were 93 mega-deals in 2020, higher than the 80 recorded the year previous.

“China M&A is likely to continue to have a domestic theme in 2021, supported by SOE reform and the ‘Dual Circulation’ and ‘Industrial Upgrade’ programmes. We expect some increase in M&A volumes overall in 2021, largely driven by domestic and private equity activities,” said PwC Asia Pacific deals leader, David Brown.

ERRATUM: IFLR's Mergers & Acquisitions report has been misattributed as a Latham & Watkins report in the earlier version of this article. We apologize for this error.