As the year 2024 approaches, the A-share market in China has witnessed a remarkable resurgence in merger and acquisition (M&A) activity, characterized by "snake swallow elephant" transactionsThis term refers to a situation where a smaller company acquires a significantly larger one, demonstrating the ambition of firms striving to expand rapidly and enhance their competitive edge in the market.
On the evening of December 22, Haier Biotech (688139.SH), with a market capitalization of 11.2 billion yuan, announced its intention to absorb and merge with Shanghai Laisi (002252.SZ), a company valued at approximately 47.9 billion yuanThe very next morning, Hongchuang Holdings (002379.SZ) revealed its plan to acquire 100% equity in Shandong Hongtuo Industrial Co., which boasts a staggering net asset value of 47.2 billion yuanThese developments are not isolated incidents; rather, they reflect a broader trend of increased M&A activity in China's capital markets.
According to experts, this phenomenon underscores the vibrant nature of M&A activity and the eagerness of corporations to amplify their size and improve their competitiveness
Tian Lihui, Director of the Financial Development Research Institute at Nankai University, noted that while “snake swallow elephant” transactions can substantially grow companies, they also carry considerable risksSuch risks include issues related to finance, regulation, target companies, integration processes, and goodwill, necessitating a cautious approach from acquiring firms.
This year has marked a significant shift in the M&A landscape, with over 130 listed companies announcing major restructuring events since the introduction of the "Six M&A Guidelines" on September 24. This figure represents a staggering increase of over 200% year-on-year, with 52 companies making their first public disclosures during this periodFurthermore, the restructuring index compiled by Wind Data has demonstrated a remarkable increase of 54.33%.
Industry insiders suggest that the current wave of mergers and acquisitions reflects a preliminary consensus between buyers and sellers, with a burgeoning number of companies seeking to engage in transactions
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Nonetheless, practical applications remain relatively rational, as a substantial number of counterparts have yet to finalize M&A dealsThe question arises: how sustainable is this wave of M&A activity?
Guotai Junan Securities has stated that what we are currently witnessing is a new M&A cycleExperts anticipate that this wave of restructuring has only just begun and is likely to continue for an extended period, possibly extending to three yearsThey emphasize that this M&A enthusiasm is more reflective of a cyclical trend than a fleeting phenomenon.
Indeed, "snake swallow elephant" transactions have drawn significant attention within the year’s M&A surgeFor instance, the announcement made late on December 22 regarding Haier Biotech's intention to acquire Shanghai Laisi marked a pivotal moment in the marketThe acquisition is structured such that Haier Biotech will issue A-shares to all shareholders of Shanghai Laisi, effectively conducting a share-swap merger along with fundraising through additional A-share issuance
Consequently, both stocks were suspended from trading the next day.
Similarly, Hongchuang Holdings, in its January announcement, revealed plans to raise capital by issuing shares to purchase 100% equity in Hongtuo Industrial, a subsidiary of Weiqiao Aluminum that is wholly owned by Shandong Hongqiao, Hongchuang’s parent companyAt the close of trading on December 20, Hongchuang Holdings had a total market capitalization of about 10.2 billion yuan, a stark contrast to Hongtuo's audited net asset value of approximately 47.2 billion yuan.
In October, another significant transaction came to light when Guangzhi Technology (300489.SZ) expressed interest in acquiring a 100% stake in Xian Dao Electronics Technology CoThe announcement highlighted a deal potentially involving share issuance along with cash payments to Xian Dao’s shareholders while simultaneously raising funds from specific institutional investors
With Xian Dao estimated to hold a valuation of 21 billion yuan according to the Hurun Global Unicorn List, this deal underscores the financial imbalances often present in such transactions, as Guangzhi’s market value before suspension stood at a mere 3.1 billion yuan.
It is imperative to note that such "snake swallow elephant" mergers are often anticipated to constitute related party transactions, reflecting an underlying theme of thinner lines between various company interests in the sector.
While companies aim for external expansion, Tian Lihui cautions about the inherent risks involvedThe acquiring party frequently resorts to financial leveraging to finance the acquisition, which can lead to significant debt obligations in the following yearsShould the integration yield results below expectations, fulfilling these debt obligations through operational profits can become an arduous task, leading to substantial financial strains.
Moreover, he identifies a tendency among acquirers to approach such mergers with premium valuations, potentially leading to inflated target company valuations and an increase in goodwill
Should the acquired entity fail to meet its performance commitments, the acquiring company could face considerable risks associated with goodwill impairment.
The current fervor surrounding M&A activity is heavily influenced by regulatory changes aimed at streamlining the IPO process while also opening up diverse exit channels for investorsAmidst this backdrop, mergers and acquisitions have emerged as a focal point for companies seeking strong asset integrations and opportunities for market evolution.
This year has witnessed a slew of M&A policies being released by the China Securities Regulatory Commission (CSRC). For example, the "Eight Provisions for the Sci-Tech Innovation Board" issued on June 19 promoted more robust support for M&A transactions, while the “Six M&A Guidelines” introduced on September 24 offered clearer directives for listed companies pursuing industrial upgrades and consolidation strategies.
The increasing support for M&A policies has stimulated a resurgence in the M&A market
According to Wind data, from September 24 to December 23, 138 listed companies announced significant restructuring initiatives, with 52 companies making their disclosures for the first time—a stark increase compared to just 38 during the same period last year, with only two first-time disclosures.
Industry professionals are cautiously optimistic about the current M&A climateA medium-sized investment banker expressed that although there is considerable activity in promoting transactions, M&A processes remain complex and require careful navigation, resulting in prudent approaches among parties involvedMeanwhile, representatives from larger brokerage firms pointed out that while policy and facilitation agents exhibit significant enthusiasm, actual companies are being more measured in their approachesThis cautious stance stems from the lessons learned from previous M&A waves, particularly around 2015, which left some companies with negative experiences.
Today’s M&A environment in the A-share market increasingly emphasizes industrial perspectives and synergies, featuring core transaction logics such as “strengthening supply chains and extending industry chains.” Concurrently, with the tightening of IPO channels, sellers are altering their expectations—some companies that initially sought IPO financing are now shifting their focus towards the M&A market.
Guotai Junan identified four primary areas to watch in the M&A arena: firstly, acquisitions that focus on emerging sectors, particularly semiconductors and niche industries marked by choke points; secondly, consolidations within cyclical industries such as finance and photovoltaics to optimize asset allocations; thirdly, reforms within state-owned enterprises (SOEs), focusing on resource reconfigurations; and finally, scrutinizing the reverse mixed ownership reforms affecting private enterprises, where strategic entry of SOEs enhances resilience against uncertainties.
Despite the rising interest in M&A, challenges remain
As highlighted by Guotai Junan, one of the major bottlenecks is achieving consensus on transaction pricingThis difficulty arises from the substantial valuations facing potential targets due to a history of cessation of IPO activities, notably post the “827 Policy,” which affected many companies across technology sectorsThus, it is critical for sellers to navigate the perceived differences between IPO and M&A valuations.
Moreover, established projects typically undergo myriad funding rounds, resulting in varying investor backgrounds and entry prices that complicate price negotiations, especially in the current buyer’s marketTransaction diligence difficulties, structural complexities, and the unpredictability of regulatory approvals further complicate the M&A landscape.
The proliferation of the “Six M&A Guidelines” has not prevented some listed companies from terminating ongoing restructuring plans due to unresolved core terms, competitive conflicts, compliance issues, or other complexities.
As transaction examples accumulate, the industry anticipates an uptick in discontinued or failed agreements as well