According to the State
Council's requirements, the Ministry of Industry and Information
Technology (MIIT) and several other ministries, the People's Bank of
China (PBC), as well as taxation and financial authorities have set up
a working group to coordinate M&As for various Chinese companies.
To carry out M&As in key
industries, the MIIT will require local governments to report at least
one M&A by the end of October 2010, which means that in that month
there will be at least 30 M&As in China.
The Chinese Government's goal,
according to the State Council's announcement, is to deepen system
reform, improve the basic economic system, accelerate the state-owned
economy's layout and promote the development of the non-public economy
as well as small and medium-sized enterprises through M&As.
According to information from
the State-owned Assets Supervision and Administration Commission
(SASAC), after this round the number of state-owned enterprises (SOEs)
will be reduced from 123 to less than 100.
Why M&A?
According to figures from
industrial and commercial administrators, in 2008, there were more than
13 million companies in China. To optimize industrial structures and
maintain sound economic development, the Chinese Government in recent
years has reorganized some industries with excess capacities and low
concentrations, but has yielded few results. Some industries still face
such problems as redundant construction, low industrial concentration,
sluggish independent innovation and weak market competitiveness. The
State Council's announcement therefore requires corporate
reorganization and reform, structural and development upgrades, and an
enhanced capability to fend off international market risks.
It also said that merged or
acquired companies will adopt market-oriented operations under market
economy principles, make full use of the role of market mechanisms and
regulate administrative behaviors. Equal consultation will be given to
all companies vying for M&As. The government will not give
peremptory orders for M&A of certain companies.
Private and foreign
Private capital will be
encouraged in M&A deals involving SOEs. The announcement clarifies
that sectors traditionally off limits to private capital will be open
and that restrictions on shareholding proportions will be relaxed.
Private capital will also be encouraged to enter the infrastructure,
public utilities, financial service and social benefit-related sectors
as well as monopolized industries.
In the upsurge of M&A after
the shareholding system reform of SOEs in 1994, private capital
actively participated in the process. But because of strong
administrative intervention and local protectionism, the number of
major M&A cases carried out by private capital was small. Hence
private capital is not enthusiastic about participating in M&A.
The coal, oil, finance and
telecommunications sectors will also be open to private capital, and
M&As offer the most efficient way into these sectors.
As for foreign capital, the
announcement said the government will further improve regulations,
while maintaining state security, to make it easier for foreign
companies to invest and become involved in the M&A process.
An analytical report released
by China Orient Fund Management Co. Ltd. (Oriental Fund) said among the
six major industries where M&A is encouraged, the iron and steel,
cement and electrolytic aluminum sectors have excess capacity and a low
industrial concentration, and will require large amounts of capital.
This may be easy for foreign companies with deep pockets, but private
capital looking to participate should first consider their own
development and financial capacity before getting involved.
Fiscal support
The State Council's
announcement requires commercial banks to develop M&A credit
businesses in an active and sound manner, expand credit scales and fix
credit terms. General credit will be granted to companies after
M&As are complete, the announcement stated.
The decision also encourages
securities companies, asset management companies, equity investment
funds and industrial investment funds to participate in corporate
M&As and provide direct investment and other forms of financial
support. The Orient Fund's report said financing channels will be
increased for companies involved in M&A deals.
Support for qualified companies
to finance M&As will be conducted by issuing stocks, bonds and
convertible bonds, and encouraging listed companies to expand financing
channels for M&As through stocks, cash and other innovative payment
schemes.
Debt issues related to M&As
must be properly dealt with in accordance with related laws and
regulations. Asset management companies, venture capital companies,
equity investment funds and industrial investment funds will also be
encouraged to deal with debts of companies being merged.
Obstacles to tackle
A review of M&A cases in the past shows that local governments have resisted trans-regional M&As.
Local governments, the State
Council announcement stated, should abolish unfavorable measures toward
M&As, especially those that restrict companies based in other
regions from acquiring local companies. By straightening out the
relations among regions, governments at the local level can share the
benefits multiple M&As have to offer.
According to measures released
by the Ministry of Finance (MOF), the State Administration of Taxation
(SAT) and PBC in 2008, 25 percent of payable taxes by corporate
headquarters and branches should be allocated among the branches in
various localities in different proportions. This policy is being
considered to get to the root of trans-regional M&A problems, said
the Orient Fund report. As a result, even after a company has been
merged or acquired, it may still need to retain branches and
subsidiaries to realize any substantial profit.
Although the announcement did
not clarify the profit-sharing proportions among different regions, the
profits and tax revenues generated by the acquired companies may be
shared 50-50 by local governments of the acquiring and acquired
parties. However, the detailed sharing proportions will need to be
ironed out by related departments.
Departments involved
To implement the M&A work
as soon as possible, the State Council's announcement has created a
detailed division of responsibilities. Twelve departments so far have
been given oversight on policies related to taxes, financing and land
to coordinate the governments and companies in different regions.
The PBC and China Banking
Regulatory Commission will be responsible for encouraging commercial
banks to develop M&A credit businesses and support transnational
M&As. The Ministry of Commerce is responsible for the operations of
companies that need to be merged or acquired. The MIIT is responsible
for abolishing obstructions to M&As and relaxing market access for
private capital. Promoting market-oriented reform, implementing
preferential policies for M&As, supporting personnel-related issues
in SOEs, among other tasks, will be delegated to other ministries
(commissions) and regulatory bodies.
Feng Wei, an analyst with
Huatai United Securities Co. Ltd., said with assistance from the dozen
government departments, the M&A process would be accelerated within
the year.
TA_ by cementchina.net