A fledgling industry
Mergers & Acquisitions are still new in China. Although 115 companies are licensed to consult on and conduct M&A operations, only 21 of these were profitable in 2003, according to the industry regulator China Securities Regulatory Commission (CSRC). Furthermore only nine of these licensed advisory firms generated fee incomes of more than Rmb10m in 2003 - up from just six in 2002.

Yet the industry is growing. China's M&A activities continued to increase in 2004, both for domestic and cross-border transactions. In the year up to mid-October, there were 821 mainland M&A deals worth a total of US$42.2bn. This represents a very healthy 44% increase on the full-year figure for 2003. This is far higher than Hong Kong's M&A volume of only US$9bn - down fifteen percent over the same period in 2003.

What is fuelling industry growth? Growing interest stems largely from increasing involvement by foreign players through acquisitions, particularly in industries which are going through phased consolidation and liberalisation - notably financial services, pharmaceuticals, and logistics. HSBC, for instance, has acquired a stake in the Bank of Communications; and US brewing giant Anheuser Busch (AB), and other global beer makers, have bought into mainland brewers. AB's successful bid against South African rival SAB Miller for a majority stake in Harbin Brewery was significant as the first high-profile bid for a local company contested by two foreign firms. Further inbound investments in these previously restricted industries are inevitable in 2005.

M&A is not just one-way. Mainland Chinese companies are also gaining traction with cross-border acquisitions as home-grown conglomerates look to expand on to the international stage. According to the CSRC, as of October this year Chinese firms had been involved in 43 overseas M&A deals with an aggregate value of US$1.93bn. Most of these deals have been in sectors where Chinese demand is at its most intense: metals, mining, and energy.

With increasingly robust economic growth forecast for 2005-06, China's appetite for overseas acquisitions will increase and diversify into new sectors. This trend is illustrated by the acquisition by Shanghai Automotive Industrial Corporation (SAIC) of ailing South Korean auto manufacturer Ssangyong Motors, making SAIC the first mainland carmaker to assume control of a foreign firm. The central government, anxious to nurture the emergence of domestic market leaders with the clout to take on international competitors in the global marketplace, will encourage further outbound M&A activity.

A whole generation of domestic players has emerged with an increasingly impressive flair for brokering substantial deals in a range of sectors.

China's M&A players
So who is engineering the big M&A deals? Think of M&A in China, and the big names usually come to mind. International players such as Morgan Stanley, Goldman Sachs, and JP Morgan have established a reputation for engineering huge deals in the fast-expanding mainland market, with billion-dollar deals no longer unusual.

Yet behind these global players, a whole generation of domestic players has emerged with an increasingly impressive flair for brokering substantial deals in a range of sectors. Many are securities firms with growing M&A departments.

Guotai Jun'an Securities Co Ltd is one such company. Formed through a merger in 1999 Guotai Jun'an is one of China's largest securities firms with nearly 4,000 employees, several subsidiaries, and numerous branch offices scattered across the country. The company has net assets of Rmb165m (US$19.9m), putting it top of China's securities dealers in terms of asset value. Guotai Jun'an has the largest M&A division of any of China's securities firms.

Since 2003 Guotai Jun'an has completed a number of significant M&A deals, including Grandtour's acquisition of Hualin Tire (600182 SH), the disposal of Guangdong Nuclear Power's assets, and Dongfeng Automobile Co's acquisition of Zhengzhou Nissan earlier this year. Guotai Jun'an has entered a number of international partnerships with global players, including Allianz, Goldman Sachs, and Morgan Stanley.

Shenyin & Wanguo, another securities firm with M&A operations, was set up over 12 years ago. Today, the company has a registered capital of Rmb4.2bn and a network of more than more than 140 branches in over 40 mainland cities. In June 2003 Shenyin & Wanguo was designated by UBS AG, the first QFII (qualified foreign institutional investor) in China, as its domestic broker. In October 2003 Shenyin & Wanguo was nominated China's Best Broker by Asiamoney magazine.

Small is beautiful: the M&A boutique
Although China's main securities firms have been involved in M&A for several years this has just been one area of operation alongside their other - often more lucrative - business. Yet a handful of M&A consultancies in China are boutique operators focusing exclusively on domestic M&A deals.

These companies - which include players such as HollyHigh International Capital, Real Life and China M&A Management Holdings – claim that their dedicated business model enables them to gain a greater knowledge of the marketplace, and therefore to offer a better service. Of these HollyHigh is a pioneer in the industry and by far the largest dedicated operator in domestic and cross-border M&As.

Founded by Chen Mingjian in late 1997 with equity of just Rmb100,000, HollyHigh got off to a flying start, registering 100% revenue growth in the first five years of its existence. Growth then slowed to a still impressive 50% in 2003, and today the company's equity stands at Rmb30m. Today HollyHigh employs over 70 people, and has its headquarters in Beijing, with an office in Shanghai. Over the past seven years HollyHigh has completed transactions with an aggregate transaction value of over Rmb41bn. And in the first ten months of 2004 the value of the company's M&A deals climbed 44% over the full-year results for 2003.

Small but focused
HollyHigh's client base has grown fast, totalling over 70 companies, or roughly 5% of all China's locally-listed companies. The company's strength lies in its ability to service both state-owned enterprises (SOEs) and private companies. HollyHigh's stakeholders include Teda Group, one of the country's largest SOEs, which holds 61.4% in the firm. HollyHigh directors hold the remaining shares.

How does HollyHigh differentiate itself from the larger securities companies with their greater resources? Chen believes that the company's ability to focus solely on M&A has given it a head start. "We have created a lot of firsts in the M&A market in mainland China - for example, our new SOE and private joint venture in April of this year," says Chen, referring to the merger of Tianjin Teda with Wantong, a major local property firm. Chen believes that this union between an SOE and a private enterprise represents a milestone in mainland China's M&A development.

Prising open the market
Back in 2000 the CSRC began to develop a regulatory framework for the intermediaries engaged in M&A advisory services. One of its first steps was to implement a licensing system to monitor the quality of this service, an exercise which led to the first batch of licences being issued to over 100 firms, many of them the M&A divisions of securities firms.

In 2002 the CSRC further developed this regulatory framework to introduce more M&A consultancies into the market, hoping to spur interest in the industry. But with many securities firms suffering in the market, and a greater need emerging to clarify the role of dedicated M&A advisory companies, the commission is now expected to introduce more stringent regulatory requirements in 2005 to bring greater transparency to the industry. Chen Mingjian believes that the Chinese government is keen to grow a handful of important players into market leaders with the scale and expertise to rival - or partner - foreign players. He sees HollyHigh as a strong candidate for such a position.

Will the merger makers be merged?
China's securities firms have been having a tough couple of years, with no end yet in sight. Xi Shuguang, editor-in-chief of SEEC, the largest financial media group in China, and owner of Caijing, the country's leading financial publication, believes this will prompt securities firms to step up their M&A operations in a bid to improve overall company business. Yet, burdened by loss-making divisions, securities companies may not be attractive to international investors.

By contrast Chen Mingjian believes that HollyHigh's dedicated business gives it an enduring advantage over securities firms even in the face of renewed competition, and makes it a contender for partnership with international M&A players.

Overall the market certainly seems set to grow. With the CSRC continuing to ease regulatory restrictions, and economic growth on a steady course, exponential growth in China's M&A sector looks assured. Meanwhile rarely does a week pass without a foreign financial institution knocking on HollyHigh's door. China's M&A boutiques may indeed be in the right place at the right time.