Amid an M&A Market Rebound, Who Will Reign as the King of M&A in 2025?

TMTPOST -- The latest wave of mergers and acquisitions (M&A) is just beginning, and not everyone will be able to reap its rewards.

On January 1, 2025, DCP Capital kicked off the year with a major acquisition, purchasing a 78.7% stake in Sun Art Retail Group (parent company of RT-Mart) from Alibaba for about HK$13.138 billion. This marked a strong start to the 2025 M&A market.

By January 7, 2025, two more private equity firms had secured controlling or major shareholder positions in listed companies. Qiming Venture Partners acquired a 26.10% controlling stake in Tianmai Technology for RMB 452 million, while the founder of Plum Ventures became the second-largest shareholder of Mengjie Shares with an investment of RMB 231 million.

On January 14, 2025, China Renaissance facilitated another significant deal, with Beisen Holdings (9669.HK) planning to acquire 100% of Kuxuan (Beijing) Technology Co., Ltd. for RMB 180 million in cash. Additionally, Ant Group finalized its acquisition of Haodf Online.

These transactions are just a snapshot of the ongoing M&A wave in early January.

In recent years, the IPO window has narrowed, and VC/PE exits have slowed dramatically. As a result, most investment institutions have intensified their efforts to explore non-IPO exit strategies. Supported by favorable policies, people are pinning high expectations on M&A activities.

"Currently, 70% of companies are considering selling, and 20% have already started the process," shared a prominent M&A expert recently.

Data indicates a resurgence in the M&A market. According to CVSource, 6,364 M&A deals were disclosed in 2024, a 1.65% year-on-year increase. Among these, the value of 4,755 deals disclosed totaled $252.431 billion, up 10.85% from the previous year. Wind data shows that 2,422 M&A transactions involved listed companies as buyers in 2024, a 31.13% increase from 2023.

Differences from the Previous 2014-2015 M&A Wave

The previous M&A wave aimed to improve the efficiency and competitiveness of state-owned enterprises (SOEs), promote mixed-ownership reforms, and address overcapacity issues. In contrast, the current wave focuses on achieving the "three concentrations" of state capital, particularly in strategic emerging industries.

For example, traditional industries are optimizing competition and upgrading through M&A, while emerging industries are strengthening supply chains and enhancing key technologies. This wave emphasizes industrial integration, reducing short-term profit-seeking, cross-industry ventures, and "shell preservation" practices.

The previous wave of M&As concentrated on industries such as steel, coal, and electricity, where there was an urgent need to absorb overcapacity. This round of M&As focuses more on technological innovation sectors, such as semiconductors, biomedicine, information technology, and advanced manufacturing.

In the view of Niu Junling, a partner at Hua Capital, the reasons for the M&A boom are both active and passive. On the active side, domestic semiconductor companies still lag behind their international counterparts. The government hopes that strong mergers will cultivate globally competitive enterprises.

Meanwhile, entrepreneurs of listed companies are also willing to use horizontal and vertical mergers to raise the technical barriers and strengthen their competitive moat. Additionally, investment institutions are becoming more active in the M&A field, with M&A funds emerging.

On the passive side, some low-growth sectors are facing internal competition, and companies are under cash flow pressure, forcing them to seek survival solutions.

"M&A is just the first step; it only completes about 30% of the transaction. The remaining 70% is about how to integrate post-merger," Niu said.

M&A is considered a more difficult transaction than equity investment. Firstly, valuation is a very direct issue. M&A transactions involve many stakeholders, such as buyers, sellers, investors, and sometimes even state-owned assets, Liu explained.

It’s hard to reach a consensus on the valuation system in a short period, as everyone’s opinions differ. Entrepreneurs in the primary market tend to have higher valuation expectations, while the Securities Regulatory Commission has upper limits on swap prices, making it difficult to find a common ground. Whether in the secondary market or primary market, it’s challenging to form a valuation system that is acceptable to both parties, Niu added.

Valuation also involves managing expectations. He Mu, director at China Renaissance and head of its M&A group, suggests that sellers need to accept the harsh reality of temporarily abandoning the financing valuation mindset and embrace a valuation logic restructured by the current market, using comparable companies, transactions, replacement costs, and other metrics. Additionally, it’s important to accept that we are currently in a buyer's market, where the buyer holds a relatively stronger position in valuation negotiations. To break these boundaries, the best way is to introduce competition at the right time.

Secondly, shareholder distribution is a sharp and unavoidable issue in M&A transactions. In many cases, shareholder distribution is a zero-sum game, exacerbating conflicts between shareholders. In many of today’s transactions, investors in target companies may face the dilemma of exiting with losses. How to get everyone to accept this reality and reach a distribution plan that is broadly acceptable is critical.

In most cases, shareholder distribution doesn’t have a one-size-fits-all rule; it needs to be renegotiated. Reaching a commonly agreeable logic and achieving business consensus is extremely difficult, often more so than negotiating valuation with the buyer. Besides technical methods, negotiation strategies and communication skills play a decisive role, He further explained.

The mindset of Chinese enterprises and entrepreneurs is quietly changing. Recently, China Renaissance completed the Beisen Holdings acquisition of Kuxuan, which was a comprehensive consideration of multiple distribution logic dimensions, ultimately achieving a flexible resolution through negotiations with shareholders and combining cash and stock to handle the exit of the original investors in Kuxuan.

Finally, post-merger integration is a complex issue. It involves many aspects, such as team culture integration and incentive schemes, building and operating new organizational systems, complementing or merging product lines, managing new supply chain systems, and handling new customer systems.

The main part of returns comes from post-merger effective integration and value enhancement through business empowerment, while simply relying on valuation multiples for returns has a minimal impact. Therefore, whether an M&A fund can truly empower the business and enhance its value reflects its core competitive strength, said Li Lei, the general manager of CDH Investment.

Xin Yuesheng, the managing partner of Starrysea Capital, expressed similar views, saying that A-shares listed companies may lack the ability to directly become 'move-in-ready' premium assets, thus requiring external forces to 'renovate' them. M&A funds can play a key role in 'renovating' these assets and transforming them into high-quality asset pools.

Therefore, investment institutions or M&A funds with post-investment management capabilities have a competitive advantage in the M&A era.

For example, Fengnian Capital acquired more than 70% of Dali Cape’s shares for RMB 317 million in 2017, becoming its controlling shareholder. Afterward, Fengnian Capital sent executives to rework the company’s strategy and upgraded sales, production, and R&D processes. Subsequently, Dali Cape doubled its revenue and profit and successfully listed. This post-investment empowerment system is part of their original HMSC industrial empowerment model tailored to local businesses.

"Your first 100 days post-investment are crucial. We invented the '100-day plan.' It’s not just about the numbers; it’s also about people. We conduct third-party employee surveys worldwide to identify ten areas for improvement. Whether or not the team changes, we focus on solving two or three critical issues quickly, which boosts the morale and image of the new shareholders in the company," said Wang Chen of KKR.

Overall, M&A and restructuring involve both "principles" and "techniques." The "principle" aspect should always focus on improving the quality of listed companies, enhancing operational efficiency and profitability, rather than using restructuring as an arbitrage opportunity. The "technique" involves thorough evaluation before the deal, designing the transaction plan during the deal, and effective integration and value creation after the deal, with each step being crucial to the success of the M&A transaction.

New M&A TrendsIn 2024, driven by key factors, listed companies' M&A activities are showing new trends, mainly focusing on cross-industry M&A, semiconductor acquisitions, IPOs shifting to M&As, the rise of M&A funds, and state-owned enterprises acquiring listed companies.

In the past, M&A was mainly focused on horizontal mergers within the same industry or cross-border mergers. However, in 2024, cross-industry M&A has seen an explosive growth.

In particular, many companies in traditional industries, like real estate, automotive, energy, and finance, are now pursuing M&As in industries such as AI, biomedicine, and other emerging technologies. These transactions are seen as a way to diversify investments and build synergies in new business sectors.

Semiconductors have become the most active field for M&As. The industry has been impacted by global supply chain disruptions, trade wars, and technological competition. As a result, Chinese companies are rapidly acquiring semiconductor firms globally to strengthen their position in key technologies and diversify their supply chains.

The tightening IPO environment has led many companies to consider M&As as an alternative exit strategy. As IPOs become more challenging, some startups prefer to seek mergers or acquisitions by larger companies, which can help them quickly gain market access and secure growth.

The surge of M&A activity has also driven the rise of specialized M&A funds. These funds focus on mergers and acquisitions within specific sectors and work to optimize transactions and integrations. Their success is attributed to their deep expertise in M&A management and post-investment strategies.

As part of government-led reforms, state-owned enterprises are increasingly acquiring or merging with listed companies to promote mixed ownership and optimize capital structures. These acquisitions are aimed at strengthening national champions in strategic industries such as energy, technology, and infrastructure.

Looking ahead, the key to M&A success lies in creating real synergies and enhancing the long-term competitiveness of the merged entities. The biggest challenge remains post-merger integration, where human resources, corporate culture, and organizational systems need to be harmonized. For many enterprises, this is the final hurdle to overcoming, and the role of experienced M&A teams will be more crucial than ever.