M&A activity between China and US to increase in advertising, digital media sectors: Manatt

The Manatt report is based on 100 interviews with prominent American and Chinese corporate executives, investment bankers, and private equity practitioners surveyed in mainland China, Hong Kong, Macau and Taiwan.

The majority of respondents from both sides of the Pacific expect the uncertain US-China political relationship to significantly affect deal-making over the next 12 months. Even in this challenging environment, the aggregate value of US-Chinese transactions will show little sign of contracting, according to the report.

In 2012, Chinese companies purchased US entities worth US$11.1 billion over 17 deals. During the same period, US investors poured nearly $10 billion into 64 Chinese targets.

Prior to the January 2010 $80 million acquisition of US-based online gaming advertising network Mochi Media by China's Shanda Games, advertising and digital media deal-making between the US and China mostly went in one direction—American companies buying in China.

Shanda's long-term strategy of becoming a global player in the online gaming subsector has become a common goal shared by other Chinese companies. Subsequently in 2012, Dalian Wanda’s US$2.6 billion purchase of AMC Entertainment marked the second such deal.

While overall deals are expected to rise this year, they will differ widely in size and structure due to the challenges presented by each country's distinct cultural expectations around regulation and the exchange of information.

For US-based investors, over half of respondents said they would most likely consider smaller assets valued at $250 million or less, mainly to gain a foothold in the Chinese market, while 58 per cent are driven by gaining access to the world’s largest media consumer market by volume.

US firms will benefit from the low cost of content development in China, according to a media VP surveyed. In a Q4 2011 deal, Ogilvy & Mather Worldwide acquired a 49 per cent stake in the China-based marketing agency Nanjing Yindu for an undisclosed sum.

Since the deal, other Chinese content acquisitions involved assets owned by China National Radio by QVC and Digital Entertainment International by Wizzard Software.

Respondents based in China place social media and multimedia distribution houses among the top American subsectors for investment. This allows Chinese companies to fulfil their goals of expanding globally, according to a senior-level strategist with an agency in New York.

Chinese respondents are looking to make larger deals than their US counterparts, with 37 per cent expecting the $250 million to $500 million range to be most active. Chinese bidders are expected to take on controlling stakes as much as governments permit. Their aim is not to build shareholder value, but to get strategic gains such as technology and production standards to eventually bring back to China.

Still, some of them expressed trepidation about recent decisions by the US federal government to block certain acquisitions based on national security concerns. Many potential acquirers are hesitant in sectors like digital media, where products built around sophisticated data collection, data technology and privacy can be considered issues of national security.

Disclosure requirements are also roadblocks for Chinese companies, due to their preference toward keeping information confidential. US standards for disclosing sources of financing and long-term strategies seem unnecessarily high to the Chinese.

US-based investors face the problem of performing effective due diligence, stemming from the same concern. Accessing the required information to enter the intermediate stage of negotiations is often made difficult by unwilling Chinese business owners.

Even after that stage, China's own security review, conducted by the Ministry of Commerce, as well as regulations requiring local partners, will force the bulk of M&A activity to exclude controlling-stake acquisitions. Minority stakes and joint ventures are what are most likely to be approved, and what they have to settle for.

As a result, family-owned and smaller businesses in the advertising and digital-media industries in China will be most commonly targeted by American bidders, with the industry majors being state-owned and thus off the table for M&A.

Lindsay Conner, co-chair of Manatt's entertainment and media practice, said US investors will need to become more adept at navigating China's investment restrictions and addressing the motivations of Chinese investors. Conversely, Chinese buyers will need to better appreciate American security concerns and regulatory systems, Conner said.

One of the central themes that emerges from this report is the necessity for a transactional timeline that accommodates flexibility.