In the first half of 2019, the mergers and acquisitions and reorganization of the listed companies on the Shanghai Stock Exchange (SSE) showed a new look and pattern. The SSE-listed companies, among which there are a large number of high-quality enterprises, have made full use of market-based means to carry out mergers and acquisitions and reorganization by focusing on the industrial and entity assets, with reform and innovation strengthened, vitality stimulated, resilience enhanced and quality improved. In the first half of the year, the SSE-listed companies disclosed more than 470 cases of M&A and reorganization, which involve a total amount of RMB350 billion. In terms of major asset restructuring, the SSE-listed companies disclosed a total of 45 plans, involving a total amount of nearly RMB134 billion. A total of 25 plans for reorganization were completed, involving a total amount of nearly RMB100 billion. Overall, the M&A and reorganization took on a new look with the function of supporting the real economy being strengthened.
I. Industry M&A was still the mainstream, with the focus on improving the quality of listed companies.
In the first half of 2019, the M&A and reorganization on the SSE continued to center around the main line of the real economy, and industry mergers and acquisitions remained the mainstream. The reorganization logic based on the integration in the same industry and of upstream and downstream companies became the main theme in the market, and the cases of blind and me-too cross-border reorganization prevailing in the past few years were further reduced. According to the data, in the major asset restructuring on the SSE in the first half of the year, the transaction scale of industry mergers and acquisitions exceeded RMB90 billion, much larger than that of cross-border reorganization. From the perspective of the industry, the industries with active mergers and acquisitions mainly included communication and information technology, basic chemicals, medicine, nonferrous metals, and national defense and military, which are characterized by significant scale effect. Specifically, linking up the upstream and downstream, acquiring the companies in the same industry and transforming to new technologies are important driving forces for the M&A and reorganization on the SSE. For example, Dongfeng Electronic Technology Co., Ltd. realized the overall listing of the group's parts business through absorption and merger; CITIC Securities Co., Ltd. acquired Guangzhou Securities to improve the regional distribution of business; Sichuan Minjiang Hydropower Co., Ltd. was transformed into a “Cloud + Internet” business platform of State Grid Information & Telecommunication Group Co., Ltd. through asset injection. The practice in recent years showed that the mergers and acquisitions based on the original intention of industry integration tended to perform better in the follow-up performance commitment period. According to the 2018 annual reports, a higher proportion of the companies focusing on industry mergers and acquisitions realized the performance commitments.
II. The reform of state-owned enterprises was further advanced, and the leading company effect of integrating platforms in the same industry was highlighted.
Against the background of the continuous deepening of the state-owned enterprise reform and supply-side reform, the SSE-listed state-owned enterprises vigorously integrated advantageous production capacity through mergers and acquisitions, with their governance structures and asset quality further optimized, creating a number of listed platforms highlighted by the leading position. In the first half of 2019, the SSE-listed state-owned enterprises reported a total of 225 M&A transactions, with the transaction amount up to about RMB240 billion, which was at the same level on a year-on-year basis on the whole. Specifically, 24 major assets restructuring plans were disclosed, involving a transaction amount of nearly RMB100 billion; 11 major assets restructuring plans were completed, involving a transaction amount of RMB66 billion. In the first half of the year, the role of mergers and acquisitions in boosting the reform of state-owned enterprises was brought into further play: first of all, in terms of the market-oriented debt-to-equity swaps, the listed companies acquired the debt-to-equity assets through the issuance of shares, providing a market-oriented solution for solidly promoting the supply-side structural reforms. For example, the debt-to-equity swap plans of China Railway Group Limited, Aluminum Corporation of China Limited, Shanghai Electric Power Company Limited and other companies were implemented successively in the first half of the year. Secondly, in the area of the mixed ownership reform of state-owned enterprises, new strategic investors were introduced at the group level to fuel the reform of state-owned enterprises. For example, in the mixed ownership reform Chongqing Department Store Co., Ltd. brought in diversified strategic investments, which injected new impetus into revitalizing the state-owned enterprise assets. Thirdly, asset integration and securitization were advanced simultaneously in an efficient way, as the listing platforms of state-owned enterprises rationally integrated and allocated resources through mergers and acquisitions, and the companies’ main businesses were more underscored and highlighted. For example, CSSC Science & Technology Co., Ltd. acquired the assets of hydroacoustic detection equipment to further improve the development pattern characterized by high-tech and emerging industry; by integrating the similar assets, China CSSC Holdings Limited became the listing platform for the CSSC's shipping and offshore businesses, and its leading position was much more outstanding.
III. Private companies saw their assets lifted to a new level, focusing more on the main businesses in overseas mergers and acquisitions.
In the first half of the year, the private enterprises were active in achieving industry upgrading through mergers and acquisitions and fostering new drivers for development. The SSE-listed private companies conducted a total of 246 M&A transactions with a total transaction amount of approximately RMB110 billion. Specifically, 21 major assets restructuring plans were disclosed, involving an amount of nearly RMB34 billion, and 14 of the plans were completed, amounting to RMB33 billion. M&A and reorganization played an increasingly important role in helping private enterprises accelerate transformation and upgrading, resist risk challenges and achieve high-quality development. In the same period, overseas mergers and acquisitions were also highly characterized by the focus on industry upgrading, as quite a few companies took the initiative to deepen their international arrangements and vigorously participated in international competition. For example, Ningbo Boway Alloy Material Co., Ltd. acquired an alloy material manufacturer to expand the precision filament business by highly focusing on technological innovation; Ningbo Jifeng Auto Parts Co., Ltd. acquired a German high-end auto parts company to increase its international presence; China Molybdenum Co., Ltd. acquired a global non-ferrous metal trader to try to be an important participant in the international mining trade. In addition, mergers and acquisitions also played a significant role in defusing the risks of equity pledges of listed companies. In the first half of the year, through the market-based modes of M&A and reorganization, such as partial equity transfer, change of control rights, and asset disposal or injection, the SSE market saw the liquidity of some of the controlling shareholders trapped in troubles earlier improved significantly, and the hidden risks of pledge liquidation further alleviated, effectively avoiding the expansion of individual risks.
IV. The valuation premium dropped, and the “three high points (high valuation, high goodwill and high commitment)” in restructuring were effectively eased.
In the first half of the year, the average valuation premium rate of major assets restructuring targets on the SSE was 145%, down by 60 percentage points year-on-year. Specifically, the average premium rate of mergers and acquisitions of industrial integration stood at 140%, down by about 50% year-on-year; the overall premium level of cross-border mergers and acquisitions fell from 400% in the first half of 2018 to 160%. From the perspective of the three different valuation modes, among the cases of the major assets restructuring with the valuation mode disclosed in the first half of the year, those adopting the income-based mode accounted for 52% of the total, with the average premium rate at 240.77% and the median at 122.63%; those adopting the asset-based mode accounted for 39% of the total, with the average premium rate at 98.59% and the median at 89%; there were also a small number of companies adopting the market-based mode, with the average premium rate at about 7.55%. Overall, the “three high points” phenomenon in mergers and acquisitions prevailing earlier was significantly dampened, reflecting that the valuation of mergers and acquisitions truly centering around entities and industries was relatively more rational and prudent, with more adequate and pragmatic game between the two sides in a transaction; it also showed that with the regulatory attention paid in recent years to high valuation, high goodwill and high commitment, the disorders in the M&A and reorganization market have been effectively controlled, the mergers and acquisitions that simply pursue the rise in stock price or theme and concept have cooled down significantly, the statement-style restructuring has gradually faded out of the market, and the investors attach more importance to the integration effects after the restructuring.
V. The trading suspensions for reorganization were greatly reduced, and the stock price response returned to rationality.
Since the reform of the trading suspension and resumption system, the problem of long-term trading suspension of the SSE-listed companies for reorganization has been completely solved. At present, the trading suspension for planning to acquire assets through issuance of shares is not more than 10 trading days; the trading will not be suspended for planning the acquisition of assets in cash, and the previous trading suspension will be replaced by the phased disclosure mode. In practice, in the first half of the year, only 38 companies applied for trading suspension due to restructuring, and none of the suspensions exceeded 10 trading days, thus effectively protecting the investors’ trading rights and the market liquidity. From the perspective of the stock price reaction after the resumption of trading, in the first half of the yea, the stock prices rose by an average of 2.66% on the first day after resumption of trading for reorganization, and the numbers of the stocks rising and falling on the first day after the resumption of trading were the same on the whole, with the average increase at 8.41% and the average drop at 5.74%. Some stocks recorded continuous increases as the investors were optimistic about the reorganization, and there were also consecutive drops registered by some stocks. However, in general, the phenomenon of hitting the limit up continuously after trading resumption for reorganization has ceased on the whole. Overall, the speculation on the M&A and reorganization concepts has cooled down significantly, and the phased disclosure has gradually been recognized by the market. With the previous long-term trading suspension replaced by disclosing the reorganization information in stages according to the actual situations and fully warning against risks, the investors can prudently assess risks and benefits and make independent decisions on the premise of having adequate trading rights.
VI. The reform measures achieved remarkable results, and the market vitality was fully stimulated.
In recent years, the China Securities Regulatory Commission (CSRC) has continued to deepen the market-oriented reform of M&A and reorganization, with administrative licenses substantially cancelled and simplified earlier, and at present, the number of M&A and reorganization plans of the listed companies that should be reviewed by the CSRC has been reduced year by year. Since last year, the CSRC has successively introduced a series of new measures such as targeted issuance of convertible bonds, the simplification of requirements for disclosing plans, the “rapidness for small amounts” review mechanism, and the expansion of purposes for raised funds. In the first half of this year, with the dividends of the systems gradually unleashed, the vitality of the M&A and reorganization market was effectively improved. First of all, the payment instruments were more diverse and innovative. Since the pilot program was implemented, the convertible bond has gradually become an important instrument for M&A and reorganization because of the advantages such as the more adequate game mechanism and relatively flexible design of terms. On the SSE market, since Suzhou Secote Precision Electronic Co., Ltd. disclosed the first targeted convertible bond plan, eight companies have introduced the targeted convertible bonds in their restructuring plans. At the same time, quite a few companies have been active in exploration and comprehensively used the issuance of common stock + convertible bonds + cash payment and other modes to design the individualized restructuring plans that are more conducive to the full game of the two sides of the transactions. Secondly, it was more flexible and convenient in using the raised funds. After the scope of use of the supporting raised funds had been expanded, in the first half of the year, 12 companies on the SSE market planned to use the funds raised to repay debts or replenish circulating funds, thus effectively alleviating the company's financial pressure and optimizing the capital structure. Thirdly, in terms of the transaction arrangements, more attention was paid to the integration performance after the transaction. Some listed companies took the initiative to introduce the installment payment in transaction, or made differentiated arrangements for the acquisition proportions of the underlying assets, thus making the game with the counterparty more adequate, reducing the financial burden of the listed company, and fully protecting the interests of the investors. .
In the first half of this year, the SSE resolutely implemented the requirements of the CSRC, continued to take M&A and reorganization as an important resource allocation means to unleash market vitality, enhance market resilience and improve the quality of listed companies, continuously integrated regulation and services, and made effective efforts in regulation of information disclosure for M&A and restructuring. For the M&A and restructuring transactions that conformed to the industry logic, returned to the original purposes of the real economy and were in line with the national strategies, the SSE took the initiative to carry out communication and coordination and provided necessary support based on laws and rules; with regard to the reorganizations involved in the “three high points” or fraudulent reorganizations, the SSE continued to step up regulatory inquiries, made inquiries repeatedly when necessary, and strictly prevented the M&A and reorganization from being used as an instrument for improper arbitrage or profit delivery. Reflected in the overall philosophy of regulation over the information disclosure for M&A and reorganization has always been the primary goal of improving the quality of listed companies. Going forward, the SSE will resolutely implement the requirements put forward by the CSRC for the “four awes” (stand in awe of the market, rule of law, professionalism and risks) and “one joint force” (The capital market’s development needs all the efforts made by all sides), focus on improving the quality of listed companies, highlight the concepts of continuous regulation and classified regulation, pay more attention to the implementation effect after the reorganization, and continue to support listed companies in improving quality and increasing efficiency through M&A and reorganization.