China’s market is awash with optimism, as many now proclaim that the wave of mergers and acquisitions (M&As) has arrived. Yet, more cautious voices highlight persistent challenges: finding suitable targets and buyers, navigating successful negotiations, and managing the complexities of post-deal operations.
It’s ambition versus reality.
The Chinese business world, now stepping into an era of stock-driven growth, sees M&As as an inevitable trend. But as 2024 draws to a close, how have the players fared?
Over the past two months, Waves (by 36Kr) engaged various investors and intermediaries, producing a report to dissect the dynamics of the M&A market. It raises critical questions:
- Why do the majority of M&A deals fail?
- Who are the buyers?
- What kinds of companies are more willing—or easier—to sell?
- How can investors play a role in offloading their backlog of assets?
- When will the M&A market see its true “spring”?
Has the M&A wave really arrived?
A potential false boom
In the first half of 2024, China recorded 362 M&A transactions—a 70% year-on-year surge. On the surface, it seems like a boom, but this rebound merely returns activity to levels seen in early 2022.
The comparison stems from an unusual baseline: 2023, a year when M&A activity plunged. Transaction values and volumes halved compared to 2021. The slump reflected multiple headwinds—slower-than-expected economic recovery after the pandemic, persistent geopolitical tensions, rising global interest rates, and weak equity and real estate markets.
Wang Chao, founder of Bluebridge Advisors, recalls the frustration of 2023: “Professionals were traveling nonstop, even chartering private jets for overseas inspections, but the outcomes were meager. By the second half of the year, many simply gave up.”
Despite perennial claims that “this is the year for M&As in China,” history paints a more nuanced picture. Since 2000, there have been only three significant periods of M&A activity:
- Early 2000s: Following China’s WTO accession, state-owned enterprises (SOEs) underwent reforms to compete globally, with notable deals like Newbridge Capital’s acquisition of Shenzhen Development Bank.
- Mid 2000s: Foreign investors flooded into China, acquiring factories and local brands, as seen in the acquisition of Nanfu Battery.
- After 2010: Isolated events like the privatization of Yingde Gases and Hillhouse’s acquisition of Belle International punctuated a quieter era.
Now, 2025 presents two catalysts for M&A growth: new supportive guidelines and a shift from incremental growth to stock-driven strategies. For many, mastering the art of extracting value from a stock-driven economy has become an essential skill.
Li Gang, a partner at CEC Capital, notes that M&A waves typically crest in industries that experience rapid growth followed by consolidation. The innovative drug industry offers a compelling example, with a surge in deals this year. The question now is: what will be next?
High-profile deals, big players
Buzz around M&As in 2024 owes much to a handful of eye-catching transactions. Miniso founder Huang Guangyu acquired a 29.4% stake in Yonghui Superstores for RMB 6.3 billion (USD 882 million), while Genmab made waves with its RMB 13 billion (USD 1.8 billion) all-cash acquisition of ProfoundBio.
These headline-grabbing deals are exceptional precisely because of their rarity. In the biopharmaceutical sector, 30 transactions were recorded in the first three quarters of 2024, totaling RMB 27.8 billion (USD 3.9 billion). Notably, the ProfoundBio deal alone accounted for nearly half this value, followed by Fosun Pharma’s RMB 5 billion (USD 700 million) acquisition of Henlius Biotech.
Meanwhile, Q3 saw RMB 2.2 trillion (USD 308 billion) in primary market financing transactions. Yet, most of the increase stemmed from a few mega deals, including Dalian Xindameng’s RMB 60 billion (USD 8.4 billion) financing and Huawei’s RMB 23 billion (USD 3.2 billion) funding for its Yinwang subsidiary. Stripping these out, 900 other companies collectively raised just RMB 19.1 billion (USD 2.7 billion).
M&A exits: A tough sell
Investment funds—comprising venture capital and private equity—currently face a backlog of 130,000 projects and 14,000 companies awaiting exit. In the first three quarters of 2024, only 127 Chinese companies went public domestically or abroad, representing a mere 0.9% of potential exits.
In 2023, RMB 14 trillion (USD 2 trillion) in primary market stock circulated, yet only RMB 60.5 billion (USD 8.4 billion)—just 0.4%—was recovered through M&A.
Comparing the US and China highlights the stark difference in exit strategies. In the US, 95% of exits rely on M&A, compared to just 46% in China. Similarly, US M&A funds account for 68% of PE fundraising and 69% of investments. In China, those figures languish at 3% and 1%, respectively.
According to CEC Capital’s Li, while M&As carry undeniable allure, much of it may be a mirage. Unlocking their true potential will require grappling with deeply rooted challenges—economic, cultural, and systemic.
Why is M&A so difficult?
Divergent price expectations
Over the past two years, more than half of M&A deals on China’s A-share market involved target companies valued at less than RMB 500 million (USD 70 million), according to data from Bluebridge Advisors. This trend reflects a growing focus on smaller, more manageable transactions as valuation challenges persist.
Buyers have increasingly adopted price-to-earnings (P/E) ratios to gauge investments, prioritizing a company’s valuation as a multiple of its net profit. For listed companies, a typical P/E ratio hovers around 15. This marks a shift from the price-to-sales (P/S) ratios favored during the internet-driven growth era, which were built on expectations of explosive revenue growth. The pivot signals the market’s broader maturation and a focus on profitability over potential.
For companies that flourished during the capital boom of the previous decade, adjusting to these frameworks has been jarring. This disconnect mirrors the valuation mismatch between primary and secondary markets in recent years.
A case in point is HoloMatic, an autonomous driving firm. In August 2024, its founder, Ni Kai, revealed that a merger deal with GAC Group had collapsed. The sticking point? GAC offered a valuation far below the RMB 3 billion (USD 420 million) that HoloMatic had sought. This was particularly striking as GAC had led the company’s Series C+ funding round just two years earlier, valuing it in the billions of RMB.
Some companies have even been forced to sell at a loss. Jifeng, for instance, sold its subsidiary TMD for just 20% of its peak valuation, incurring a loss of RMB 380 million (USD 53 million). Similarly, 3Peak was acquired by iCM for RMB 1.06 billion (USD 148 million), a sharp drop from its pre-acquisition valuation of RMB 1.31 billion (USD 183 million).
These cases underscore a growing trend: sellers are reluctantly accepting deep discounts to close deals. The divergence in price expectations between buyers and sellers remains a central hurdle in the M&A landscape, reshaping how deals are approached and executed.
Structural obstacles
China’s M&A market has long been shaped by restrictive policies. Historically, listed companies and PE firms faced significant limitations, such as bans on cross-industry acquisitions, prohibitions against acquiring loss-making entities, and restrictions preventing PE firms from participating in listed company mergers.
In 2024, the landscape began to shift. A series of supportive policies signaled a systemic push to invigorate M&A activity. Yet, challenges persist. Industry insiders have pointed out that while these policies mark progress, their practical implementation lags. Many stress that real impact hinges on execution, not mere issuance. Clearer regulatory guidance from bodies like the China Securities Regulatory Commission (CSRC) is essential to bridge the gap between policy announcements and real-world outcomes.
Banks, too, are adjusting their approaches to M&A loans. Traditionally, lenders have relied on metrics such as cash flow, dividend capacity, and repayment ability of acquisition targets. Yu Tong, general manager at Yicun Capital, said that, while these models are effective for risk control, they often fail to meet the nuanced demands of today’s M&A market. Some banks have begun relaxing these criteria, considering the broader circumstances of companies, including easing cash flow and repayment requirements—a shift that could unlock new opportunities for growth.
Cultural hurdles
A deeply ingrained preference for IPOs remains one of the most significant barriers to M&A in China. For many Chinese entrepreneurs, taking a company public is seen as the ultimate measure of success, while selling through M&A is often perceived as failure. Wang Chao of Bluebridge Advisors highlights this cultural divergence, noting that Chinese founders typically exhibit strong “protective instincts” toward their businesses, unlike their more pragmatic US counterparts, who often embrace selling as a natural exit strategy.
Zhang Xinzhao, founding partner of Genbridge Capital, likens M&A to an emotional act of entrusting a legacy. Acquirers such as Warren Buffett have built reputations for treating acquisitions with care, which reassures sellers that their businesses will be handled responsibly.
This mindset is exemplified by a 2006 incident involving Huang Guangyu and Zhang Jindong. When Huang expressed interest in acquiring Suning, Zhang responded that he wouldn’t sell, emphasizing that Huang couldn’t afford it. He added that if he were to fail, he would give Suning to Huang for free. This reflects the prevalent belief among Chinese entrepreneurs that going public signifies ultimate success, while selling a business is often viewed as a sign of failure.
A shortage of seasoned leadership
China’s M&A market also suffers from a dearth of experienced leaders. With an 80% failure rate for M&A deals—defined as transactions that fail to achieve their objectives even after closing—the challenges are immense. Hu Xiaoling, founding partner of CDH Investments, clarified that this statistic reflects post-transaction underperformance, not pre-closing deal collapses.
Fewer than 50 professionals across China possess the expertise needed to navigate complex M&A deals successfully. This elite group includes figures like Liu Xiaodan, Zhang Yong of Firstlight Capital, and teams from Hillhouse, CDH, and Yicun Capital. In contrast, equity investment fields boast a much larger pool of talent, leaving M&A with a critical talent gap.
Foreign PE firms, however, have a track record of success in China. In 2013, Morgan Stanley’s RMB Fund invested at a P/E ratio of 7 to acquire a 29% stake in China Feihe during the melamine scandal. Morgan Stanley delisted Feihe from the New York Stock Exchange, refocused on premium infant formula, and helped it relist six years later, generating a 100-fold return—its most profitable PE project in Asia. Similarly, Shan Weijian of PAG turned around Yingde Gases, acquired at HKD 6 (USD 0.8) per share, through strategic reforms.
Yet, foreign PE activity in China has waned. In 2024, only Advent International and Bain Capital completed significant transactions, with Bain acquiring stakes in two manufacturing firms.
The golden rule of M&A is simple: “Every deal is a right deal at the right price.” The declining valuations seen today are an inevitable consequence of capital bubbles inflated over the past decade. Years of mismatched valuations between primary and secondary markets, combined with persistent IPO bottlenecks, have forced companies to reassess their exit strategies.
Overcoming entrenched obstacles—misaligned expectations between buyers and sellers, cultural resistance to M&A, policy gaps, and a shortage of skilled professionals—is no small feat. Fundamentally, China is navigating a transition from an incremental growth model to one centered on stock-driven development. This shift is fraught with challenges, but for those who can adapt, it presents untapped opportunities.
Investors under pressure to offload portfolio companies
Investment firms are under mounting pressure to exit their accumulated portfolio companies. Venture capital (VC) and private equity (PE) funds now hold roughly 130,000 projects across 14,000 companies awaiting exit.
While buyback agreements were once considered a fallback option, they have proven largely ineffective.A report shows that only 0.27% of buyback agreements result in full repayment. Moreover, in 90% of these cases, the founder becomes the defendant, and 10% of those founders are subsequently blacklisted as dishonest creditors. This has created immense strain on both investors and founders to secure buyers.
At a recent M&A networking event, an investor observed participants wearing green badges for buyers and orange badges for sellers. The overwhelming presence of orange badges vividly highlighted the significant imbalance between sellers and buyers in the market.
A growing pool of potential sellers
Many family-owned enterprises established in the 1990s now face succession challenges. According to the Fortune 500, 80% of China’s leading private entrepreneurs are over 50, yet only 20% of their heirs are willing to take over. This generational divide stems from conflicting priorities: the older generation seeks to preserve the family legacy, while younger heirs often pursue independent careers. The concentration of these businesses in traditional industries—struggling to adapt to China’s economic shifts—makes succession even less appealing. For many families, selling to capable buyers is becoming the most practical solution.
Recent cases reflect this shift. In December 2024, Goodix Technology announced plans to acquire Viewtrix Technology, which had been preparing for an A-share IPO but instead opted for acquisition. Similarly, Lianshi abandoned its IPO in July and sold itself to Youon Technology. These moves indicate a growing acceptance of M&A as a viable alternative, particularly in light of blocked IPO pathways.
Some sectors are maturing to the point of producing companies that appeal to buyers. CEC Capital’s Li pointed to the innovative drug industry as a prime example. In 2024, M&A activity in this space surged, driven by the enhanced capabilities of Chinese biotech firms. Over the past decade, these companies have attracted rapid financing, seen valuations skyrocket, and faced eventual corrections post-IPO. Now, China ranks second globally for new drug approvals, pipelines, and blockbuster drugs. The acquisitions of ProfoundBio and Gracell Biotechnologies showcase the global recognition these companies have achieved.
State-owned enterprises as key buyers
In 2024, SOEs emerged as pivotal players in China’s M&A landscape. At least 20 publicly listed companies transferred controlling stakes to local SOEs, while central SOEs were particularly active in sectors like healthcare. Major deals included:
- China National Pharmaceutical Group (Sinopharm) privatizing China TCM for HKD 15.4 billion (USD 2.1 billion).
- China General Technology Group (Genertec) becoming the largest shareholder of Neusoft.
- China Resources (CR) Pharmaceutical Group acquiring Tasly for RMB 6.2 billion (USD 882 million).
Cities such as Beijing, Nanjing, and Chengdu have recently established local M&A funds aimed at strategic industries like biopharma and advanced manufacturing. These initiatives align with government priorities to bolster key sectors. According to Zerone, government-backed contributions dominated fundraising in September 2024, accounting for 201 funding instances.
SOE acquisitions are often driven by broader goals such as GDP growth and regional development rather than immediate financial returns. For instance, Qingdao’s acquisitions of clean energy and advanced material firms are focused on enhancing local industrial ecosystems, prioritizing long-term sustainability over short-term profitability.
Listed companies unshackled by new policies
In the first half of 2024, listed companies emerged as the dominant force in China’s M&A market, accounting for 61% of buyers, followed by private firms (25%) and SOEs. Among the 37 deals exceeding RMB 1 billion (USD 140 million), 78% involved listed companies.
Regulatory changes in 2024 lifted restrictions on cross-industry acquisitions and the purchase of lossmaking companies, enabling listed firms to adopt more diverse strategies. Many quickly announced plans to acquire semiconductor assets and expand into integrated circuits, signaling a push into high-tech sectors.
While internet giants have historically been key players in M&A, their domestic activity has tapered off following regulatory crackdowns. Instead, they are turning to cross-border acquisitions. ByteDance and Alibaba have targeted overseas e-commerce platforms, while Meituan recently acquired generative AI company Light Year (Guangnian Zhiwai).
Is China ready?
With fewer opportunities in primary markets, some VC and PE firms are shifting toward buyout strategies. Consumer sectors, characterized by relatively low valuations, have become a focal point. Genbridge, for example, recently acquired a food factory, leveraging downstream relationships to integrate and optimize operations for efficiency.
Post-acquisition management has proven critical to M&A success. In 2017, Harvest Capital partnered with an asset management company to acquire a 70% stake in Dalicap Technology. Following the acquisition, the investor revamped the company’s strategy, operations, and R&D. This overhaul doubled revenue and profits, culminating in a successful IPO.
The question of when China’s M&A wave will fully materialize hinges on whether the market genuinely needs one. Historically, the U.S. has experienced five distinct M&A waves, each driven by economic prosperity, favorable policies, and industry booms. These periods reshaped industries and the broader economic landscape.
China, by contrast, remains at a nascent stage. Yicun Capital’s Yu noted that even small towns in the U.S. bear the imprint of M&A, reflected in the dominance of national retail chains. In China, however, a fragmented market structure indicates that industrial consolidation is just beginning.
An M&A wave in China could eliminate inefficiencies from the incremental growth era while fostering sustainable development in a stock-driven economy. But achieving this will require:
- Economic adjustments: Slower GDP growth refocusing efforts on maximizing the efficiency of existing assets.
- Structural willingness to sell: Greater alignment between buyer and seller expectations, supported by post-bubble valuation corrections.
- Policy support: Clear, actionable guidance to nurture M&A activity and ensure effective implementation.
Different industries will experience this shift at varying speeds. Consumer goods and biotech, which have already seen substantial capital inflows, are well-positioned to lead the trend. Zhang from Genbridge predicts a surge in M&A activity among smaller consumer companies over the next two to three years.
While 2024 offers early signs of progress, the true M&A wave remains on the horizon. For a market like China—driven by an enduring quest for efficiency and growth—the wave is inevitable. It’s not a question of if, but when.
KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Xu Muxin for 36Kr.