Manatt Survey Reveals Divergent Expectations for U.S.-China Relationship, Likely to Affect Deal Making
LOS ANGELES, CA—June 11, 2013—Investment and M&A activity between the U.S. and China in the entertainment, advertising and digital media sectors will increase over the next 12 months, according to more than two-thirds of respondents surveyed in a new report from the law firm of Manatt, Phelps & Phillips, LLP. Conducted in association with Mergermarket, the report is based on 100 interviews with prominent American and Chinese entertainment, advertising, and digital media corporate executives, investment bankers, and private equity practitioners.
Majorities from both sides of the Pacific expect the uncertain U.S.-China political relationship to significantly impact deal making and investment activity. Among those who expect a material change in relations between the countries in the coming year, more U.S.-based respondents expect improvements to the relationship (by a 40% to 18% margin) while more of their Chinese counterparts expect a decline in the relationship (by a 34% to 30% margin). And while deals are expected to rise, 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.
"As both U.S. and Chinese investors take advantage of opportunities for expansion, investors would be well-advised to foster open and honest communication with one another and to have candid conversations about the potential obstacles a particular transaction may face," said Gordon Bava, co-chairman of Manatt and head of its Corporate & Finance Division. "As the response to our survey demonstrates, the most important resources for successful deal making may be patience and perseverance, creativity in structuring deals and partnerships, and sensitivity to the differences between countries and the ways to create bridges between them."
The full report is available here. It includes the following key findings:
As U.S.-based companies and investors target entertainment, advertising and digital media opportunities in China, over half of U.S.-based respondents say they will most likely consider companies and assets valued at US$250m or less, mainly to gain a foothold in China. U.S. bidders will not be acquiring controlling interests; however, due to Chinese law and regulatory obstacles, strategic partnerships and joint ventures are the structures most likely to be approved.
Respondents based in China place social media and multimedia distribution among the top American subsectors for investment and M&A over the next 12 months. And Chinese bidders are looking to make larger deals. Respondents overwhelmingly expect Chinese bidders to take on controlling stakes of American entertainment, advertising and digital media targets over the next 12 months, government permitting, and respondents say their aim is not primarily to build shareholder value, but to bring new content or technology back to China.
Some potential Chinese bidders express trepidation about the U.S. federal government. Decisions by the U.S. government to block certain acquisitions based on national security concerns, for example, have made many potential acquirers hesitant across sectors like digital media, where products built around sophisticated data collection, data technology and privacy can be considered issues of national security. U.S.-based investors have a different concern: China's security review and regulations requiring local partners will force the bulk of M&A activity from the U.S. into China to exclude controlling-stake acquisitions.
When asked about issues in the U.S. that present challenges to Chinese bidders looking to gain a foothold in the American entertainment, advertising and digital media industries, respondents pointed to regulatory approval (44%) and disclosure requirements (34%). For American companies, performing effective due diligence is the most significant obstacle to acquiring companies in the Chinese advertising, entertainment and digital media industries, as accessing the required information to enter the intermediate stage of negotiations is often made difficult by Chinese business owners.
"Manatt and Mergermarket conducted this study to illuminate perceptions and realities on both sides of the Pacific regarding M&A and investment activity in the entertainment, advertising and digital media sectors," said Lindsay Conner, co-chair of Manatt's Entertainment & Media practice. "U.S. investors in China will need to become more adept at navigating China's investment restrictions and government involvement, and Chinese sellers will need to become more comfortable with U.S. investor requirements. Conversely, Chinese buyers in the U.S. will need to better appreciate American security concerns and regulatory systems, and U.S. sellers will need to better understand and address the motivations of Chinese investors."
"Despite the obstacles to dealmaking between the U.S. and China, both sides have strong motivations for persevering, to drive company and industry growth and the expansion of entertainment, advertising and digital media worldwide," Conner added.
About Manatt, Phelps & Phillips, LLP
Manatt, Phelps & Phillips, LLP, is one of the nation's leading law firms, with offices strategically located in California (Los Angeles, Orange County, Palo Alto, San Francisco and Sacramento), New York (New York City and Albany) and Washington, D.C. The firm represents a sophisticated client base—including Fortune 500, middle-market and emerging companies—across a range of practice areas and industry sectors. For more information, visit www.manatt.com.