CICC Deep Dive: Mergers and Acquisitions Handbook

Abstract

Question 1: What is merger and acquisition restructuring?

1. In terms of methods, mergers and acquisitions include mergers and acquisitions, with mergers divided into absorption mergers and new establishment mergers, while acquisitions mainly refer to equity acquisitions; restructuring refers to the recombination of resources, which can be specifically divided into expansion-type, contraction-type, and other forms of restructuring.

2. In terms of purpose, from the perspective of the acquirer, it mainly includes industrial mergers and acquisitions to promote efficiency improvement, asset listing, and market value management. 3) In terms of pricing methods, there are mainly income method, market method, and asset-based method, while appropriate qualitative adjustments need to be made, and special considerations should be given to new economy enterprises. 4) In terms of review processes, internal decision-making mainly includes preliminary consultations, hiring consultants and due diligence, planning for suspension (if necessary), board meetings, and shareholder meetings, while the regulatory review process mainly includes acceptance, inquiries, review by the restructuring committee, registration with the China Securities Regulatory Commission, and other external reviews.

Question 2: What is the historical evolution of merger and acquisition restructuring in China's capital market?

The evolution of the merger and acquisition restructuring system in China's capital market can be roughly divided into five stages: system formation (2000-2013), increased support (2014-2015), problem response (2016-2017), marginal relaxation (2018-2023), and policy revitalization (2024 to present). Over the past 20 years, the field of mergers and acquisitions in the capital market has experienced a cycle of "development—prosperity—regulation—restart," and currently, merger and acquisition restructuring in China's capital market is entering a new stage and new pattern.

Question 3: What are the new orientations of current merger and acquisition restructuring policies?

We believe that the new round of policies since 2024 presents three characteristics: First, further increasing support for mergers and acquisitions of technology innovation enterprises. Since the beginning of the year, documents such as "Sixteen Measures for Capital Market Services for High-Level Development of Technology Enterprises," "Eight Measures for Deepening the Reform of the Sci-Tech Innovation Board to Serve Technological Innovation and New Quality Productivity Development," and "Opinions on Deepening the Reform of the Mergers and Acquisitions Market for Listed Companies" have clearly defined the policy orientation to prioritize support for mergers and acquisitions of technology enterprises that break through key core technologies, and have pointed out specific directions for promoting the efficient implementation of mergers and acquisitions by technology enterprises. Second, mergers and acquisitions further "shift from virtual to real," gradually returning from "arbitrage mergers" to "industrial mergers." On one hand, the new "National Nine Articles" proposes to increase regulatory efforts on "backdoor listings," and we believe that the value of "shell" resources will further decline in the future, and blind cross-border, short-term profit-seeking, and illegal "shell protection" merger behaviors are expected to gradually decrease. On the other hand, the institutional documents issued since the beginning of the year focus on supporting listed companies to implement mergers and acquisitions in the same industry and upstream and downstream. At the same time, moderate encouragement is given to cross-border mergers and acquisitions, proposing to support well-operated listed companies in conducting cross-industry mergers that align with business logic around industrial transformation and upgrading, and seeking a second growth curve. Third, promoting mergers and acquisitions to become an important means to smooth the delisting channels of A-shares and improve the market ecology. For a long time, the delisting of A-share listed companies has been characterized by a low number of delisted companies and mainly passive delisting. Against this background, promoting absorption mergers between listed companies is expected to provide more diversified proactive delisting channels for listed companies, facilitating a virtuous cycle of entry and exit and survival of the fittest in the A-share market Question 4: What are the characteristics of the merger and acquisition market?

From the perspective of A-share listed companies as acquirers, there have been 1,093 merger and acquisition events from 2024 to date (as of October 29), involving a transaction amount of 463.6 billion yuan. We expect that the activity level of A-share mergers and acquisitions will increase in the future due to multiple factors, including the optimization of the merger and acquisition restructuring system, a strong willingness among many non-listed companies to seek acquisitions, and some listed companies potentially using mergers and acquisitions to enhance their strengths or find a second growth curve. In terms of success rate, from 2010 to 2024, the success rate of mergers and acquisitions in the A-share market has mostly remained above 90% in most years, with a success rate of 92.5% so far in 2024, which is at a historically high level. In terms of industry distribution, from 2010 to the present, based on transaction amounts, the real estate, public utilities, and transportation industries have the most mergers and acquisitions. In terms of acquisition methods, agreement acquisitions are currently the dominant method in the A-share market, with a significant increase in the proportion of absorption mergers in 2024. From the perspective of acquisition purposes, since 2024, the number of backdoor listings has significantly decreased, while the amount of mergers and acquisitions for strategic cooperation and horizontal integration has increased. In terms of payment methods for acquisitions, the proportion of mergers and acquisitions using pure cash payments has been steadily increasing in recent years, while the use of equity payments has significantly decreased. In terms of financial characteristics, we find that companies involved in mergers and acquisitions have larger market capitalizations, faster revenue growth, faster net profit growth, higher price-to-book ratios, lower ROE, and higher quick ratios.

Question 5: How do mergers and acquisitions affect market performance?

The overall performance of listed companies undergoing mergers and acquisitions fluctuates with changes in systems and activity levels. Since the second half of 2024, with the optimization and relaxation of the merger and acquisition restructuring system, market attention to listed companies undergoing mergers and acquisitions has significantly increased, and restructuring-related indices have risen rapidly, clearly outperforming the market. In terms of event effects, we use A-share listed companies since 2010 as a sample: 1) Overall performance: Listed companies undergoing mergers and acquisitions have a strong short-term event effect, but there is also significant internal differentiation, with higher average excess returns from mergers and acquisitions having typical event impacts. After the release of the "Six Guidelines for Mergers and Acquisitions," the merger and acquisition market has clearly heated up. Compared to the overall market, listed companies undergoing mergers and acquisitions achieved significant excess returns within a month, with an average excess return of 12.9% and a median of 2.0%, which are 9.9 and 3.3 percentage points higher than historical levels, respectively. 2) From the perspective of industry distribution, the performance of industries shows differentiation after the first disclosure date of mergers and acquisitions, with technology and manufacturing sectors having higher excess returns in the long term, while cyclical and real estate chain industries perform weaker. 3) From the perspective of enterprise nature, both central state-owned enterprises and non-central state-owned enterprises saw stock price boosts after the disclosure date of mergers and acquisitions, with non-state-owned enterprises' excess returns significantly higher than those of central state-owned enterprises. 4) From the perspective of acquisition purposes, historically, mergers and acquisitions aimed at backdoor listings have relatively high returns, while in recent years, there has been increased attention to horizontal integration types of mergers and acquisitions Question 6: What are the new trends in the mergers and acquisitions market?

Compared to the prosperous phase of mergers and acquisitions in 2014-2015, the current mergers and acquisitions market is showing many new trends, with "atypical" and innovative cases frequently emerging. Specifically, these trends are manifested as follows: 1) The simplified review process is applicable for stock swap mergers between listed companies, maintaining a high level of activity in mergers between listed companies. 2) Support for well-operated listed companies to conduct cross-industry mergers that align with business logic around industrial transformation and upgrading, seeking a second growth curve, especially since the end of September this year. 3) The simplified review process is applicable for high-quality companies issuing shares to purchase assets (not constituting a major asset restructuring), leading to frequent occurrences of share issuance for asset purchase mergers. 4) Amid the wave of going global, many listed companies with international business layouts are engaging in cross-border mergers. 5) In the context of a slowdown in IPO rhythms, some companies that have terminated their IPO processes are turning to the mergers and acquisitions field.

Question 7: How to seize investment opportunities in mergers and acquisitions?

Based on the focus of this round of policies and recent trends in mergers and acquisitions, we have organized the following four investment directions for investors' reference: 1) Leading technology companies should strengthen and enhance themselves, as the current mergers and acquisitions policies further support technology innovation enterprises; 2) The trend of industrial integration in traditional sectors. Historical data shows that in areas with relatively low industry concentration, the willingness for mergers and acquisitions is relatively strong; 3) Under the new circumstances, the willingness of state-owned and central enterprises for market value management is expected to increase. Mergers and acquisitions, as an important direction for market value management, are expected to see increased marginal willingness from the perspective of state-owned and central enterprises; 4) Diverse options for unlisted companies. In recent years, in the context of changes in the IPO environment, many unlisted companies have also chosen mergers and acquisitions as a directional consideration.

Main Text

What is the historical evolution of mergers and acquisitions in China's capital market?

The evolution of the mergers and acquisitions system in China's capital market can be roughly divided into five stages: system formation (2000-2013), increased support (2014-2015), problem response (2016-2017), marginal relaxation (2018-2023), and policy revitalization (2024 to present). Over the past 20 years, the field of mergers and acquisitions in the capital market has experienced a cycle of "development—prosperity—regulation—restart," and the current mergers and acquisitions in China's capital market are entering a new stage and new pattern.

Since the beginning of 2024, the mergers and acquisitions system has been continuously optimized, and policies have welcomed revitalization. Specific progress includes:

► On April 12, the "Several Opinions on Strengthening Regulation, Preventing Risks, and Promoting High-Quality Development of the Capital Market" (referred to as the new "National Nine Articles") was released, which includes many provisions regarding mergers and acquisitions, mainly involving three points: 1) Promoting listed companies to enhance investment value. Encouraging listed companies to focus on their main business and comprehensively use mergers and acquisitions, equity incentives, and other methods to improve development quality. 2) Further smoothing diverse delisting channels. Improving policies and regulations on absorption mergers, encouraging leading companies to strengthen integration with listed companies in the industrial chain based on their main business. Further reducing the value of "shell" resources. Strengthening the regulation of mergers and acquisitions, reinforcing relevance to the main business, strictly controlling the quality of injected assets, and increasing regulatory efforts against various illegal "shell protection" behaviors 3) Increase the intensity of merger and acquisition reform and implement multiple measures to invigorate the M&A market. At the same time, the China Securities Regulatory Commission (CSRC) issued the "Opinions on Strictly Implementing the Delisting System," which elaborated on the diversified delisting channels through mergers and acquisitions, mainly involving: 1) Using high-quality leading companies as the "main force" to promote mergers and acquisitions among listed companies. 2) Focusing on industrial mergers and acquisitions, supporting market-oriented mergers and acquisitions among listed companies under different control in the same industry and upstream and downstream sectors. 3) Improving policies related to mergers and acquisitions, addressing "bottlenecks" in cross-sector mergers and acquisitions, such as investor suitability requirements. 4) Listed companies that voluntarily delist through tender offers, shareholder meeting resolutions, etc., should provide special protections such as cash options for dissenting shareholders.

► On April 19, the CSRC issued "Sixteen Measures for Capital Market Services to Support High-Level Development of Technology Enterprises," with key points related to mergers and acquisitions including: 1) Concentrating efforts to support major technological breakthroughs. Prioritizing support for technology companies that break through key core technologies in terms of listing financing, mergers and acquisitions, and bond issuance, and improving the full-chain "green channel" mechanism. 2) Promoting efficient implementation of mergers and acquisitions by technology companies. Formulating targeted convertible bond restructuring rules, optimizing the small-scale rapid review mechanism, appropriately increasing the valuation inclusiveness for light-asset technology companies' restructuring, and supporting technology companies in using various payment tools such as shares, targeted convertible bonds, and cash for restructuring, helping them improve quality and efficiency and strengthen their core businesses.

► On April 30, the Shanghai and Shenzhen Stock Exchanges officially released the "Rules for the Review of Major Asset Restructuring of Listed Companies (Revised in April 2024)," with key points related to mergers and acquisitions including: 1) Raising the restructuring listing conditions for the main board and the ChiNext, strictly controlling the quality of injected assets to prevent inefficient assets from being injected into listed companies. 2) Improving the small-scale rapid review mechanism for restructuring. Removing the restriction that financing for the Sci-Tech Innovation Board and ChiNext "must not be used to pay cash consideration for this transaction"; adjusting the financing limit for the Sci-Tech Innovation Board and ChiNext from "not exceeding 50 million yuan" to "not exceeding 10% of the audited net assets of the listed company at the end of the most recent year"; reducing the review time limit for small-scale rapid transactions to 20 working days to clarify market expectations. 3) Clarifying the investor suitability management requirements for parties obtaining shares in restructuring transactions.

► On June 19, the CSRC issued "Eight Measures to Deepen the Reform of the Sci-Tech Innovation Board to Serve Technological Innovation and the Development of New Productive Forces," with key points related to mergers and acquisitions including: 1) Optimizing the stock and bond financing system for listed companies on the Sci-Tech Innovation Board. Establishing and improving the "green channel" for stock and bond financing and mergers and acquisitions for "hard technology" enterprises engaged in key core technology breakthroughs. 2) Supporting mergers and acquisitions with greater intensity. Supporting listed companies on the Sci-Tech Innovation Board in conducting mergers and integrations along the industrial chain. Increasing the valuation inclusiveness for mergers and acquisitions, supporting listed companies on the Sci-Tech Innovation Board in acquiring high-quality unprofitable "hard technology" enterprises. Enriching payment tools for mergers and acquisitions and conducting research on installment payments for share consideration. Supporting listed companies on the Sci-Tech Innovation Board to focus on optimizing and strengthening their main businesses through absorption and mergers ► On September 24, the China Securities Regulatory Commission (CSRC) issued the "Opinions on Deepening the Reform of the Mergers and Acquisitions Market for Listed Companies," which includes the following specific content: 1) Support listed companies in transforming and upgrading towards new quality productivity. The CSRC will actively support listed companies in mergers and acquisitions (M&A) related to strategic emerging industries and future industries, including cross-industry mergers aimed at transformation and upgrading, acquisitions of unprofitable assets that help strengthen supply chains and enhance key technology levels, as well as supporting companies in the "Two Innovations" sector to acquire upstream and downstream assets in the industrial chain, guiding more resources to gather towards new quality productivity. 2) Encourage leading listed companies to focus on their main businesses and increase integration with listed companies in the industrial chain. Support mergers and acquisitions between listed companies in the same industry and upstream and downstream companies under different control, as well as mergers and acquisitions between listed companies under the same control. Assist traditional industries in reasonably increasing industry concentration through restructuring and improving resource allocation efficiency. For the integration needs between listed companies, support will be provided through improving lock-up period regulations and significantly simplifying review procedures. At the same time, arrangements such as "reverse linkage" during the lock-up period will encourage private equity investment funds to actively participate in mergers and acquisitions. 3) Further increase regulatory inclusiveness. Increase inclusiveness regarding restructuring valuation, performance commitments, competition among peers, and related transactions. 4) Enhance the transaction efficiency of the restructuring market. The CSRC will support listed companies in issuing shares and convertible bonds as payment tools based on transaction arrangements, staggered payment of transaction prices, and phased financing to improve transaction flexibility and capital utilization efficiency. At the same time, establish a simplified review procedure for restructuring, significantly simplifying the review process, shortening review timelines, and improving restructuring efficiency for eligible listed companies. 5) Improve the service level of intermediary institutions. 6) Strengthen regulation in accordance with the law.

► On September 24, the Shanghai and Shenzhen Stock Exchanges publicly solicited opinions on the "Review Rules for Major Asset Restructuring of Listed Companies," with key points including: 1) Clarifying the applicable scenarios for the simplified review procedure. The scope includes two types of transactions: one is the share-swap mergers between listed companies, and the other is high-quality listed companies issuing shares to purchase assets that do not constitute major asset restructuring. High-quality listed companies are defined as those with a total market value exceeding 10 billion yuan and rated A for information disclosure quality by the Shanghai Stock Exchange in the past two years. 2) Setting a negative list for the simplified review procedure. 3) Specifying mechanisms related to the simplified review procedure. For restructuring transactions that meet the conditions for the simplified review procedure, the exchange will accept applications based on the verification opinions of intermediary institutions within 2 working days and issue review opinions within 5 working days after acceptance. 4) Strengthening the responsibilities of all parties involved in the simplified review procedure.

What are the new orientations of current M&A and restructuring policies?

Through a systematic review of the M&A and restructuring policies introduced since the beginning of 2024, we find that the new round of policies presents three characteristics:

First, further increase support for M&A and restructuring of technology innovation enterprises. Since the beginning of the year, institutional documents such as the "Sixteen Measures for Capital Market Services to High-Level Development of Technology Enterprises," "Eight Measures for Deepening the Reform of the Sci-Tech Innovation Board to Serve Technological Innovation and New Quality Productivity Development," and "Opinions on Deepening the Reform of the Mergers and Acquisitions Market for Listed Companies" have all clearly defined policies prioritizing support for M&A and restructuring of technology enterprises that break through key core technologies It pointed out specific directions on how to efficiently implement mergers and acquisitions (M&A) for technology-based enterprises. With the structural transformation of China's economy, the demographic dividend is gradually weakening, and the financial cycle has entered a downward phase. The role of technological innovation in modernization is continuously increasing. As a fundamental system of the capital market, the M&A system is an important market tool to support economic transformation and upgrading, and to achieve high-quality development. The market-oriented reform of the M&A system helps support listed companies in laying out around technological innovation and industrial upgrading, guiding more resources to gather towards new productive forces.

Secondly, M&A is further "devirtualizing" and gradually returning from "arbitrage M&A" to "industrial M&A." Arbitrage M&A mainly refers to M&A activities that utilize valuation differences in the capital market or policy dividends, often aimed at short-term financial gains. In contrast, industrial M&A focuses more on the development needs of the real economy, aiming to optimize industrial structure and enhance the overall strength of enterprises. We believe that the current round of M&A system emphasizes actual support for industry and enterprise quality. On one hand, the new "National Nine Articles" proposes to strengthen the regulation of "backdoor listings," and we believe that the value of "shell" resources will further decline in the future, with blind cross-border, short-term profit-seeking, and illegal "shell protection" M&A behaviors expected to gradually decrease. On the other hand, the institutional documents issued since the beginning of the year focus on supporting listed companies in implementing M&A activities within the same industry and along the upstream and downstream. At the same time, there is a moderate relaxation of cross-border M&A, proposing to support well-operated listed companies in conducting cross-industry M&A that aligns with business logic around industrial transformation and upgrading, and seeking a second growth curve. We believe that future M&A by listed companies will more likely focus on industrial M&A as the main line, whether in the same industry or across industries, with industrial integration, upgrading, and development as the primary goals. For traditional industries, M&A can achieve transformation and upgrading as well as industrial chain integration, improving the intelligence and digitalization level of the industry and enhancing the concentration level of the industry. For high-quality technology innovation enterprises, M&A can acquire key technologies, talents, and market resources, accelerating the industrialization of innovative achievements and promoting the optimization and reconstruction of industrial and supply chains.

Thirdly, promoting M&A as an important means to smooth the delisting channels of A-shares and improve the market ecology. As of now, the number of A-share listed companies exceeds 5,300, making the A-share market the second-largest stock market in the world. In recent years, the A-share market has played an important role in supporting listed companies' financing and promoting the development of the real economy. However, the A-share market also faces issues such as an ineffective delisting mechanism, the need to improve the quality of listed companies, and an insufficiently formed atmosphere of "survival of the fittest." For a long time, the delisting of A-share listed companies has been characterized by a low number of delisted companies and a predominance of passive delisting. Against this backdrop, promoting mergers and acquisitions among listed companies is expected to provide more diversified proactive delisting channels for listed companies, facilitating a virtuous cycle in the A-share market with both entries and exits, and survival of the fittest.

What are the characteristics of the M&A market?

Overall characteristics of the M&A market ► Scale

From the perspective of listed companies as bidders, there have been 1,093 merger and acquisition events from 2024 to date (as of October 29), with a transaction amount of 463.6 billion yuan, a year-on-year decrease of 8.8%. We believe that the activity level of mergers and acquisitions is expected to increase in the future, mainly due to: first, the optimization of the merger and acquisition system may create a favorable market environment for listed companies to carry out mergers and acquisitions; second, against the backdrop of a slowdown in IPOs, many non-listed companies are seeking to be acquired, and financial investors have a strong willingness to exit through mergers and acquisitions; third, there are currently many existing listed companies in the A-share market, and some listed companies may seek to enhance their strengths or find a second growth curve through mergers and acquisitions.

► Success Rate

The current success rate of mergers and acquisitions is at a historically high level. Between 2010 and 2024, the success rate of mergers and acquisitions in the A-share market has generally remained high, with most years maintaining above 90%. The peak was reached in 2010 at 94.5%, while it dropped to a low of 86.5% in 2016. Although there have been slight fluctuations in recent years, the overall rate has remained stable, with a success rate of 92.5% from 2024 to date, which is at a historically high level.

► Industry Distribution

Real estate, public utilities, and transportation are the industries with the most mergers and acquisitions. From 2010 to date, based on transaction amounts, real estate, public utilities, and transportation have the highest average shares, at 7.9%, 6.9%, and 6.6%, respectively. The basic chemical and non-bank financial industries also rank relatively high and show significant cyclical characteristics. In addition, within the technology manufacturing sector, electronics, machinery equipment, and pharmaceuticals and biology are at the forefront, with average shares of 6.4%, 6.2%, and 5.2%, respectively. Since the beginning of this year, the proportion of mergers and acquisitions in the technology manufacturing sector has significantly increased, especially in defense and military, electronics, and pharmaceuticals and biology, which are higher than the historical average by 20.6, 7.1, and 3.1 percentage points, respectively. Data from September 24 to October 28 shows that in the technology manufacturing sector (in terms of the number of mergers and acquisitions), machinery equipment (11.9%), pharmaceuticals and biology (7.9%), electronics (7.3%), and computers (6.0%) dominate. This industry distribution characteristic is highly consistent with the policy direction in the "Six Guidelines for Mergers and Acquisitions" that supports listed companies in transforming and upgrading towards new productive forces.

► M&A Methods

Agreement acquisition is currently the dominant method of mergers and acquisitions in the A-share market, with a significant increase in the proportion of absorption mergers. In recent years, the most significant change in the methods of mergers and acquisitions has been the substantial reduction in the issuance of shares to purchase assets, while agreement acquisitions have become mainstream. This year, absorption mergers have also been widely used as an important method of mergers and acquisitions. On average, from 2010 to date, the amount of assets purchased through the issuance of shares accounted for the largest share at 33.9%, followed by agreement acquisitions (33.1%), capital increases (13.9%), and absorption mergers (6.9%). Since 2024, the proportion of absorption mergers has significantly increased to 24.8%, exceeding the historical average by 17.9 percentage points, while the trend of reducing the issuance of shares to purchase assets has continued Specifically, the restructuring of listed companies can be divided into equity-based restructuring and cash-based restructuring. For restructurings involving the issuance of shares to purchase assets, the listed company needs to apply to the stock exchange and pass the review of the merger and acquisition restructuring committee, a process that is usually more complex and time-consuming. In contrast, for cash-based restructurings that do not involve the issuance of shares, the listed company only needs to disclose relevant information in stages and cooperate with the stock exchange's inquiries, making the review process relatively simplified. In comparison, agreement acquisitions allow both parties to negotiate transaction terms independently within a legal framework, enabling a quicker completion of the transaction process, which is particularly important for companies looking to rapidly complete strategic layouts or seize market opportunities.

► Purpose of Mergers and Acquisitions

Since 2024, the number of reverse mergers has significantly decreased, while the amount of mergers and acquisitions for strategic cooperation and horizontal integration has increased. The current M&A market is gradually shifting from "arbitrage mergers" back to "industrial mergers," with the transition from market value orientation to industrial orientation in mergers and acquisitions accelerating. On average, from 2010 to the present, horizontal integration, diversification strategies, and strategic cooperation are the three most significant purposes of mergers and acquisitions, accounting for 46.8%, 13.4%, and 12.0%, respectively. Since entering 2024, the amount of reverse mergers has sharply decreased to 0, and mergers and acquisitions aimed at diversification strategies are also on the decline.

► Payment Methods

Since 2019, the proportion of mergers and acquisitions using pure cash payments has been steadily increasing, while those using equity payments have significantly decreased. On average, from 2010 to the present, the highest proportion of payment methods has been cash, equity, and physical assets, accounting for 57.0%, 37.9%, and 1.2%, respectively. Among these, the proportion of cash payments has significantly increased in recent years, especially in 2023, where 84.3% of M&A transactions used cash payments.

► Nature of Enterprises

In recent years, the proportion of mergers and acquisitions involving central and state-owned enterprises has increased. On average, from 2010 to the present, local state-owned enterprises, central enterprises, and private enterprises account for 35.1%, 31.6%, and 24.6% of the M&A market, respectively, with central and state-owned enterprises combined reaching 59.7%. Since 2019, the proportion of central and state-owned enterprises in the overall M&A market has continued to rise, while the proportion of private enterprises has decreased. On one hand, this reflects the strategic requirements for optimizing layouts and structural adjustments of central and state-owned enterprises, which typically achieve resource integration and optimize industrial chain layouts through mergers and acquisitions; on the other hand, it also reflects the increasingly important role of central and state-owned enterprises as stabilizers in a complex economic environment. Through mergers and acquisitions, central and state-owned enterprises can not only strengthen their main businesses but also promote the coordinated development of the upstream and downstream of the industrial chain, enhancing industrial concentration and market competitiveness.

► Financial Characteristics

Mergers and acquisitions involve companies with larger market values, faster revenue growth, faster net profit growth, higher price-to-book ratios, lower ROE, and higher quick ratios. We collected data from A-share listed companies acting as bidders from January 1, 2010, to October 28, 2024, retaining only domestic mergers and acquisitions and conducting statistics based on the first disclosure date (including completed, ongoing, and failed transactions) Based on this, we calculated the latest financial report data of A-share merger and acquisition companies before the disclosure date of the mergers and acquisitions and compared it with the average of Shenwan's first-level industries to derive the financial characteristics of the merger and reorganization enterprises. The results indicate that, overall: 1) Larger companies are more inclined to engage in mergers and acquisitions, with merger and acquisition companies having an average market value that is 7.09 billion yuan higher than the industry average; 2) Companies undergoing mergers and acquisitions have faster revenue growth, with the revenue growth rate in the latest quarter before disclosure being 15.7 percentage points higher than the industry average; 3) The net profit growth rate of companies undergoing mergers and acquisitions is also faster, exceeding the industry average by 41.3 percentage points; 4) The price-to-book ratio of merger and acquisition companies is relatively high, exceeding the industry average by 1.2 times; 5) Companies undergoing mergers and acquisitions have more abundant current assets, with a quick ratio that is 1.2 higher than the industry average.

How do mergers and acquisitions affect market performance?

Event Effect Analysis of Mergers and Acquisitions

We collected data from A-share listed companies as acquirers from January 1, 2010, to October 28, 2024, retaining only domestic merger data and conducting statistics based on the first disclosure date (including completed, ongoing, and failed transactions). The statistical results show that listed companies' mergers and acquisitions have a strong average event effect in the short term, but there is also significant internal differentiation. From the first trading day after the initial disclosure of mergers and acquisitions, the average excess return relative to the Wind All A index reaches 1.2%, gradually rising to an average excess return of 5.0% within one year and reaching 10.7% within two years. However, from the perspective of the median excess return, the excess return on T+1 is only 0.0% and declines over time, reaching -14.4% within two years The results indicate that the average excess return from mergers and acquisitions (M&A) and restructuring is positive, primarily contributed by the significant gains of certain companies.

► From an industry perspective, the performance of sectors after the initial disclosure date of M&A and restructuring shows divergence. In the long term, the technology and manufacturing sectors exhibit higher excess returns, while the cyclical and real estate sectors perform poorly. Based on the Shenwan first-level industry classification, we calculated the excess performance of companies in different industries one day, one month, three months, six months, one year, and two years after the disclosure date of M&A and restructuring. The results show: 1) The industry performance after the initial disclosure date of M&A and restructuring can generally be sustained. The sectors that achieved significant excess returns within two months of the disclosure date are mainly power equipment, social services, computers, and electronics, with average excess returns (relative to the Wind All A) of 5.3, 4.9, 4.8, 4.5, and 4.3 percentage points, respectively. In the long term, the sectors that performed well over two years are electronics, home appliances, computers, power equipment, and food and beverages, with cumulative excess returns of 18.3, 17.2, 11.7, 10.8, and 10.5 percentage points, respectively. 2) The sectors that performed poorly in the medium term are mainly in the consumer industry, with the sectors that performed poorly within two months being primarily oil and petrochemicals, environmental protection, steel, construction decoration, and non-bank financial industries, with average excess returns of -3.1, -0.1, 0.3, 0.3, and 0.7 percentage points, respectively. From a long-term perspective, the sectors that performed poorly remain stable, with the sectors that performed poorly within one year being mainly oil and petrochemicals (-27.4%), beauty and personal care (-18.5%), and textiles and apparel (-14.3%).

► From the nature of the enterprises, the stock prices of both central state-owned enterprises and non-central state-owned enterprises are significantly boosted after the disclosure date of M&A and restructuring, with non-central state-owned enterprises significantly outperforming central state-owned enterprises. Over the 10 trading days following the disclosure date of M&A and restructuring, the excess returns for local state-owned enterprises, private enterprises, central state-owned enterprises, and foreign enterprises are 2.5, 3.9, 3.0, and 6.0 percentage points, respectively. In the medium to long term, the excess returns of non-central state-owned enterprises exceed those of central state-owned enterprises. The cumulative excess return rates for central state-owned enterprises after one year/two years are 2.9% and -0.4%, respectively, lower than the cumulative excess return rates of 6.3% and 12.0% for non-central state-owned enterprises.

► From the purpose of M&A and restructuring, due to historical reasons, the returns from shell acquisitions have always been relatively high, while horizontal integration has gained momentum in recent years. Over the 10 trading days following the disclosure date of M&A and restructuring, the cumulative excess return rates for shell acquisitions, horizontal integration, asset adjustments, vertical integration, diversification strategies, strategic cooperation, and financial investments are 45.9, 1.8, 5.1, 2.2, 3.4, 1.1 percentage points, respectively. In the medium to long term, over two years after the disclosure date of M&A and restructuring, except for shell acquisitions, horizontal integration has the highest cumulative excess return rate at 13.7%, followed by diversification strategies (10.6%) and asset adjustments (7.5%), while M&A and restructuring for financial investment purposes have the lowest cumulative excess return rate at 0.7%.

"The Six Guidelines for M&A" have significantly heated up the M&A and restructuring market. We further separately calculated the excess performance of A-share listed companies relative to the Wind All A after September 24. Since the China Securities Regulatory Commission released the "Six Guidelines for M&A" on September 24, the enthusiasm for M&A and restructuring in the A-share market has significantly increased Data shows that compared to the Wind All A Index, listed companies involved in mergers and acquisitions achieved significant excess returns within a month, with an average excess return of 12.9% and a median of 2.0%, which are 9.9 and 3.3 percentage points higher than historical levels, respectively. This performance reflects a relatively positive market response to the new policies on mergers and acquisitions.

New Trends in the Mergers and Acquisitions Market?

Since the beginning of the year, the mergers and acquisitions system has been continuously optimized, and the activity level in the mergers and acquisitions market has increased. Compared to the relaxed policy period of 2014-2015, this round of the mergers and acquisitions market has shown many new trends, with "atypical" and innovative cases frequently emerging, specifically as follows:

► High Activity Level in Absorption Mergers Among Listed Companies

The new "National Nine Articles" and "Six Articles on Mergers and Acquisitions" both propose to "encourage leading companies to strengthen the integration of listed companies in the industrial chain based on their main business." The revised "Review Rules for Major Asset Restructuring of Listed Companies" on September 24 indicates that stock swap absorption mergers between listed companies are subject to a simplified review process. Against this backdrop, especially since September, the activity level of absorption mergers among listed companies has remained high.

► Initial Signs of Cross-Industry Mergers

The "Six Articles on Mergers and Acquisitions" propose to "support well-operated listed companies in conducting cross-industry mergers that align with business logic, focusing on industrial transformation and upgrading, and seeking a second growth curve, to accelerate the transition to new productive forces." During the relaxed policy period of 2014-2016, the proportion of cross-industry mergers among listed companies significantly increased. However, with the tightening of policies, the proportion of cross-industry mergers declined in 2017-2018 and has remained stable in recent years. From an industry perspective, since 2014, the proportion of information technology in cross-industry merger targets has significantly increased compared to 2010 and has remained relatively stable, reaching 25% since 2024.

► Marginal Increase in Asset Purchases Through Share Issuance Mergers

The "Six Articles on Mergers and Acquisitions" propose to "establish a simplified review process for restructuring, allowing high-quality companies with a market value exceeding 10 billion yuan and a continuous A rating for information disclosure quality for two years to issue shares for asset purchases (not constituting major asset restructuring), streamlining the review process and shortening the review registration time." ► Cross-Border Mergers and Acquisitions

Historically, the scale of cross-border mergers and acquisitions has also been influenced by domestic merger and reorganization policies. With the recent relaxation of merger and reorganization policies, many listed companies that are expanding their international business are engaging in cross-border mergers and acquisitions.

► From IPO to M&A

Since the slowdown of the IPO rhythm on August 27, 2023, many companies planning to go public have terminated their IPO processes and accepted mergers and acquisitions by listed companies. At the same time, the companies withdrawing their IPOs are mainly innovative technology enterprises, aligning with the current guidance to encourage mergers and reorganizations of innovative technology companies.

Author of this article: Yi Zhenzhen S0080519030002, Zhang Xinyu S0080124070034, Source: CICC Insights, Original title: "CICC Deep Dive: Mergers and Acquisitions Handbook"