China's crackdown on tech sector could cool M&A activity after first-half deals soar, PwC says

Didi Chuxing, finished a data security review, sweeping measures to overhaul overseas listings, bar IPOs by online education platforms, Tencent Holdings, intensify competition in the sector

Concerns about an ongoing regulatory crackdown on China’s technology sector is starting to weigh on merger activity and could slow down what has been a bumper year for domestic deals, according to PwC.

The volume of domestic deals by strategic buyers in the first half surged to its highest level since early 2018, with 2,753 transactions raising US$145.6 billion, the audit and consulting firm said. That represented a 41 per cent increase from the latter half of 2020 and a nearly 7 per cent increase from the first half of last year.

The tech sector also was the second highest industry for strategic deals in China in the first half, representing 17 per cent of all transactions, according to PwC.

However, the recent crackdown on technology and online tutoring firms has made the world less predictable for investors and deals around those high-growth sectors, said David Brown, Asia-Pacific deals leader at PwC.

“At the moment, people are not quite sure where this is going. You see the asset prices bouncing around and that’s indicative of the fact there’s a lot of uncertainty,” Brown said at a press conference on Wednesday. “Uncertainty is generally the enemy of M&A because you can price agreement. You can’t get transactions to happen. People just press the hold button.”

Beijing has heightened its scrutiny of practices in the tech sector since it abruptly shelved the planned dual listings of Ant Group, the operator of Alipay, in November.

That has only intensified since Didi Chuxing, the operator of China’s dominant ride-hailing app, went forward with the biggest initial public offering in the US by a Chinese firm since 2014, before regulators finished a data security review.

In recent weeks, the Chinese government has announced sweeping measures to overhaul overseas listings of companies that have access to the data of more than 1 million Chinese consumers and said it would bar IPOs by online education platforms.

On Wednesday, Tencent Holdings, the biggest video game business operator globally, said it would significantly cut down on the playing time of minors under 18 years old for its flagship Honour of Kings game to appease concerns in Beijing about gaming addiction among China’s youth.

Earlier this week, S&P Global Ratings said greater scrutiny on mergers, overseas listings and anticompetitive behaviour in the tech sector in China could intensify competition in the sector, as firms focus on organic growth and greater internal investment over deals.

Brown, the PwC partner, said he expects the shifting regulatory landscape and uncertainty over deals in the Chinese tech sector to “play out reasonably quickly”.

“At some point, it will become clear and that will help,” Brown said. “Once everybody has a common view of the world actually you’re in a better phase.”

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