In recent news, a significant milestone has emerged from China's dynamic capital market, specifically regarding the merger of Guotai Junan Securities (601211.SH) and Haitong Securities (600837.SH). This merger has successfully passed the scrutiny of the Shanghai Stock Exchange's mergers and acquisitions committee, marking the first approved merger in the A-share market since 2025. This development ignites a renewed interest in the merger and acquisition (M&A) landscape within China's financial sector.

Since the announcement of six guidelines for mergers and acquisitions, the A-share market has seen an unprecedented surge in activityFrom September 24 onward, hundreds of firms have disclosed their merger intentions, with 49 companies unveiling restructuring plans and issuing proposals for further share issuance

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Interestingly, only eight of these firms are from the same sector, while 41 have ventured into cross-industry mergersAmong these cross-sector actions, eight involved acquisitions of electronic component enterprises and semiconductor firms, underscoring a strategic shift towards high-tech and innovative sectors.

However, the process of restructuring and merging companies is a labyrinth of complexitiesIt necessitates the seamless collaboration of buyers, sellers, intermediary institutions, and regulatory bodiesConflicts of interest are a persistent issue, as the motivations of buyers and sellers do not always alignAdditionally, with so many parties involved, maintaining compliance and managing insider information presents another daunting challenge.

Given the fervor of the current M&A market, one might wonder: how many of these mergers can actually proceed smoothly?

The current market environment is indeed bustling

Mergers and acquisitions serve as a critical avenue for capital raising and investor exits outside of initial public offerings (IPOs). As such, activity in the M&A market often intensifies during periods when IPO momentum slows

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For instance, in 2015 and 2016, the A-share market witnessed the completion of 215 and 226 IPOs, respectivelyDuring those years, however, there were also significant numbers of firms engaging in private placements —736 and 744, respectively — a considerable portion of which were raised for acquisition purposes.

Prominent transactions emerged during this period, such as the comprehensive listing of China Electricity Construction (601669.SH) and the reverse merger of Landsea Green Group (600606.SH) with Jinfeng InvestmentAdditionally, renowned companies like Giant Network (002558.SZ) resorted to backdoor listings, evidencing the robust M&A activity even amid tougher IPO conditionsA wave of privatizations also swept through the market, with Wanda Group and Qihoo 360 privatizing to later re-list on A-shares.

Conversely, the establishment of the Science and Technology Innovation Board (STAR Market) and forward-looking registration system reforms between 2020 and 2023 resulted in a robust average of 424 IPOs per year

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Meanwhile, only about 398 additional firms pursued private placements during the same timeframe; these were predominantly in renewable energy and photovoltaic sectors, not related to mergers or acquisitionsFor instance, CATL (300750.SZ) raised substantial sums of RMB 19.7 billion and RMB 45 billion in 2020 and 2022, respectively, to expand its production capacity.

Due to a sluggish market, the IPO process faced significant deceleration in 2024, with only 100 firms completing listings and raising a total of RMB 67.353 billionThis contrasts starkly with the RMB 586.886 billion raised from IPOs in 2022. Prior policies had curbed speculative trading in shell companies, which subsequently impacted the frequency and volume of mergers and acquisitions, with only 145 placements completed that year, largely of smaller scales.

With an increase in investment enthusiasm supported by large funds and various industry guidance programs, particularly following the STAR Market’s launch, many sectors, such as semiconductors and healthcare, received favorable financing conditions in recent years.

In 2020, financing in China's semiconductor sector amounted to 458 rounds with a total of RMB 109.769 billion raised; funding continued to rise, reaching RMB 111.6 billion in 2021 and garnering an impressive RMB 159.4 billion in 2022, amounting to 9.4% of total financing that year

However, as 2023 progressed, the slowdown in STAR listings led to a significant drop, with only RMB 54.6 billion collected in the local semiconductor market, reflecting a stark decline from the previous year.

The ongoing effects of a reduced IPO landscape compounded with a lack of capital outlets for quality startups have contributed to an increasing sense of disillusionment among investors with one even suggesting, “Is the primary market dead?” This phenomenon underscores the challenges facing the domestic tech sector—particularly as many companies grapple with urgent needs for transformation amidst changing market demands.

To invigorate the market and facilitate the transition and upgrade of public companies, the six merger guidelines were published on September 24, 2024. This announcement has since provoked a significant reaction within the M&A space, evidenced by 49 companies disclosing their restructuring agendas since the guidelines came into play

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Compare this to just 16 companies which outlined their plans from January 1 to September 24, 2024, which included state-owned mergers like Gansu Energy (000791.SZ) and Guolian Securities (601456.SH).

Yet, risks still loom large in this environment

Despite the encouragement for public companies to leverage mergers and acquisitions to inject quality assets and bolster investment value that the new policies present, legal oversight concerning M&A activities remains stringentAuthorities emphasize the ongoing commitment to uphold fairness within the market and protect investor interests even amidst policy relaxations.

On November 9, 2023, Yinfang Micro (000670.SZ), in an attempt to acquire certain assets, faced a serious setback as investigations opened into allegations of insider trading among the involved parties

As a result, the Shenzhen Stock Exchange has canceled their application for major asset restructuring, effectively quashing the merger efforts.

Moreover, prior to significant acquisition news, major stock fluctuations led to scrutiny regarding Jin Hongshun (603922.SH). Although the company asserted compliance with all relevant laws and regulations during this acquisition process, implementing stringent confidentiality measures and maintaining tight controls over insider knowledge, the market remains alert to potential irregularities.

Beyond these investigations, numerous M&A transactions have met their demise simply due to failure to align interests between partiesThis includes Shimao Energy (605028.SH) halting its acquisition of 58.07% equity in Zhanding Technology, and Karede (002072.SZ) retracting its bid for a 29.01% stake in State Grid Electric Power.

Even within successful mergers, the challenge of effectively controlling the acquired entities often leads to strife for these public firms

Companies such as Helun Zhe (300201.SZ), Shenli Co(603819.SH), and Conny Electric (603111.SH) have grappled with post-merger issues, primarily surrounding performance shortfalls or fraudulent reporting, which have forced them to seek legal remedies.

Furthermore, the goodwill resulting from high-premium acquisitions can amplify corporate riskIn 2023, Nadasda (002180.SZ) recognized RMB 8.159 billion in goodwill impairment, turning their profits into a RMB 6.185 billion lossSimilarly, companies such as ST Huayi (002602.SZ), ST Yigou (002024.SZ), and Jincheng Pharmaceuticals (300233.SZ) have all reported substantial goodwill impairment losses during the same timeframe.

The rapid advancements in technology and shifts in market landscapes have propelled China’s growth beyond previous decades

As a consequence, numerous listed companies confront significant adaptation challenges, facing intense pressure to transform their business modelsEncouraging mergers with high-quality tech firms amidst a deceleration of IPO activities could pave the way to mutual benefits in unlocking new potentials.

While the relaxing of M&A policies aims to stimulate activity, there's still a firm emphasis on adherence to laws and robust regulation to ensure that acquisitions and mergers remain transparent and justSince the introduction of the six guidelines, over a hundred companies have revealed their restructuring intentionsWith 49 firms planning capital increases, it is imperative to carefully discern genuine movements from opportunistic endeavors within the market, necessitating vigilant regulatory oversight.