Stronger together

07/28/2022

When done right, mergers and acquisitions have the ability to help a company to achieve exponential growth, capture a larger share of the market and effectively elevate the business. However, the journey to a successful merger or acquisition is pockmarked with challenges, and calls for experts like accountants to help companies find the best way forward. Accountants who specialize in M&As tell Jeremy Chan how they add value in the M&A process, the skills needed to succeed in this area, and why Hong Kong will always maintain its status as an M&A hotspot

Illustrations by Gianfranco Bonadies



To a company, there are few decisions that are as important – and critical to get right – as mergers and acquisitions (M&A). While there is a long list of benefits for companies, it can be easy for them to get distracted by the merits, and in doing so, fail to navigate the risks that threaten transactions. Aron Leung CPA, who has spent more than 20 years of his career dealing with M&As, knows this well. “From the perspective of the buyers, the most common risk in every acquisition is the lack of a thorough understanding of the target company, and an understatement of the resources required to manage the acquisition process. This could lead to a huge cost,” says Leung, Director and Advisor of a consulting services company, and a member of the Hong Kong Institute of CPAs’ Corporate Finance Committee (CFC).

Valuation experts, lawyers, investment bankers and advisors work closely together to steer companies through the delicate process – and all of them rely on the expertise of an accountant. “As accountants, we act as independent advisors to buyers, who want to understand different areas of the target company. So we conduct financial and tax due diligence reviews of the acquisition target. It’s our job to help them identify the risks and opportunities of the transaction,” adds Leung. “We contribute to various phases in the acquisition process.”

Leung is one of a growing number of accountants who specialize in M&A. Drawn to the fast-paced and often unpredictable nature of the job, they are also attracted to the potential found within Hong Kong, which has long served as an M&A hub for domestic, Mainland and multinational companies.

There were 1,529 M&A deals in Hong Kong worth a combined value of US$182.79 billion in 2021, representing a 49 percent increase in value from 2020, according to the South China Morning Post, citing data from Refinitiv. It is the largest number of M&A transactions seen in Hong Kong since 2017, when M&A deals totalled US$207.52 billion.

M&A deals in both Hong Kong and Mainland China totalled 2,381 in 2021 – the most deals since 2006 – according to China & Hong Kong Trend Report FY 2021, a report released in January and conducted by Mergermarket, a financial data provider. The study found there was a 13 percent increase in deal values compared to 2020, totalling US$545.2 billion in 2021, and an 18 percent increase in deals, also compared to the previous year. The boom in M&As last year is largely attributed to company mergers in infrastructure and technology, media and telecommunications, and an increase in private equity buyouts.


Strategically positioned

Hong Kong’s proximity to Mainland China has helped to bolster M&A activity in the city. It serves as a key connector for overseas companies hoping to acquire companies located in Mainland China and vice versa. Despite ongoing travel restrictions continuing to impact foreign inbound investments in Mainland China this year, Hong Kong’s stable legal system, for example, continues to provide much-needed comfort to investors looking to tap into the Mainland market. “Certain foreign investors are not familiar with the interpretation of legal rules and government policies on the Mainland – and this brings uncertainty,” says Thomas Tang CPA, Partner, Deal Advisory at KPMG. “For inbound investments, Hong Kong is a platform for investors to invest into the Mainland; it provides them with more visibility in terms of the key aspects of agreements under Hong Kong law.”

Both Mainland and overseas investors are also drawn to the city’s status as an international financial hub and its deep capital pools, notes Jacky Lai CPA (practising), Partner, Assurance at EY. “Hong Kong’s financial market has the right size and depth, along with a rich talent pool in professional services, and a diverse suite of financial products and highly liquid currency. All of these give Hong Kong the edge in terms of being a hub for overseas M&A – whether it is inbound or outbound,” he says.

Hong Kong’s culturally-astute talent pool also provides the city with a key advantage that few other cities have. “Apart from a good command of English and Mandarin, we in Hong Kong have a good understanding of the recent developments, practices and most importantly, the culture of China, and at the same time we have a global mindset, compared to other financial hubs. This is a unique advantage that Hong Kong has,” points out James Cheng CPA, Investment Director at China Everbright Limited and a member of the CFC. “There are also various M&A-friendly policies and infrastructure in Hong Kong, for example our stable tax system and incentives, tax treaties with China, free flow of capital, and revised limited partnership fund regime, to name a few. These all make Hong Kong an ideal destination for doing M&A in China, Asia and beyond.”

Backed by SPACs

Another force driving M&A activity in Hong Kong is start-ups going public by merging with special purpose acquisition companies (SPACs). Also known as “blank cheque companies,” SPACs are designed to raise funds in an initial public offering (IPO) with the aim of acquiring a private business at a later stage. The introduction of the Hong Kong Stock Exchange’s (HKEX) SPAC listing regime, which came into effect in January this year, will not only lead to more M&A deals, but also provide investor assurance. A total of 12 SPACs have applied to list in Hong Kong since January, and the city saw its first ever SPAC listing in March.

The final rules of the new SPAC listing regime require SPAC promoters, which refer to experienced and reputable professional managers, such as private equity firms or institutional investors, to be licensed by the Securities and Futures Commission (SFC) and for all SPAC initial offerings to raise a minimum of HK$1 billion in funds, among other requirements.

Cheng welcomes the new SPAC regime and says it will benefit both start-ups in Hong Kong and the Greater Bay Area (GBA), and pave the way for more listings in Hong Kong. “As a start-up course lecturer in the University of Hong Kong for the past two years, I see it as a huge positive to the start-up ecosystem in Hong Kong and the GBA. Nowadays, start-ups customarily seek external capital during growth stage, and these investors need to feel comfortable with the prospect of realizing an investment before making one. While IPOs as a pathway to realize investments are time-consuming, and market sentiment at listing is notoriously difficult to predict, SPACs provide a very efficient and less time-consuming alternative of getting businesses listed. It provides investors with certainty to realize investments when they invest in early-stage companies, for instance tech start-ups, and will in turn drive more money into the market to fund the brilliant ideas I have seen in the past couple years,” he says.

As required by the new listing regime, a de-SPAC transaction – which is a company merger involving a SPAC, a buying entity and a target private business – must take place within 24 months of a listing, with acquisitions to be completed within 36 months of a listing. This will inevitably add thrust to M&A transactions, adds Andrew D’Azevedo, Tax Partner at PwC Hong Kong and Mainland China. “We have seen some difficulties in the SPAC market, one example being time pressure in finding suitable targets to buy,” he says.

The new rules will also favour quality listings over quantity, requiring that the business to be acquired, also known as a de-SPAC target, must effectively meet the new listing requirements and be large enough that its fair market value would be at least 80 percent of the initial funds raised by the SPAC. “In other words, what we don’t want to see is a SPAC buying into sub-standard companies, leading to a failed SPAC arrangement,” explains Tang. “With the HKEX’s SPAC listing rules, we should expect SPAC transactions to be of a fairly good quality. This will create another layer of comfort for investors who want to enter the SPAC market.”

D’Azevedo concurs, and notes that the new regulations will provide an impetus for SPAC listings to perform better and allay any investor concerns. “The regulators in Hong Kong now require a higher standard in terms of promotors and sponsors. This will boost investor confidence, but at the same time, put more pressure on seeing a successful SPAC transaction through to the end.”



“For inbound investments, Hong Kong is a platform for investors to invest into the Mainland; it provides them with more visibility in terms of the key aspects of agreements under Hong Kong law.”

CPAs in M&As

As Lai notes, accountants play a vital role in every M&A deal, and are often involved in the beginning stages of the process with other experts. “Before a target is even marketed to the buyer, bankers, advisors and accountants would ensure that the appropriate financial information is in place, and that a deal model with proper profit or cash projections are ready for the potential buyers,” he says.

The most taxing aspect of every M&A is the due diligence process, which begins upon the acceptance of the offer. This sees the M&A team conducting a detailed examination of the target company’s operations, such as its financial metrics, assets and liabilities, customers, and environmental, social and governance (ESG) performance. The due diligence process is crucial, Lai adds, as it helps the M&A team and accountants test assumptions and identify any issues hidden within the target company. “It helps us to identify the transaction value drivers, improve the M&A deal structure, and mitigate any related risks,” he explains.

Indeed, performing due diligence helps accountants to structure the deal itself. In an M&A, a deal structure essentially outlines how the deal will generate value for all parties involved, and takes into account issues that may arise several years into the future and in particular, unforeseen risks that could impact the deal. “As a result of the findings from our due diligence, we’re able to advise clients on the risk areas of the target business, and how to best mitigate them through transaction documentation and structuring the deal,” says D’Azevedo. “We can provide financial, tax and any other technical input required for our clients to make an informed decision before going ahead or deciding to pull the plug on a deal.”

D’Azevedo, who specializes in regional M&A deals involving multiple jurisdictions, notes that tax issues uncovered during due diligence could have the potential to adversely impact the deal process. “We have seen a few isolated cases where a tax issue we’ve identified through due diligence has actually turned into a deal-breaker, where either the buyer has walked away, or where the deal structure has had to be completely revamped or renegotiated to allow sufficient comfort for the buyer, so that historical tax risks will not be inherited.”

Accountants also play a key role after the deal has been signed. “We often pop champagne and celebrate after a deal is signed, but it is only the beginning of a long value creation journey,” notes Cheng, highlighting that accountants play pivotal roles throughout the journey from acquisition to post-deal management and eventually exit. “If the financials do not reflect the underlying business operations, the valuation can only be wrong, not to mention heightened risks on profitability, cash flow, internal controls and even operations, strategic decision-making and business viability,” he says.

Sustainable value

A target company’s ESG performance is becoming an increasingly important deciding factor in M&A deals. According to The ESG Imperative in M&A, a report by Bain & Company released in February, more than 50 percent of M&A practitioners see ESG leadership as justifying deal valuations.

D’Azevedo has seen how a company’s ESG performance can impact its overall valuation following the due diligence process. “ESG is now a key value driver,” he says. “Certain ESG factors could justify a much higher purchase price and indicate that the investment is resilient in performance post-deal, and hence, future exit value.”

There is also increasing demand from investors for companies that place sustainability at the forefront of their operations, notes Lai. “Certain financial institutions have already been mandated to increase their investment in sustainable products and disclose their level of green investments –  these developments are driven by a strong push from institutional investors to build a green and more socially-responsible portfolio,” he says. “Institutional investors can significantly influence M&A-related decisions of the companies they have invested in.” For example, American investment bank Goldman Sachs Group Inc. acquired NN Investment Partners, a top-ranked ESG asset manager in Europe, for US$1.9 billion in April, adding ESG offerings to Goldman’s existing offerings.

The demand for sustainability has led to ESG experts joining the due diligence process, with accountants having to work closely with them to scrutinize a target company’s ESG priorities. ESG due diligence typically involves the collection of ESG key performance indicators, documents, performing interviews with company stakeholders, performing checks and reviews, and physical inspections in order to compile an ESG risk assessment, according to Lai. “All of these steps – and the skill sets required – are largely similar to financial due diligence. It isn’t uncommon to see advisors and ESG experts working together with accountants to perform ESG due diligence these days,” he explains. ​


“Certain ESG factors could justify a much higher purchase price and indicate that the investment is resilient in performance post-deal.”


Working as one

Accountants who are part of an M&A team have to be effective communicators in order to generate value alongside the different experts they work with. It is therefore crucial that team members highlight risks or findings as soon as they are discovered, as this will not only ensure issues can be quickly addressed, but also establish trust, and lead to greater overall transparency within the team. “We cannot do work in silos,” stresses Tang. “We need to work hand in hand with other advisors and investors to make sure that we clearly communicate our findings. This helps everybody to gain a better understanding of the target company from different perspectives.”

D’Azevedo notes that close communication throughout the entire M&A process will help the team to build trust with the client. “Teams have to be connected and aware of the risks each member is highlighting throughout the deal process. This is the only way that ensures a coordinated approach when we deliver our findings to the client,” he says. “It is important for the client to know that they’re working with one coordinated team, instead of a decentralized team that isn’t communicating with each other.”

Lai says the meticulous nature of M&As makes it a specialization worth considering for accountants. “The foundation of an accountant’s work is analysing and comprehending data sets and numbers, and a lot of what we do in an M&A relies on the details of both the process and analysis. We have to be detail-oriented; if the details in an M&A aren’t right, it can jeopardize the entire deal,” he says.

CPAs who are interested in understanding more about M&As and meeting like-minded individuals can consider attending events hosting by the Institute’s Corporate Finance Interest Group (CFIG), says Leung. “The CFIG is made up of professionals from a wide variety of backgrounds and experience. Some of them, like myself, are more experienced in M&As, whereas others specialize in listing matters, IPOs, investment banking and private equity. So it’s a great way to network with people from different backgrounds,” he says. “We can provide a lot of insight into how the process works, and to help members stay updated on the latest developments in M&A.”

Cheng invites CPAs to not only attend in-person seminars and webinars, but to also put forward their suggestions as to what they would like to learn. “While we actively identify topics for our members, we always listen to our fellow members on what interests them, and we reach out for appropriate speakers,” he says, noting how he helped to organize a webinar on SPACs in 2021 and invited lawyers to speak on the topic. “We’re always happy to get in touch with our contacts for future webinars.”


“A lot of what we do in an M&A relies on the details of both the process and analysis. We have to be detail-oriented; if the details in an M&A aren’t right, it can jeopardize the entire deal.”

To buy or not to buy?

While an M&A may seem like an obvious strategy for future growth, it is crucial for companies to conduct the proper research into the company they hope to acquire or merge with, and whether doing so will fit into the long-term growth strategy of the organization. “Internally, they should look into whether the target company can really add synergy or value to their existing business,” Tang explains. “It is key for them to do this before jumping into doing all the detailed execution work.” D’Azevedo agrees, noting that a client has to assess the commerciality of a deal, long before proceeding to the due diligence process. “Because once that starts, advisor fees can rack up pretty quickly,” he says.

Lai says companies can consider financial forecasting to determine what they will ultimately gain from the acquisition or merger. “They can estimate the value their business will gain through modelling the economic benefits of the services, solutions and clients a target has access to. Perhaps the acquisition will help them to gain more share from a competitor, or it may open up a new revenue stream outside of their current dimension,” he says.


With the right preparation, and team to conduct due diligence and coordinate the deal, the company will stand a better chance in reaping the benefits of an acquisition, Lai concludes. “As with most aspects of business, acquisitions also carry risk. But by being strategic, and basing decisions on robust due diligence – especially around culture fit and value alignment – a business can come out of an acquisition stronger than ever.” 


There were 1,529 M&A deals in Hong Kong in 2021. The deals are worth a combined value of US$182.79 billion and is the largest number of M&A transactions seen in Hong Kong since 2017, which netted US$207.52 billion in deal value.