Chinese companies large and small, private or State-owned, are embarking on a spree of overseas mergers and acquisitions, spurred by government policies that encourage overseas expansion.
All the signs are that M&A activity will break all records this year, even at a time of economic slowdown.
But what are the targets? Where are they? And, more importantly, how are Chinese firms going to overcome the inevitable challenges?
Ministry of Commerce data suggest smaller enterprises rather than larger, State-owned and private entities are behind the latest surge. In January, China’s non-financial outbound investment rose 18.2 percent from a year earlier to 78.7 billion yuan ($12 billion), almost three times the rate in December.
Of the country’s total overseas direct investment in January, 92.5 percent came from smaller enterprises, up 175.2 percent on the same period last year.
Figures from Morning Whistle Group show that private companies completed 76.78 percent of the M&A deals last year, while State-owned enterprises accounted for 20.29 percent.
The target areas were technology, media and telecommunications, agriculture and food, and energy and mineral resources. That is likely to remain the same this year, analysts say.
Commerce Ministry spokesman Shen Danyang attributes the trend to government policies aimed at promoting collaboration between Chinese entities and international companies.
Chinese investment in foreign manufacturing rose 87.8 percent to 10.6 billion yuan in January year-onyear, with much of the money flowing into the telecommunications, electronics, pharmaceuticals and motor vehicle sectors, Shen says.
And the data supporting the boom keeps coming. Chinese investment in the United States rose to 10.2 billion yuan in January, nearly four times the amount in the same month last year, according to ministry data. So what is driving this? Diving commodity prices are making some foreign companies a cheap buy. In addition, many SOEs have the means to buy, and for private companies, big or small, historically low interest rates mean borrowing is easier.
The Belt and Road Initiative, seen by many as a key pillar in China’s foreign trade drive, means government cash may well be available to SOEs to help fund acquisitions and make investments.
The Silk Road Fund, a government-owned investment vehicle, was launched at the end of 2014 with an injection of $40 billion. It aims to support infrastructure projects, mainly in Eurasian countries that lie along the proposed Silk Road Economic Belt and 21st Century Maritime Silk Road routes between China to Europe.
More to the point, Chinese State and private companies see the Belt and Road Initiative as a clear sign that the government wants them to look overseas.
“A lot of SOEs are fairly cash-rich,” Ben Cavender of China Market Research Group told nasdaq.com recently. “One of the issues they are running into is they’re out of room to grow in their home market.”
Probably the most eye-catching recent deal was in February, when China National Chemical Corp, commonly known as ChemChina, agreed to pay $43 billion for the Swiss pesticide maker Syngenta AG. If regulators and the Swiss company’s shareholders approve the deal, it will be the largest-ever Chinese takeover of a foreign company.
The chemical company also grabbed headlines by buying Italy’s premium tire maker Pirelli for $7.7 billion. The deal was funded in part by Silk Road Fund, which took a 25 percent stake in the ChemChina unit set up to buy Pirelli’s shares.
Wang Jianlin, chairman of Dalian Ownership in terms of number of deals Form of investment by volume Wanda Group, has forthright views on foreign acquisitions.
“Any time is good for an M&A,” he told business students at Oxford University recently. “It’s hard to determine when it’s inexpensive and when it’s expensive. It may be the case if you look at your investment on a two to three year time span, but if you take a long-term view, say 10 years, then it really doesn’t matter.”
However, merger activity can have its challenges. Most analysts accept that the US, although a huge market, does provide a series of regulatory hurdles, as well as a Congress that at times seems highly protectionist.
For example, a move by Chinese investors led by GSP Ventures to acquire an 80 percent stake in the lighting and auto unit of the Dutch company Philips fell through after the US Committee for Foreign Investment blocked the move on security grounds. Philips has several US government contracts.
“The United Kingdom and the US are equally important countries,” Wang says. “I’ve invested $10 billion in the US because it is a big market, but the UK is the freest market in the world. The US claims to be a free country, but for investing there are many complicated approval processes.”
Still, the foreign merger route for Chinese companies continues unabated.
Chinese firms look upon mergers as a way of acquiring know-how to help the country in its transition from a focus on “made in China” to “designed in China”.
“M&A deals are an important ingredient to China’s State-driven transition and development strategy,” says Danae Kyriakopoulou, senior economist at the Centre for Economics and Business Research in London.
“This is because Chinese companies need to acquire the know-how of the new growth sectors in order to support the economy’s rebalancing away from being the world’s hub for basic manufacturing and heavy industry and towards high-end economic activities, and M&A with companies of those more-developed economies in those sectors is a way to do that.”
Chinese companies are being encouraged to seek merger targets abroad, buoyed by government policies that have reduced paperwork and eased restrictions on foreign investments, says Duncan InnesKerr, regional director for Asia at the Economist Intelligence Unit.
“The slowdown in China’s economic growth has added momentum to the trend.”
Professor Alan Barrell of the Centre for Entrepreneurial Learning at the Judge Business School, University of Cambridge, says: “It makes enormous sense for a cash-rich economy such as China to spread wings and grow internationally by acquisition and to explore sectors as yet unexploited overall by M&A involving overseas companies and assets, notably technology, and not just real estate.’’
However, there are pitfalls. Kyriakopoulou says the main challenges facing Chinese enterprises arise after deals have been struck.
“These are chiefly to do with the understanding of different regulatory systems and the clash of corporate cultures.”
Wanda chairman Wang talked about the challenge of linguistic problems in M&A when he addressed students in Oxford.
“English is our greatest challenge. We have a lot of senior employees in Wanda. However, when going global in tourism, sports and entertainment, inadequacy in English is a huge challenge.”
Contact the writer at chris@mail. chinadailyuk.com
A farmer stacks collection baskets near sacks of Syngenta beans at a farm near Johannesburg, South Africa.