20.29%

China Daily (Canada) - - ANALYSIS -

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

PRO­VIDED TO CHINA DAILY

A farmer stacks col­lec­tion bas­kets near sacks of Syn­genta beans at a farm near Jo­han­nes­burg, South Africa.

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