The perfect partner is just an ocean away
Chinese businesses have joined the international match-making stakes and are still a little starry eyed
Iremember that on the first anniversary of China Daily, on June 1, 1982, the paper’s Opinion Page carried a short letter from Willbur Schramm, the then director-emeritus of the Institute of Communication Research, Stanford University; and the East-West Communication Institute, East-West Center, in Hawaii.
Schramm said China Daily’s potential readers would include “the millions outside China who cannot read the People’s Daily and other official publications in Chinese, but nevertheless want to hear the voice and feel the pulse of China if they can”.
“This group is hard to reach because it is so widely scattered, hard to serve because it holds diverse ideas of the path a China paper should walk between information and persuasion. Yet it may be potentially the most important audience to which the daily might seek to expand its future years.”
The professor didn’t say what people this group would include. But a front-page lead that had appeared just three weeks earlier, on May 7, 1982, indicated who they might be. The headline reads: PRC likely to seek out overseas investment.
The bulk of the story was based on a talk given by Ji Chongwei, a senior economic official, upon his announcement of a newly established Foreign Investment Administration Committee under the Ministry of Foreign Economic Relations and Trade (now part of Ministry of Commerce).
That was the time when the paper was an eight-page black-and-white product. I had just joined the staff, freshly graduated from college after receiving “re-education” on farms during the “cultural revolution” (1966-76). Things were only beginning to change. But I was not clear what overseas investment was and why it was so important as to deserve to be a front-page lead.
Most young staff members like me, even though we had majored in English, had never heard of the expression “mergers and acquisitions”.
Soon enough, changes taught me that overseas investment was an indispensable driving force in China’s modernization. But change was hard, as many foreign business people complained of difficulties. To make a profit would be a great trial of patience.
Negotiations could drag on for months, if not years. It was not until the early years of the 1990s when the concept of market economy was written into China’s top-level official document. Foreigners’ equity in a Chinese company was an issue subject to the universal standards of law, and no longer politically sensitive.
What followed was a golden time. China remained a leading recipient of foreign direct investment for over two decades. In return, the country witnessed the most rapid growth in GDP and in foreign trade.
Mergers and acquisitions, as a matter of course, became a daily phenomenon between Chinese and foreign companies.
In 2016, the country is moving rapidly toward a balance between inbound and outbound direct investments. In the first quarter of 2016, China was the largest M&A player in the world.
The business of buying or merging with overseas companies is not unlike looking for the perfect marriage partner: At times it may be OK to let your heart rule your head, but ultimately the decisions to be taken need strong doses of sober reflection.
Looked at this way you could say that over the past 15 years China’s enterprises have fallen head over heels with mergers and acquisitions, have taken the plunge and are now enjoying the honeymoon.
The clearest evidence of the gusto with which the country has taken to this new way of life is the fact that in the first quarter of this year it was the world’s largest acquirer in terms of the value of mergers and acquisitions, based on figures provided by Dealogic, a global financial data provider.
China announced a record $92 billion of overseas mergers and acquisitions deals from January to March this year, accounting for 30 percent of the world’s total, Dealogic says.
In February the State-owned conglomerate China National Chemical Corp agreed to buy the Swiss agricultural group Syngenta for $43 billion, making it the largest foreign takeover by a Chinese company.
“Chinese companies are becoming big buyers globally,” says Wang Yunfan, chief executive officer of Morning Whistle Group in Shanghai, a one-stop service provider in overseas mergers and acquisitions of Chinese capital.
The value of such activities has grown six years in a row, the total last year being $107 billion, Dealogic says.
“That number would have been unimaginable a decade ago,” says Zhang Xiaoping, a business consultant and a keen observer of mergers and acquisitions.
In 1992 Shougang Group bought a 98.4 percent stake in Hierro Peru Co in one of the earliest overseas mergers and acquisition deals by a Chinese company, he says.
However, it was not until 12 years later, after the National Development and Reform Commission streamlined rules on the management of overseas investment projects, that interest by Chinese concerns in overseas mergers and acquisitions really began to take off. That year the deals were worth $7 billion.
As with any quest for a good suitor, Chinese enterprises have had the odd rebuff or two on the mergers and acquisitions path over the past decade or so. In 2005, a bid of $18.5 billion by China National Offshore Oil Corporation for control of Unocal, then a US oil and gas company, fell flat. That too was the fate that Aluminum Corp of China had to accept after it offered $19.5 billion for a partnership with Anglo-Australian company Rio Tinto Group, one of the two largest suppliers of iron ore in the world, in 2009.
“One of the lessons of Aluminum Corp of China’s failure to take over Rio Tinto Group is that you need to increase the opportunity cost of the deal,” says David Xu, partner-in-charge of the advisory KPMG Northern China, who joined KPMG in 1997 and has been a specialist consultant in overseas mergers and acquisitions since 2005. The failure of the Rio Tinto deal was the result of bulk commodities prices rising sharply, more than making up for a cancellation
fee the company would have to pay, Xu says.
Henry Cai, chairman of the Asian-Europe growth capital investor AGIC Capital, says: “There has been a huge amount of overseas investment by Chinese companies over the past 15 years, but in half the cases the result has been failure. One of the main reasons is that Chinese companies have had little knowledge of industrial systems in other markets. There’s a wave of overseas investment going on right now, but a company should only act when it really is ready; there is no need to rush.”
The best prospects lie in “intellectualized and automatic sectors”, Cai says.
Over the past three years private companies have emerged as one of the major players in overseas mergers and acquisitions, Xu says.
“Before 2013 few private companies came to us for advice on overseas mergers and acquisitions, but now such business almost equals that of State-owned enterprises.”
Private companies are more nimble in their decision making, and they will continue to be an increasingly important force in overseas mergers and acquisitions, Xu says, citing the insurance company Anbang, the investment group Fosun and the conglomerate Dalian Wanda as examples. All three have been highly active acquirers internationally.
“You really need three to five years to gauge whether one of these overseas deals is successful because integrating two corporate entities can be a fraught task.”
Of all the overseas deals Xu has studied, those of the automotive components maker Wanxiang Group in the United States have been among the most impressive, he says.
“The size of Wanxiang’s M&A deals has not been that big, and the price has been relatively reasonable.”
Since its first acquisition of a solar energy plant in the US in 1996, Wanxiang has bought 28 plants in the US, producing auto spare parts for GM, Ford and Daimler Chrysler.
Ni Ping, president of Wanxiang Group’s US company, says the way existing staff and those of a newly acquired company are integrated can determine whether the acquisition succeeds or not. Having local staff is particularly important for Chinese companies, he says. Wanxiang employs more than 6,500 people in the US.
Despite the impressive growth of Chinese enterprises’ overseas mergers and acquisitions, the proportion of Chinese assets overseas remains minuscule compared with those of developed markets. Europe, the United States and Japan each have about 40 percent of their business assets overseas, and the figure for China is just 8 percent, Morning Whistle says.
“A lack of skilled people is one of the biggest problems,” Xu says. “In recent years Chinese companies have taken on more international M&A talent to manage mergers and acquisitions process, but it will take a bit longer to get other professionals like engineers good at communicating with their counterparts in the acquired foreign company to get up to speed.”
According to a survey by the University of International Business and Economics in Beijing, Chinese companies lack translation and other language skills needed to expand overseas.
These can still be counted as the early days of Chinese companies making transnational acquisitions, says Shen Danyang, a spokesman for the Ministry of Commerce.
Chinese overseas investment accounts for just 3.4 percent of the world’s total, he says, the figure for the US being 24.4 percent. Britain, France, Germany and Japan are also ahead of China on this count, he says.