The per­fect part­ner is just an ocean away

Chi­nese busi­nesses have joined the in­ter­na­tional match-mak­ing stakes and are still a lit­tle starry eyed

China Daily (Canada) - - RAILWAY - HU YUANYUAN

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.

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