China’s ac­qui­si­tion spree won’t end well

The Pak Banker - - OPINION - Michael Schu­man

CHINA is on a shop­ping spree. On Jan. 12, Chi­nese prop­erty de­vel­oper Dalian Wanda bought con­trol of Hol­ly­wood film pro­ducer Leg­endary En­ter­tain­ment for $3.5 bil­lion. Just three days later, the ap­pli­ance gi­ant Haier ac­quired Gen­eral Elec­tric's white goods busi­ness for $5.4 bil­lion. The deals are just drops in a gush­ing tor­rent of Chi­nese over­seas spend­ing. For­eign di­rect in­vest­ment from China reached $111 bil­lion in 2015, by one es­ti­mate -- 10 times more than a decade ear­lier. For many Chi­nese com­pa­nies, such ac­qui­si­tions seem to make sense. En­cour­aged by the govern­ment and flush with cash, they have the fi­nan­cial mus­cle to buy on the world mar­ket what they cur­rently lack: tech­nol­ogy, mar­ket share, brands and man­age­ment skills. Why do things the hard way -- in­vest­ing in re­search and de­vel­op­ment, nur­tur­ing brands, and build­ing sales net­works -- when you can just write a check?

His­tory, though, tells us it's not that easy. In the 1980s, Ja­panese gi­ants, also awash in cheap money, snapped up for­eign com­pa­nies and tro­phy as­sets -- most fa­mously New York's Rock­e­feller Cen­ter -- but in many cases the deals were overly ex­pen­sive, poorly con­ceived and hor­ri­bly mis­man­aged. "The strate­gic ra­tio­nale," in the words of one con­sult­ing firm, "was fuzzy at best, amount­ing to lit­tle more than `be­cause it's cool, and be­cause we can.'" In the 1990s, Korean com­pa­nies that tried to ac­quire their way into world mar­kets learned that the old adage -you get what you pay for -- is all too true. Sam­sung's mis­guided stab into the global PC mar­ket -- its pur­chase of trou­bled AST Re­search -- ended in mas­sive losses. LG fared only a bit bet­ter with its ac­qui­si­tion of the flail­ing U.S. elec­tron­ics firm Zenith, which still sur­vives but never be­came a plat­form for in­ter­na­tional ex­pan­sion. The Haier-GE deal has some un­com­fort­able sim­i­lar­i­ties. Af­ter near­lytwo decades of ef­fort, Haier is still strug­gling to make progress in the U.S. mar­ket. Buy­ing GE in­stantly trans­forms it into a ma­jor player. But the price is steep: Haier is pay­ing about $2 bil­lion more than ri­val Elec­trolux had pre­vi­ously pledged, in a deal that broke apart due to reg­u­la­tory con­cerns. With only $400 mil­lion in earn­ings (be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­za­tion) on $5.9 bil­lion in rev­enue in 2014, the GE busi­ness is def­i­nitely not high mar­gin. And by main­tain­ing the GE op­er­a­tion as an in­de­pen­dent busi­ness with its own man­age­ment, Haier may lose some of the po­ten­tial syn­er­gies and sav­ings of the merger as well.

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