Foreign Correspondence

[Amaunet]

China Looks Outside Asia for M&A

Sun Oct 24, 2004 08:50 AM ET
By Caroline Humer and Brian Kelleher

NEW YORK/HONG KONG (Reuters) - Chinese companies are starting to pursue North American and European electronics and consumer brands as their government pushes them to build global sales forces for their low-cost products.

These companies are targeting businesses that have strong brands or technologies but are lagging behind larger competitors with lower manufacturing costs, bankers and lawyers said.

"They are rapidly expanding out of the area that was the first focus, which was getting ahold of natural resources and other raw materials," said Jack Lange, a partner at law firm Paul, Weiss, Rifkind, Wharton & Garrison.

"There is the desire to get ahold of a global brand, a desire to get a global distribution network, the desire to get technology or in some cases the right to use technology," he said.

Lange, who is based at the firm's Hong Kong office, recently worked on two consumer electronics deals that bring low-cost Chinese manufacturing to global brands. TCL International Holdings (1070.HK: Quote, Profile, Research) , a Chinese television and cell phone vendor, formed joint ventures earlier this year with two French companies, consumer electronics manufacturer Thomson SA (THMP.PA: Quote, Profile, Research) and telecommunications company Alcatel (CGEP.PA: Quote, Profile, Research) .

Those deals contrast with more traditional ones, such as the recent $5 billion bid by state-owned China Minmetals Corp. for Canadian mining giant Noranda Inc. (NRD.TO: Quote, Profile, Research) .

BRISK ACTIVITY

The number of deals can only increase, industry players agree, although they differ on their estimates of the pace at which that will occur.

Companies like China's No. 1 steel maker, Baoshan Iron and Steel Co., or Baosteel (600019.SS: Quote, Profile, Research) , and top appliance maker Qingdao Haier Co. (600690.SS: Quote, Profile, Research) are among those expected to buy assets overseas.

"I think (Chinese companies are) very seriously looking at North America and Europe because they think they're the highest quality assets," said Leon Meng, head of China M&A for J.P. Morgan (JPM.N: Quote, Profile, Research) .

Overseas merger and acquisition activity by Chinese companies is on track to surpass 2003 levels this year, according to research firm Dealogic. Through mid-October, there were 43 overseas deals, up from 39 for all of last year. The total value of the deals was $1.93 billion, compared with $2.2 billion for the full year of 2003.

This growth comes amid a stronger M&A market overall, as deal values have increased 78 percent in the Americas and 25 percent in Europe in the first nine months of 2004 from a year earlier, Dealogic said.

Trying to stimulate overseas corporate investment, Beijing in the summer circulated a list that detailed buying opportunities like auto parts makers and software developers in the United States.

"This is a really rational approach to overseas investment," said Stuart Valentine, a partner in Hong Kong law firm Clifford Chance, adding it was the first time the government had done this.

"The long-term goal is for China to develop multinational companies," he said.

Chinese companies have started by expanding in Asia. The 999 Group, one of the largest drugmakers in China, bought a 51 percent stake in Japan's East Asia Pharmacy last year and is seeking to acquire another Japanese pharmaceutical business, according to Donald Koo, a lawyer with Paul, Hastings, Janofsky & Walker in Hong Kong.

OVERCOMING HURDLES

Overseas transactions face their obstacles, such as integrating the acquisition. Financing a deal is relatively easy, but paying for working capital requirements sometimes proves difficult for companies with no previous track record in foreign markets, J.P. Morgan's Meng said.

Lange, the Paul Weiss lawyer, said other barriers include national security issues and concerns about foreign ownership of certain assets, such as factories.

"In the U.S., the whole idea for many communities of being under the control of a company from Communist China is going to be so exotic that it's bound to generate some resistance, which may affect the structure of deals," Lange said.

That can mean leaving out certain assets or forming joint ventures, as TCL did, instead of making an outright acquisition, he said.

Chinese companies also need to get more comfortable using M&A to grow, bankers say.

"Although there has been M&A domestically, not many companies have grown through M&A, but organically," said David Chin, head of Asia M&A for UBS (UBSN.VX: Quote, Profile, Research) .

But the challenges of outbound M&A will not stop the trend from growing, experts agreed.

"In the next 10 years, I don't think you'll see Chinese companies dominating any part of the U.S. economy," Clifford Chance's Valentine said, "but you will see significant investment."

Others said the market, while growing, will be limited by the small number of world-class companies in China.

"There are a few companies in China that are large enough to use outbound M&A as a tool, but they're going to be very selective," said Ed King, executive director for Morgan Stanley (MWD.N: Quote, Profile, Research) . "In the near future, I don't think you'll see a flood of activity as you saw from Japan in the '80s."


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