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Chinese companies stride on to M&A stage
Published: December 1 2010 12:17
The global economic crisis has done little to slate the thirst of Chinese companies searching for outbound acquisitions.
With the euro and dollar low and the renminbi strengthening, companies in China have stepped up their hunt for international assets and now almost every industry is on their radar.
So far this year, these companies have spent $51.4bn on overseas deals, up 40 per cent on the $36.8bn they spent during the same period last year, according to Dealogic. The bulk of those deals have taken place in oil, gas and mining as China moves to secure strategic resources.
Now, however, international dealmaking by Chinese companies is diversifying into all sectors, from automotive and high technology to consumer and luxury goods.
This spending spree is being encouraged by China’s government, which wants to see private companies, as well as state-owned enterprises, expand internationally to boost their global competitiveness.
For most, money is no object. They could outbid almost any international multinational in most competitive situations – especially at a time when chief executives are wary of overpaying for deals in advance of a full recovery. The bigger problem is whether they can win over their target board and shareholders.
The bidding war around Draka, the Dutch cable manufacturer, clearly highlights the issues many of these Chinese companies will face as they take their place on the global mergers and acquisitions stage. Last week, Xinmao Science and Technology, a Shenzhen-listed subsidiary of Xinmao Group, made a surprise all-cash €1bn ($1.3bn) offer for Draka, trumping an earlier offer from Prysmian, the Italian cable company, by as much as 20 per cent.
The move immediately drew scrutiny from investors who wanted to know how a company the size of Xinmao with a market value of just €400m would be able to finance a deal with a €1.5bn enterprise value.
To allay these doubts, Xinmao issued a statement saying it had the necessary financing from China Minsheng, the Chinese bank, to make the offer.
That is not something a company in a developed country would have to prove during an M&A situation.
Meanwhile, Prysmian is using the protectionist card to try to convince Draka’s shareholders that its offer is superior, albeit lower, to Xinmao’s. Paolo Romani, the Italian industry minister, said he would consult the Dutch government about keeping the merged group in Europe. “Maybe it is better to have the headquarters of a big multinational in a strategic sector stay in Europe instead of risking all the know-how [being] transferred to China,” he was quoted as saying.
The Italian company has also been making much of its scope to generate roughly €100m of annual run-rate synergies within three years of buying Draka.
Shareholders will decide whether money or strategic rationale will win the day, but Xinmao’s aggressive intervention shows just how determined Chinese buyers are in trying to secure international expertise and technology. As Liu Haiyan, senior vice-chairman of the China Federation of Industrial Economics, said on the sidelines of a Sino-European economic relations summit in Hamburg last week: “A number of Chinese companies came with us to understand how they can invest here.”
Inevitably, there will be many mistakes as they learn how to do M&A overseas. There have already been some clumsy attempts, such as Bright Food’s recent approach to United Biscuits.
The company, which is majority owned by the Shanghai provincial government, offered a high price to gain exclusivity with Blackstone of the US and France’s PAI with a view to buying the $3.2bn maker of Jaffa Cakes and Twiglets.
But talks crumbled when Bright Food tried to chip its initial offer down, forcing the private equity owners to reopen the sale process to other bidders. Bright Foods should have known better – this was its second attempt at an international acquisition, and its first also fell by the wayside.
The Chinese company spent more than a year trying to buy Sucrogen, the sugar and biofuels unit of Australia’s CSR, before losing to Singapore’s Wilmar International. If that had happened in the west, shareholders would be questioning the company’s M&A strategy and leadership. However, Bright Food is unlikely to be deterred from its plans for international expansion.
Difficult situations such as these explain why the bulk of Chinese companies may still favour taking minority stakes in western companies, or forming joint ventures with them, rather than risk their reputations in developed markets by launching high-profile bids that carry a significant risk of failing.
For instance, Fosun, China’s largest private conglomerate by sales, snapped up 7.1 per cent of Club Med, the holiday-resort operator, with relative ease. Agreeing not to lift its stake in the French company beyond 10 per cent for 24 months may have helped smooth negotiations.
Emboldened by that deal, Fosun is now planning a foray into Europe with a range of investments into luxury brands, small technology companies and the generic drugs sector to tap into the continent’s technological expertise and its highly skilled labour base.
The lesson is that Chinese companies should expand slowly unless there really is a big opportunity that is too good to miss. But if they engage in a full takeover of an overseas asset in the public eye, than they need to be prepared for the inevitable backlash. Especially if they cannot execute what they have promised.
