Fifteen years ago, China initiated a “Go Out” policy that encouraged state-owned companies to acquire overseas energy and mining assets to feed an emerging export juggernaut.
Today a new generation of Chinese buyers has emerged: private companies led by deal-hungry entrepreneurs. Rather than looking for natural resource deals, firms like Lenovo Group Ltd. (992), Fosun International Ltd. (656) and Dalian Wanda Group are pursuing everything from computer servers to movie theaters and brand names like Club Med. (CU)
The trend reflects the Communist Party’s attempts to give non-state actors a greater role in the $9.4 trillion economy while lessening its dependence on exports. Acquisitions abroad by private companies may help the Chinese leadership reshape an economy hobbled by excess investment, shaky debt and pollution toward one driven by consumption and technology.
“We are seeing the second wave of China’s outbound M&A,” said Eugene Qian, Citigroup Inc.’s head of global banking for China. “Privately-owned enterprises aren’t replacing state-owned enterprises, but they are joining the wave of going out. They are more opportunistic, thoughtful and nimble.”
Private companies accounted for about one-third of the total value of outbound deals that exceeded $1 billion last year, the highest share since Bloomberg began compiling the data in 1999. Including all deals, Tencent Holdings Ltd. (700) was the most active buyer overseas, the data show.
Choking on Smog
Yang Yuanqing, who runs Lenovo, the world’s largest computer maker, announced more than $5 billion of acquisitions in January, buying a low-end server unit from International Business Machines Corp. and Motorola Mobility from Google Inc. Four months earlier WH Group Ltd., led by 73-year-old Chairman Wan Long, completed the $4.7 billion takeover of Smithfield Foods Inc., the biggest overseas purchase by a non-SOE from China.
More are expected. Alibaba Group Holding Ltd., China’s largest e-commerce company, has set up offices in the U.S. and is examining potential purchases in the country, according to two people familiar with the matter. Florence Shih, a spokeswoman for Alibaba, declined to comment. A spokeswoman for Lenovo didn’t return an e-mail seeking comment.
In November, at the third full meeting, or plenum, of the Communist Party’s 18th Central Committee, President Xi Jinping laid out plans for the broadest economic changes since the 1990s. Among them was a push to give private companies a greater role in the economy. Three decades of growth powered by exports and fixed-asset investment have left China’s cities choking on smog and its financial system saddled with excess debt.
Expansion-minded business leaders like Yang and Wan are key to the transformation.
“They’re very ambitious and it ties in with the renewed call from the Third Plenum -- that the private sector should become an increasingly large part of the economy,” said Kenneth Courtis, former Asia vice chairman at Goldman Sachs (GS) Group Inc.
As companies make acquisitions overseas, they add technology and skills that spur them to increase hiring and investment in research and development at home, said Shanghai-based Phil Leung, who runs the Asia M&A practice at Bain & Co.
“The shift of the economy from everything state-owned to majority privately-owned leads to similar changes in China’s outbound deals,” said Victor Gao, vice chairman at Beijing-based buyout firm Sino-Europe United Investment Corp., who previously held senior roles at investment banks including Morgan Stanley. (MS)
State-owned corporate assets, which accounted for almost the entire Chinese economy three decades ago, fell to 23 percent of the total at the end of 2012. Private-sector assets expanded to 56 percent, according to Chu Xuping, head of the research center at China’s state assets regulator. Foreign-invested enterprises and joint ventures account for the remainder.
The “Go Out” policy goes back to 1999 when then-President Jiang Zemin said Chinese companies needed to participate in economic globalization. The next year, a full assembly of the Communist Party’s central committee ruled that China should focus its overseas investment in areas such as natural resources and infrastructure.
In the 15 years since Jiang’s call, Chinese resources companies have purchased $199 billion of assets overseas, data compiled by Bloomberg show. The spree culminated with Cnooc Ltd.’s $15.1 billion takeover of Canada’s Nexen Inc., announced in 2012 and the largest-ever outbound acquisition by a Chinese company. Natural resources deals done by state-owned companies accounted for about a third of the $159 billion of overseas deals in the past two years, the data show.
The entrepreneurs have different targets. Fosun, the Shanghai-based conglomerate controlled by billionaire Guo Guangchang, bought stakes in Greek jewelery maker Folli Follie SA (FFGRP) and French resort operator Club Mediterranee SA. This year, it agreed to purchase control of Portuguese lender Caixa Geral de Depositos SA’s insurance unit for 1 billion euros ($1.4 billion).
Dalian Wanda Group, founded by China’s second-richest man Wang Jianlin, in August purchased Sunseeker International Ltd., whose yachts have been featured in James Bond movies. A year earlier, the company bought AMC Entertainment Holdings Inc. for $2.6 billion, expanding into the U.S. to create the world’s biggest cinema owner.
China’s Internet companies are also extending their reach abroad as competition mounts in their home market. Tencent, which is marketing its WeChat messaging application overseas, completed its acquisition of a stake in Activision Blizzard Inc. (ATVI) in October and invested in Korean messaging app Kakao Corp. in 2012.
The entrepreneurs contrast with SOE executives who often are government officials, said Courtis.
“You had to be careful not to make any mistakes on your watch,” he said of SOE managers.
Private companies pursuing deals in developed markets have provoked fewer concerns from regulators, who view state-owned firms as an extension of the government, according to Courtis.
“It’s just easier for private companies to win the hearts of America for a deal whereas the state companies are treated with suspicion,” said Thilo Hanemann, research director for Rhodium Group, a New York-based research firm that analyzes global business and economic trends.
WH Group, whose shareholders include Goldman Sachs and Temasek Holdings Pte, won U.S. approval to buy Smithfield, the world’s largest hog and pork producer, following an inter-agency review by the Committee on Foreign Investment in the U.S., or CFIUS.
The agency had blocked at least three transactions in the past five years that would have resulted in Chinese companies gaining control of assets near U.S. military facilities.
State-backed Cnooc, China’s biggest offshore oil producer, was barred from operating oilfields in the Gulf of Mexico after its purchase of Canadian energy company Nexen, people familiar with the matter said last year. Cnooc abandoned an $18.5 billion bid for Unocal Corp. in 2005 amid U.S. political opposition.
The privately-owned Chinese companies that are leaders in their sectors, such as Lenovo and Alibaba, won’t face as many hurdles as they seek acquisitions globally, according to JPMorgan Chase & Co.’s Brian Gu.
“They see themselves as global companies, not just Chinese companies,” Gu, co-head of China investment banking at JPMorgan, said in Beijing. “It’s a positive development for China’s economy and corporates.”
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