Great Leap Upward: Behind China's $100 Billion Shopping Spree

  • Companies seek `largest portfolio diversification in history'
  • Value of this year's overseas deals already tops 2014 tally

China’s Anbang Insurance Group Co., which has twice sweetened its offer to buy Starwood Hotels & Resorts Worldwide Inc., is engaged in a high-stakes bidding war with Marriott International Inc. to acquire the owner of the upscale Sheraton, Westin and St. Regis brands.

Win or lose, the latest $14 billion bid unveiled Monday by an Anbang-led investor group makes this much clear: Chinese companies have launched an unprecedented buying spree, one far more ambitious than previous efforts focused primarily on locking up supplies of global commodities and raw materials. Now, cash-rich Chinese buyers, often backed by generous lending from state banks, are trying to diversify into everything from lodging, cranes and pesticides to semiconductors, flat-screen TVs and Hollywood studios in a quest to expand into new global markets and key technologies.

Chinese firms have announced $113 billion in overseas deals since the start of the year, led by China National Chemical Corp.’s $46 billion takeover of Syngenta AG, a worldwide player in pesticides and genetically-modified seeds. That tops the total of all deals in 2014 and is close to last year’s record $121 billion tally.

The shopping spree reflects an effort by President Xi Jinping’s government to encourage Chinese companies to gain know-how and market share through foreign transactions as the country’s $10.4 trillion economy continues to decelerate. It’s a potential boon for investment bankers -- and a source of worry for corporate chieftains in the U.S. and Europe who may soon face new Chinese competitors.

“What we’re seeing is the coming-of-age of corporate China. It’s being driven by a deliberate strategy to invest in the needs of the growing Chinese middle class and to acquire additional expertise,” said Hernan Cristerna, the global co-head of mergers and acquisitions at JPMorgan Chase & Co. “There’s a real opportunity for China to emerge as a partner of choice all over the world, if acquirers prove themselves to be responsible, constructive owners.”

Hardly a week passes without news of another Chinese cross-border deal. On March 22 Bang & Olufsen A/S, the maker of luxury electronics including $31,000 flat-screen TVs, announced talks to be bought by the Chinese businessman who controls luxury-car dealer Sparkle Roll Group Ltd.

The Chinese government has been encouraging the acquisitions, either through direct involvement with government-controlled companies or increased levels of financing from state-owned banks. The nation’s cabinet has made at least a dozen official pronouncements encouraging foreign deals since the beginning of last year.

That push comes against a backdrop of slowing economic expansion in China, as the government attempts to steer the economy toward consumption and services instead of manufacturing and investment. At this month’s National People’s Congress in Beijing, Xi’s government unveiled a target for economic growth of 6.5 percent to 7 percent in 2016, which would be the slowest pace in about 25 years.

“Chinese companies are choosing to invest abroad to shore up growth prospects,” said Ellis Chu, the head of China M&A at Bank of America Corp. “What we’re in the midst of is the largest portfolio diversification in history.”

‘Batman Begins’

A few large companies are leading the charge. ChemChina, Anbang and arms of the HNA Group Co. conglomerate have all announced multiple purchases already in 2016. While the ChemChina-Syngenta merger accounts for almost half this year’s deal volume, plenty of other Chinese firms are rolling the dice on major transactions too. Crane manufacturer Zoomlion Heavy Industry Science & Technology Co. is offering $3.4 billion for U.S. rival Terex Corp., while Dalian Wanda Group Co. is paying $3.5 billion for control of Legendary Entertainment LLC, the Hollywood studio behind “Batman Begins.”

Even as the economy slows, Chinese companies boast plenty of financial firepower. Cash held on Chinese corporate balance sheets increased 14 percent to $3.99 trillion in the last two years, according to Bloomberg-compiled data. 

Meanwhile, China’s yuan was trading at five-year lows in January, following a surprise devaluation in August last year. The currency is forecast to depreciate another 4.2 percent by the fourth quarter, according to the median estimate of analysts surveyed by Bloomberg.

With acquisitive firms focused on the question of the yuan’s stability going forward, “the time to go global is right now,” said Zhao Longkai, an associate professor of finance at Peking University’s Guanghua School of Management. “There’s an expectation of a further risk of devaluation.”

Observers of China’s outbound shopping splurge have been struck by the diversity of companies doing the buying, which extends far beyond state-backed giants and natural resources champions that have historically dominated dealmaking. The Sparkle Roll owner, for example, has never made a major acquisition outside China, and the offer for Bang & Olufsen became the subject of a confusing contretemps as shareholders realized there are two Chinese firms by that name, one of which denied any involvement in the deal.

Losing Out

The number of first-time acquirers with limited experience making deals abroad means it’s “critical that the sellers are diligent in reviewing the quality and certainty of the proposals,” said Mayooran Elalingam, head of Asia-Pacific M&A at Deutsche Bank AG. 

It can also mean foreign company boards refusing to recommend offers -- even those coming in at a premium to other bidders. China Resources Microelectronics Ltd., pursuing its first overseas acquisition, last month failed to win approval from Fairchild Semiconductor International Inc. for its $2.46 billion offer. On Monday, a Chinese-backed group dropped an offer for Affymetrix Inc. after the DNA testing firm said it had concerns over approval from U.S. and Chinese regulators.

For Chinese companies that do complete acquisitions, the next challenge will be how to manage their purchases, striking the right balance between hands-on direction and giving new units a long leash.

Political Scrutiny

In Syngenta’s case, ChemChina Chairman Ren Jianxin pledged to leave the Swiss company’s management in place and re-list the company on public markets in a few years’ time. Another flagship Chinese deal, Zhejiang Geely Holding Group Co.’s 2010 purchase of the iconic Volvo car brand, resulted in “a great deal of autonomy” and new investment that was missing under former owner Ford Motor Co., said Eric Thun, a professor at Oxford University’s Said Business School who studies the Chinese corporate world.

That approach is popular among Chinese companies because, for the most part, they “don’t have the capability to manage these assets,” Thun said. “These are not global organizations.”

They’ll also be under significant scrutiny from politicians in the countries where they choose to invest. A U.S. lawmaker has asked for the Committee on Foreign Investment in the U.S., a government body that reviews transactions by international acquirers, to look carefully at Zoomlion’s deal for Terex, which has significant contracts with the American military. Fairchild Semiconductor cited the risk of a negative decision from the panel in its rejection of the China Resources offer.

More broadly, Chinese buyers making their first forays abroad need to show employees, regulators and investors that they can successfully integrate purchases and stick to commitments, according to JPMorgan’s Cristerna. 

If they fail, they will miss “a real opportunity to establish themselves in the global corporate arena,” Cristerna said. “It could take a very long time to recover.”

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