China's `Hot' M&A Plan Gets A Cool Review

Shanghai's plans to list state-owned enterprises on a local property exchange ("The next hot spot for M&A: Shanghai," International Business, Mar. 13) are fundamentally flawed. The economic logic of mergers and acquisitions has always been to achieve profitability by massive downsizing and cost-cutting. This process almost undoubtedly involves reducing workers and factors of production to acceptable levels. As well, M&As often provide much-needed injections of new capital and management expertise. With government restrictions on laying off workers and shuttering factories, buyers will be inheriting huge liabilities with little chance of recovery. More troubling, the government intends to preclude foreign investors from the exchange, and local investors lack the capital and expertise to turn the companies around. Local buyers will end up financing the deal by borrowing heavily from state banks, further straining state coffers. A possible solution would be joint ventures with restrictions on foreign ownership.

Over the long term, it is hard to imagine how China would be able to keep all its state workers in place without creating financial chaos. The only obvious solution is to reeducate its excess workforce and expand production capacity.

Douglas Lam