For China, It's Mergers and Ambition

Mainland outfits are opting for M&A to go global, says Boston Consulting Group's Jim Hemerling. For the West, it's a challenge and opportunity

Already the world's largest local market for everything from refrigerators to mobile phones, China sees itself in the not-too-distant future as a major global business player—home to some of the world's most prestigious and profitable corporations and brands. It plans to get there not only by developing and nurturing homegrown companies able to compete with the best in the world, but by pursuing an aggressive strategy of mergers and acquisitions. This already is under way.

There is a genuine hunger for growth and success in China. Though the knowledge and skills necessary to manage large global companies are still lacking in many cases, there is no turning back. The West should see this as both a long-term challenge and a golden opportunity.

Chinese companies, many of them owned or controlled by the government, have been investing in Western companies for 20 years. Recently, high-profile deals such as the 2003 merger of the Chinese television manufacturer TCL with the television division of France's Thomson electronics, owner of the RCA and Thomson brands, and the 2004 acquisition of IBM's (IBM) personal-computer business by China's Lenovo introduced the world to a new generation of Chinese companies with global aspirations.


  Even unsuccessful mergers such as Haier's (HRELF) failed bid for Maytag—eventually purchased by Whirlpool (WHR)—and the attempted purchase of Unocal by energy giant China National Offshore Oil Corp. (CNOOC), which ran into U.S. political opposition, reflect China's global ambitions.

So far, the overall value of the Chinese acquisitions has been relatively small—about $30 billion since 1986. This is significantly less as a percentage of gross domestic product (GDP) than the amount invested by companies in other rapidly developing economies, such as India and South Africa. And it pales in comparison to the more than $60 billion a year foreign companies are investing in China. But it's an important start. And Chinese companies have two things going for them that are necessary to move forward aggressively: encouragement from the government and plenty of available capital.

The Boston Consulting Group's recent review of 515 Chinese mergers and acquisitions since 1986 found that most such transactions fall into one of four broad categories.


  The vast majority of deals to date have involved Chinese companies acquiring foreign operations—Lenovo's purchase of IBM's PC business, for example—in order to expand overseas. There have been some 223 such deals since 1986, with a total value of about $18 billion.

The second-largest category has been overseas investments, where a Chinese investment company or private-equity firm purchases a stake in a foreign company primarily for the sake of financial return. For example, in 1993, CITIC Pacific (CTPCY), a subsidiary of the state-owned China International Trust and Investment Corp., purchased a 12% stake in Hong Kong Telecommunications. There have been 186 such deals since 1986, with a combined value of about $9.6 billion.

There also have been two other merger-and-acquisition categories. One, driven by domestic expansion plans, involves a Chinese company buying out or taking over the mainland assets of a foreign joint-venture partner, as Shanghai Bright Dairy and Food did in 2003 when it purchased Guangzhou Danone Yogurt from Groupe Danone (DA). There have been some 76 deals in this category since 1986, with a combined value of $1.6 billion. The other model has been Chinese investment in foreign assets in the country, with about 30 such deals, valued at $600 million, during the past 20 years.


  To understand what lies ahead, Western business and political leaders need to understand the changes in the nature of China's merger-and-acquisition deals and likely future global ambitions. This could be both good news and bad news for Western multinationals.

In the earlier years, from the mid-1980s through the year 2000, most of China's merger-and-acquisition deals were focused inward, on the domestic market. After China joined the World Trade Organization (WTO) in 2001, however, the mergers and acquisitions took on a more outward appearance, signaling China's plans to become a major player on the global economic stage.

In addition to the much-publicized Lenovo-IBM deal, which was a real eye-opener for many in the West, there have been other significant mergers and acquisitions. For example, China Netcom Group (CN), an $8 billion Chinese telecommunications company, teamed up with partners to buy Asia Global Crossing (ASGXF).


  PetroChina (PTR), a subsidiary of the China National Petroleum Corp., purchased the Indonesian oil and gas assets of U.S.-based Devon Energy Corp. (DVN) Shanghai Automotive Industry Corp., one of China's big three auto makers, purchased a controlling stake in South Korea's SsangYong Motor Company (SYGMF) and China's Nanjing Automobile Group purchased Britain's MG Rover Group.

For the foreseeable future, the global ambitions of Chinese companies will receive strong encouragement and support from the Chinese government, which has an explicit policy of internationalizing Chinese businesses and creating "national champions" through consolidation. The fact that China's biggest companies are largely state-owned greatly magnifies Beijing's role.

For some companies, global acquisitions have proven to be highly problematic and value-destroying, highlighting the considerable challenges Chinese acquirers face when expanding internationally. For other companies, acquisition has clearly emerged as the quickest and most efficient way to achieve China's international ambitions. Thanks to a booming economy, many Chinese companies have considerable cash reserves. And if additional funds are needed, cheap financing is available from state-owned banks and private equity firms.


  Though their initial merger-and-acquisition efforts failed, big players such as Haier and CNOOC will undoubtedly be back at the table in the near future, as will many other Chinese companies. Western executives need to expect it. China's efforts clearly will create significant challenges for many Western companies seeking to maintain product or sector dominance in an increasingly cost-driven global environment.

But they also will create a unique opportunity for some companies: to collaborate or cooperate with Chinese companies; to supply them with a range of products and services; and even, perhaps, to unload some asset or division that—for economic or other reasons—doesn't fit in with the company's long-range plans, but might seem attractive to a Chinese suitor.

China's global challengers are coming. There's no stopping them. But the economic pie is large and growing, and China's appetite for mergers and acquisitions should be seen in the West as a potential opportunity as well as a threat.

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