M&A risks and opportunities
THE Lenovo Group’s US$1.25-billion purchase of IBM’s personal computer business three years ago was the pioneer for Chinese companies in overseas mergers and acquisitions.
The purchase paid off when Lenovo saw its income from PC sales rocket with a more recognized brand name and easier access to other overseas markets.
The move has helped Lenovo become a global company. But other Chinese firms have not been so lucky with overseas buys.
Chinese companies have a huge appetite to invest overseas because of their liquidity stockpile. But so far, they have not been the world’s boldest buyers.
Part of this has been due to the negative reception that Chinese bids have received in the United States and Europe, often out of protectionism or political motives, experts said during the recent CFO Leadership Forum.
The case of CNOOC Ltd, China’s biggest offshore oil producer, was cited as an example. In 2005, CNOOC withdrew its US$18.5-billion bid for Unocal Corp after the deal was opposed by politicians in the United States.
“Many Chinese companies encounter obstacles in overseas acquisitions. Some were out of political concerns such as national security. Some were due to pure incompatibility, especially in Western countries and when the core gain is a brand or its customers,” said Wu Chen, editorial director of CFO China, a unit under the Economist Group.
On the whole, many companies in developed countries were not ready to be taken over by Chinese companies, which are stereotyped as having a weaker corporate culture and less subtle management skills.
Some Chinese companies were just bewildered by the difference and complexity of laws, supervision and relationships between the employer and workers in a foreign country, he said.
But China has recently been an active player in foreign investment, especially in M&A deals.
According to the Ministry of Commerce, China’s overseas investment rose to US$33 billion last year from US$21.2 billion in 2006. For the first time last year, the flow of capital outside the country became larger than the inflow of foreign capital.
A survey by CFO China suggested that more companies aimed to expand into the global market through acquiring foreign outlets.
It showed that about 47.5 percent of Chinese companies responding to the survey wanted to conduct M&A abroad in March, compared with 36 percent in December last year.
Potential buyers are no longer limited to big state-owned enterprises in energy or finance - some private companies, in consumer goods such as garments and food, also wanted to expand their markets.
Robert Brown, chairman of Watson Wyatt Global Investment Committee, saw emerging markets such as China fit for stable investment in the long term. Mature markets including the United States and Europe provided a short-term opportunity for investment because of the US subprime mortgage crisis, he said.
And the timing is good to buy foreign companies when the credit crunch forces revaluation and bargain opportunities.
For instance, Lehman Brothers Holdings Inc was expected to seek funds from overseas investors after it was hit by the credit turmoil, and may report its first quarterly loss since going public in 1994.
As the fourth-largest US securities firm, Lehman Brothers kept falling on the New York Stock Exchange last week amid concerns it may need a capital injection.
But it’s not just bargains that attract Chinese firms.
“To conduct M&A is the quickest way to penetrate a new market, boost core competitiveness such as building a brand, obtaining technology or establishing a distribution network,” said Zhou Qingtong, vice president of Lenovo Group.
“Also, it is a requirement for Chinese companies to fend off challenges from rivals both at home and abroad.”
Strong international competitors are also looking for good M&A deals - and Chinese companies will have to run to keep up.
For example, Nomura Holdings Inc, Japan’s largest investment bank, was reported to have raised 2.1 billion euros (US$3.3 billion) to buy European assets, including equity and loans that lost value after the US credit crisis.
But still, Chinese companies should balance the investment impulse with risk control.
Zhou suggested companies should examine details of the costs of the acquisition, its clients, competitors, market prospects and all of their correlation and coherency with the Chinese counterparts.
Also, companies should prepare plans to retain the talents and clients in the target outlet, as well implement cultural and financial integrations.
Minority stakes could also be valuable, according to Zhou.
Tags: CNOOC, Energy, Finance, food, foreign-investment, IBM, investment, Lenovo, PC