Wednesday 26 November 2008
SOEs, Private Firms Set Acquisition Targets Overseas
It’s time for Chinese firms to go out and take stakes from real assets in American and Europe. Manufacturing is and will be China’s foundation for the foreseeable future, but Chinese firms lack skills and expertise that abound in the West. But now Western firms face a sore lack of hard cash, which Chinese companies can find in abundance. It would seem to be a marriage made in heaven.
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SOEs, Private Firms Set Acquisition Targets Overseas
Xiong Yan
25 November 2008
It’s time for Chinese firms to go out and take stakes from real assets in American and Europe. Manufacturing is and will be China’s foundation for the foreseeable future, but Chinese firms lack skills and expertise that abound in the West. But now Western firms face a sore lack of hard cash, which Chinese companies can find in abundance. It would seem to be a marriage made in heaven.
Though a great many US and European companies have taken stakes in Chinese companies, just a few Chinese companies have taken the leap into the US and Europe. Now the situation may change as strategic opportunities are opening up.
Although Chinese manufacturing capacity has seen great improvement, an abyss exists between domestic companies and US and European companies in terms of key technology and management. To narrow the gap, Chinese companies have to “go out” by taking stakes in advanced overseas companies so that Chinese companies can learn how to move from the low end of the production chain to the high end.
However, Chinese companies have faced great difficulties in buying into European and US companies. They lack international experience, and are not familiar with overseas economic and legal environments. And the US and European countries are very leery about accepting Chinese M&A. The CNOOC-Unocal debacle is a good example of the economic nationalism and protectionism in western countries.
Financial crisis brings opportunities
But things change, and with the deepening global financial crisis, many western companies are suffering financial difficulties and seeing their share prices drop sharply. The total market value of America’s Big Three auto companies, Ford, GM, and Chrysler, was only $10 billion at the one point.
To relieve the financial pressure on these companies, western countries will have to lower the threshold for overseas investment. Officials of the US Department of Energy have announced that the US will welcome Chinese investment into its petroleum and natural gas area. Obstacles to China’s overseas M&A seem to be suddenly disappearing.
For Chinese enterprises desiring to go out, current international markets are offering them a precious opportunity. China’s huge foreign exchange reserve can now be put to productive use, and taking stakes in leading companies in western countries has become a strategic option.
China should encourage its domestic firms to take stakes in western companies of the real economy. On one hand, this would help the western companies survive the hard times, which would improve the international image of Chinese enterprises as a whole. On the other hand, China can get access to the technology and management skill it wants to reach a win-win situation.
Such acquisition would be mid- and long-term strategic investment aiming to form equity cooperation, not short-term trade or fire sale.
Target Companies
Target companies for the first round of acquisition should be leading companies of an industry, high-tech companies, and resource companies.
1. Leading companies of an industry:
Leading companies in the US and Europe should be important targets of China’s overseas acquisition, as they would help Chinese firms to gain more power in their own industries and make them more competitive.
As the share structure of these companies is very dispersed, to become a major shareholder, a Chinese firm need only own a small percentage of equity in these companies.
2. High-tech Companies:
Equity in high-tech companies in western countries, such as leading software, telecoms, and precision instrument firms, should be another target of Chinese companies. By joining with these concerns, Chinese companies will acquire advanced technology that it can then transfer to China. This may be the biggest reward for Chinese companies.
3. Resource Companies
Resource companies are another important target of China’s companies. China’s advantage as the world’s factory will not change in the short term, but neither will the resources needed for “made in China”.
The iron ore negotiations these past few years demonstrate China’s dependence on overseas resources. Acquiring overseas resource companies would help to relieve China’s tight supply. Seizing the opportunity of slumping share prices, Sinopec and CNOOC are negotiating with US-based Marathon Oil Company for acquisition of a subsidiary, and the negotiation has reached the final stage.
All the western companies of the three types, big of small, are worth buying into. China may acquire small and medium companies and take stakes in big companies, and only needs to buy a small stake into World’s 500.
SOEs and private companies “going out” together
Chinese enterprises going out to acquire overseas include both state-owned and private companies. Compared with private companies, state-owned companies are better supplied with funds and can more easily find support from banks and the government. However, their weaknesses are apparent, including slow decision-making, lack of talent, lack of incentive mechanism, and obstacles to overseas acquisition merely because they’re owned by the Chinese government.
Some SOEs such as Chinalco and Sinosteel have drawn world’s attention by positive overseas M&A. However, most of China’s important companies have not made any move. With favourable treatment at home, SOEs tend to be conservative and complacent, unwilling to venture out even when opportunities are calling them. The government needs to adopt policies to encourage these laggard companies to move out into the greater world.
Compared with state-owned companies, private companies have fewer funds and less support from the government, but they also have their own advantage: flexibility, quick decision-making, and fewer political obstacles in overseas M&A.
Private companies have keener senses and realized the M&A opportunities of the financial crisis very early. They have been seeking out proper investment objects in the US and Europe, but their weakness is lack of financial wherewithal. The government should positively support their overseas M&A.
The government should also promote the operation between financial institutions and companies of real economy. Now China Investment Corporation and some insurance companies may cooperate with companies acquiring in western countries.
The author is the president of Beijing Equity Exchange and the Chair of China’s Mergers & Acquisitions Association. The article represents the views of the two organizations. The Chinese version of the article is published on China Business News.
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