HONG KONG: Abundant liquidity, government support and a strong yuan fuelled Chinese companies’ overseas buying spree.
But since they bought at the peak of the market and did not have a clear strategy for acquisitions, it should come as no surprise that most of those deals have turned sour.
Once bitten, twice shy.
Crisis-ridden companies around the world are hoping that cash-rich Chinese buyers will come to their rescue. But the Chinese are not eager, having gotten their fingers burned.
Chinese regulators are now giving more scrutiny to foreign deals, forcing interested buyers to lay out the most pessimistic scenario when seeking their approval. Bankers say Beijing is sceptical about buying anything but resources, which are seen as important to China’s strategic interests and involve few integration challenges.
Chinese manufacturers thought they had found a winning strategy in making goods cheaply in China and slapping prestigious Western brand names on them.
But the strategy hit a wall as companies like TCL, the Chinese electronics manufacturer, struggled for years to turn around businesses it had bought in North America and Europe.
Lenovo’s purchase of IBM’s PC unit was widely praised as a rare success at the time, but this month a broad restructuring and profit shortfall was announced. The acquired unit has high exposure to large enterprises in developed markets, a segment that was hit hard by the economic downturn, said Xin Zhao, an analyst at Cazenove.
“Before China caught the globalization wave, our teachers in the West ran into problems,” said Yang Mianmian, president of the Chinese electronic appliance giant Haier, which spurned an offer last year to buy General Electric’s electronics unit.
“The financial crisis has changed our thinking, and now we are looking more at rural demand,” Yang said.
One of the potential pitfalls has been overpaying. Chinese buyers generally lack experience in valuation methodology. Moreover, they often do not have a strong understanding of the target’s experience and tend to underestimate factors like cultural differences and powerful unions.
Some deals have not only incurred hefty losses but have turned into public relations nightmares as the financial crisis has bitten harder.
Take the example of Ssangyong Motor, the South Korean automaker, which filed for bankruptcy Jan. 9 after suffering from the global slump in automobile sales.
Analysts believe that SAIC Motor, which is based in Shanghai and owns 51 percent of Ssangyong, would be prepared to let the sport utility vehicle maker in Korea fail. Some South Korean news media have accused SAIC of having planned all along to strip Ssangyong’s technology and dump the company.
“Chinese companies have now realized there are many pitfalls on the road abroad and are learning from their experience,” said David Yu, a partner at Llinks Law Offices, who advised SAIC on the deal.
Generally, these Chinese companies are financially sound. Three state-owned banks trail only Berkshire Hathaway, Warren Buffett’s holding company, on the global list of groups with the most cash. But this would be a bad time for them to hunt for bargains.
The temptations are great, as many Western brands long considered to be out of Beijing’s reach are now fighting for Chinese attention. Ford, for example, is looking for buyers to take up Volvo; a bank representing it has pitched it to at least three Chinese automakers.
“Chinese automakers need to be extremely cautious about those seemingly once-in-100-years opportunities to avoid failures which will not be recovered in many decades,” said Yankun Hou, an analyst with Nomura Securities.
To avoid more big losses, Chinese companies would be well advised to cut their teeth on smaller deals in growing industries and markets, mindful that acquiring technology is much easier to manage than buying brands, because it does not involve taking over the whole operation.
“It is not clear that all the bad news is yet out, so assessing a target bank’s exposure is still challenging for any investor,” said Holger Michaelis, a partner with the Boston Consulting Group in Beijing. “The timing, however, appears good for screening potential targets, but with a focus on smaller deals in less risky segments, like wealth management and asset management.”
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In China, Corporate Buyers Now Beware
By Wei Gu
Reuters
21 January 2009
HONG KONG: Abundant liquidity, government support and a strong yuan fuelled Chinese companies’ overseas buying spree.
But since they bought at the peak of the market and did not have a clear strategy for acquisitions, it should come as no surprise that most of those deals have turned sour.
Once bitten, twice shy.
Crisis-ridden companies around the world are hoping that cash-rich Chinese buyers will come to their rescue. But the Chinese are not eager, having gotten their fingers burned.
Chinese regulators are now giving more scrutiny to foreign deals, forcing interested buyers to lay out the most pessimistic scenario when seeking their approval. Bankers say Beijing is sceptical about buying anything but resources, which are seen as important to China’s strategic interests and involve few integration challenges.
Chinese manufacturers thought they had found a winning strategy in making goods cheaply in China and slapping prestigious Western brand names on them.
But the strategy hit a wall as companies like TCL, the Chinese electronics manufacturer, struggled for years to turn around businesses it had bought in North America and Europe.
Lenovo’s purchase of IBM’s PC unit was widely praised as a rare success at the time, but this month a broad restructuring and profit shortfall was announced. The acquired unit has high exposure to large enterprises in developed markets, a segment that was hit hard by the economic downturn, said Xin Zhao, an analyst at Cazenove.
“Before China caught the globalization wave, our teachers in the West ran into problems,” said Yang Mianmian, president of the Chinese electronic appliance giant Haier, which spurned an offer last year to buy General Electric’s electronics unit.
“The financial crisis has changed our thinking, and now we are looking more at rural demand,” Yang said.
One of the potential pitfalls has been overpaying. Chinese buyers generally lack experience in valuation methodology. Moreover, they often do not have a strong understanding of the target’s experience and tend to underestimate factors like cultural differences and powerful unions.
Some deals have not only incurred hefty losses but have turned into public relations nightmares as the financial crisis has bitten harder.
Take the example of Ssangyong Motor, the South Korean automaker, which filed for bankruptcy Jan. 9 after suffering from the global slump in automobile sales.
Analysts believe that SAIC Motor, which is based in Shanghai and owns 51 percent of Ssangyong, would be prepared to let the sport utility vehicle maker in Korea fail. Some South Korean news media have accused SAIC of having planned all along to strip Ssangyong’s technology and dump the company.
“Chinese companies have now realized there are many pitfalls on the road abroad and are learning from their experience,” said David Yu, a partner at Llinks Law Offices, who advised SAIC on the deal.
Generally, these Chinese companies are financially sound. Three state-owned banks trail only Berkshire Hathaway, Warren Buffett’s holding company, on the global list of groups with the most cash. But this would be a bad time for them to hunt for bargains.
The temptations are great, as many Western brands long considered to be out of Beijing’s reach are now fighting for Chinese attention. Ford, for example, is looking for buyers to take up Volvo; a bank representing it has pitched it to at least three Chinese automakers.
“Chinese automakers need to be extremely cautious about those seemingly once-in-100-years opportunities to avoid failures which will not be recovered in many decades,” said Yankun Hou, an analyst with Nomura Securities.
To avoid more big losses, Chinese companies would be well advised to cut their teeth on smaller deals in growing industries and markets, mindful that acquiring technology is much easier to manage than buying brands, because it does not involve taking over the whole operation.
“It is not clear that all the bad news is yet out, so assessing a target bank’s exposure is still challenging for any investor,” said Holger Michaelis, a partner with the Boston Consulting Group in Beijing. “The timing, however, appears good for screening potential targets, but with a focus on smaller deals in less risky segments, like wealth management and asset management.”
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