Many believe that the global financial crisis presented China with the opportunity to go on an overseas shopping spree. The crisis blindsided many foreign companies who were caught in either over-leveraged or over-invested positions, leaving them vulnerable to acquisition.
The facts seem to back this up. According to statistics from Dealogic, an international financial data provider, China's overseas mergers and acquisitions (M&As) in 2009 amounted to US$ 46 billion in value. That year alone, Geely acquired Sweden's Volvo unit, China Minmetals acquired Australia's OZ Minerals, Valin took a stake in the Fortescue Metals Group Co., and Haier purchased a stake in New Zealand's Fisher & Paykel white goods manufacturer. Chinese companies swept across the entire industrial board.
But as the global economy recovers and asset prices rebound, will China be able to maintain its M&A momentum? Undoubtedly.
Through overseas M&A, Chinese enterprises not only obtain technology and well-known brand names, but also boost their own incomes. And with large-scale credit incentives, Chinese businesses have the capital to do so.
Capital Flows into Australia
Last year, China's oil and steel companies composed the main force for overseas acquisitions. Capital flowed towards Australia, Canada, and other countries with developed resource industries and sound legal systems. Currently, M&A in this field accounted for 97 percent of the value of total M&A, with 90 percent flowed into Australia.
Although Chinalco's US$ 19.5 billion investment in Rio Tinto failed, the setback did little to dampen the enthusiasm of Chinese enterprises. After Australian authorities rejected an initial takeover of OZ Minerals by China Minmetals, negotiated settlement led to a successful 91 percent stake being purchased for US$ 1.4 billion. Valin was able to take 17.55 percent equity of Fortescue Metals, Australia's third-largest iron ore producer, while the giant was suffering from debt. As an added bonus, Valin gained access to a seat on Fortescue's board of directors.
Energy and Commodities
Over the past decade, China's three large, state-owned oil companies have been probing for resource endowments in Kazakhstan, Sudan, Iraq, and Venezuela.
Using the financial crisis to its advantage, PetroChina has sharpened its edge overseas. In 2009, the company acquired two oil sands projects from Canada's Athabasca Oil Sands Company for US$ 1.8 billion, and in alliance with Kazakhstan's state-owned KazMunaiGas it acquired MangistauMunaiGas for US$ 3.3 billion. United with BP, PetroChina participated in the first round of bidding for an Iraqi oil and gas field. Through several stages the company also bought out a 45.5 percent stake in Singapore Petroleum. Furthermore, PetroChina may even be looking to gain foothold in the Argentina and Nigeria.
Sinopec successfully acquired Swiss Addax Petroleum in 2009 for US$ 7.5 billion. The deal marked China's largest overseas acquisition to date. But Addax's assets in sensitive areas in Iraq made it impossible for Sinopec to participate in the second round of local bidding.
As China's oil companies were "going out," they began to use a new cooperative model with multinational oil giants and resource-rich countries. Chinese companies would team up with Western oil companies to bid jointly in the upstream of the oil industry. In return, China would give state-owned companies from resource-rich countries and Western companies access to participate in its downstream sector. By jointly covering the upper, middle, and lower ends of the petroleum industry, all companies were able to benefit. Share participation, joint bidding, oil for loans, and other models became increasingly common.
Since 2009, China Investment Corporation (CIC), China's sovereign wealth fund, has increased the weighting of resources and commodities in its portfolio. In the last boom cycle, some companies in these fields overextended themselves in terms of investment and debt. When the financial crisis struck, CIC took advantage of the opportunity, knowing that commodity-linked investments serve as a powerful hedge against inflation. Moreover, with a global recovery and growth in emerging markets, resources and commodities will be in high demand, leaving ample room for appreciation. By participating in these fields, CIC can enjoy the benefits of emerging markets and Chinese growth, and obtain higher returns.
Overseas Auto Acquisitions
During the economic downturn, the automobile industry was not only a bright spot for China's economy, it was also the highlight of China's overseas acquisitions. Troubled American automakers had no idea that Chinese companies would appear at the negotiating table for nearly every sales deal.
Beijing Automotive Industry, in an attempt to become one of China's "big four" automakers, wrapped up negotiations with Saab related to intellectual property rights, and acquired technology to build its own brand. Privately-owned Geely raised HK$ 740 million to acquire DSI, the world's second-largest producer of automatic transmissions, and reached the agreement to acquire Volvo.
Compared with technology and asset acquisitions, manufacturing acquisitions are relatively complicated to sort out. China's major overseas acquisitions used to bear little fruit and served to disappoint many.
Speculation regarding Geely's Volvo acquisition was rampant for two main reasons. First, there were questions as to whether the acquisition price tag was too high. Second, it was unclear if Geely could succeed where America's Ford had failed. Would Geely be able to generate enough financing and resources?
Industry insiders generally believe, however, that there is opportunity for consolidation within the auto industry. New-energy vehicles are revolutionizing the industry and creating plenty of room for integration.
Sorting Through the Risks
As Chinese companies ramp up the scale of their overseas acquisitions, one nagging question remains: will the acquisitions stir up opposition and resentment from people on the receiving end?
Experts point out that China is expending huge sums to seize opportunities, making high-cost investments like the Central Asia-China gas pipeline and the second "West-to-East" gas pipeline. If problems occur at the source of these resources, the investment in these projects will be unrecoverable.
A PetroChina executive in charge of overseas business refuted such anxieties, saying that the company continually updates its testing and evaluation systems in order to avoid areas of high risk. Such risk may stem from terrorism, political instability, trade protectionism or resource nationalism.
But there are signs that the risk assessment capabilities of Chinese companies still need to be improved.
A large number of enterprises are overly eager to grow in size via acquisitions, and many financial institutions encourage Chinese companies to go bargain hunting.
Clearly, M&A decisions require deliberate calculation in order to minimize price risk. Low prices do not necessarily indicate a profitable deal. The decision to invest lies in whether there is potential for growth. The fundamental reason for the failure of acquisitions is often Chinese companies' inability to manage corporate teams from developed-market companies.
At the same time, the fact that so many Chinese companies are state-owned is a cause of concern in many foreign markets. A "Chinese acquisition" will often be the focus of domestic media in the acquired company's country as well as in the international media. Transparency is often the biggest issue and is one that Chinese companies must directly address.
Financial risks must also be taken into account. Indeed, in addition to traditional players like the China Development Bank, more and more large-scale banks are willing to provide loans for M&As. But companies must first ensure that their own operations remain strong and that they have the willpower not to overextend.
