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M&A Market Emerges in China

The promise of a potentially much more lucrative M&A activity in China enticed M&A International Incorporated, a global M&A alliance, to hold its first conference in Beijing on April 19–21 to assess that potential and its limitations. In addition to company representatives, representatives of the Chinese Government and the country’s legal, private equity, banking and industrial sectors participated in the meeting.

Strong performances were reported by Chinese companies on the M&A market in 2006. According to M&A International, during the first 11 months of 2006, Chinese firms closed 313 domestic-only M&A deals valued at US$8.5 billion. Internationally, Chinese entities reported M&A deals valued at US$14.1 billion.

“We think 2007 will be a record year for M&A as it relates to Chinese industry. The continued availability of low-cost finance, admission to the WTO [World Trade Organization] and general growing confidence will embolden investment in China and by Chinese entities overseas,” said Chris Scales, executive director of M&A International.

Resources, Technologies and Brands

Mergers and acquisitions are considered a viable way for Chinese companies to gain access to the natural resources, advanced technologies and to established brands they need to keep China’s reforming and opening economy on a sound track. At the same time, M&As help ease China’s entry into and integration with the global economy.

Statistics indicate that 60 percent of China’s overseas investment in 2006 was allocated to the acquisition of oil and natural gas companies.

In October 2005, PetroChina Company Limited acquired Petroleum Kazakhstan Company Limited for US$4.18 billion. Although the China National Offshore Oil Corporation (CNOOC) terminated its 2005 effort to buy Unocal Corporation, a US firm with mainly overseas oil and gas assets, CNOOC successfully closed a deal to buy a 45-percent share of a Nigerian offshore oilfield for US$2.3 billion at the start of 2006 during a visit by Chinese President Hu Jintao. Leading iron and steel companies, including the Shougang Group, bought iron ore in Peru and Australia. All these efforts reflect China’s craving for the resources needed to fuel its rapid development. It is predicted that in 20 years, there will be a hundred-million-ton gap between supply and demand for oil and natural gas and 45 major mineral resources, of which only 6 are produced in sufficient quantities in China.

Another focus of Chinese companies is technology. After initial stages of expansion and consolidation in the domestic market, leading IT and home-appliance companies have come to the point of globalization. Acquiring key technologies to remain competitive in the broader international market is a must. China’s leading PC-maker, Lenovo, acquired the PC division of IBM, giving it a new window on technology but also a chance to benefit from established brand loyalty. BENQ’s purchase of Siemens’ mobile phone business resulted in the transfer of about 1,000 patents to BENQ, giving it key advanced technologies in the field of cell-phone production.

However, despite those successful cases of overseas buying, China is still a fresh hand in the global M&A market, and it must cope with many obstacles.

Beijing-based Dana Schuppert, PhD, chairman of Strategic European Investment Management Limited, an affiliate of M&A International that focuses on China, Europe, India and Southeast Asia, said the outside world needs some time to gain a better understanding about China and to build confidence in doing business with its companies. China, for its part, it will have to gradually promote its ideals and cultivate its markets to let the outside world understand China’s determination and market strength.

Key Sectors Protected from Monopoly

Industry reports show that of all the M&A cases in China in 2006, 75.7 percent involved foreign companies buying Chinese companies, most of which were leading firms in their sectors. Examples include Goldman Sachs’ acquisition of Shineway Group, a leading meat-processing company based in Henan Province, and the French home appliance giant SEB’s purchase of Supor Cookware Corporation Limited.

There is some local concern that mature and powerful foreign companies may drain the value of the emerging Chinese companies they have purchased or use their market strength to establish industrial monopolies by buying leading companies, which some feel has occurred in the soft drink and daily-sanitary-products sectors.

In September 2006, two rules, Measures for Administration of Takeover of Listed Companies and Regulations for Merger with and Acquisition of Domestic Enterprises by Foreign Investors became effective, regulating M&A activities, especially those involving foreign firms buying Chinese ones. The rules listed seven industries considered vital to national security, such as military, telecommunications and the energy industries, over which the country must maintain control. It also stipulates that M&As involving China’s Time Honoured Brands (Zhongguo Laozihao) and those that could lead to market monopolies should be reported to the Ministry of Commerce for approval.