Waking the Economic Dragon: China's International Deals

Weekly Corporate Growth Report, Jun 23, 2008 by Dolbeck, Andrew

While dealmaking may have fallen off in the West, it appears to be on the rise in China. There are big deals going on in China, such as Shenzhen-based China Merchants Bank's recent $4.7 billion takeover of Hong Kong's Wing Lung Bank. But perhaps even more notable is the rise of Chinese investments in the international arena.

In the month of May alone, China reported an all-time record of 55 merger and acquisition deals, up ten percent over the previous year, according to China Venture, an investment researcher and advisor. According to Dealogic, Chinese companies spent $31.1 billion on overseas deals from beginning of this year through May 27, which is more than the country spent on such deals in the whole of 2007.

China's quest for international acquisitions is still going strong. Chinese metals trader Sinosteel, for example, has made a hostile bid for Australian iron ore prospector Midwest. Chinese mining company Shenzhen Zhongjin Lingnan Nonfemet is currently engaged in a bidding war to buy Australian base metals miner Herald Resources. Qingdao Haier, China's largest home-appliance maker, is bidding for General Electric's home appliance division against rivals from South Korea, Germany, Turkey, Mexico, Sweden, and Italy. Chinese state-owned enterprises and sovereign wealth funds are targeting mining companies, power companies, and financial institutions.

There are a number of factors driving the dealmaking trend in China. For one thing, China has money to spend. Many Chinese firms have recently made successful public offerings, providing them with the capital to pursue merger and acquisition deals. Foreign exchange rates are also working in the country's favor, with a strong yuan making foreign companies an attractive investment for Chinese firms. The Chinese government is also encouraging deals, offering stateowned enterprises low-interest bank loans to pursue acquisitions.

Chinese investment bank China International Capital Corp. has become the leading supporter of Chinese deals, surpassing Western investors Citigroup, JP Morgan, Lehman Brothers, and Rothschild. Lehman Brothers had been the highest-ranked M&A advisor in China, but China Internationa] Capital took the lead after advising China Unicom on its merger deal with China Netcom.

As China continues to industrialize, its demand for raw materials grows, driving deals to control foreign sources of oil, iron ore, and other industrial products. In early 2008, Aluminum Corp. of China and Alcoa spent $14 billion to take a 12 percent stake in Rio Tinto, with China Aluminum providing most of the purchase price. The purchase challenges rival BHP Billiton's plan complete a hostile takeover of Rio Tinto for $100 billion. If BHP succeeds in acquiring Rio Tinto, the deal would create the world's largest single producer of iron ore, which could lead to an increase in the costs of iron products that would impact a wide range of Chinese companies. More recently, Sinosteel raised its stake in Midwest to 33.82 percent from 28.37 percent to keep the Australian iron ore prospector from being acquired by Murchison Metals.

Raw materials aren't the only thing on China's wish list, either. By buying foreign manufacturing concerns, Chinese companies can join their low-cost production facilities to internationally recognized brands and established distribution networks. This is one of the reasons that Qingdao Haier is pursuing GE's appliance operations. Haier also made a joint bid with private equity firms Bain Capital and Blackstone to purchase Maytag in 2005, but did not acquire the appliance company.

Another reason behind China's investment in foreign deals is the need to take a role on the international stage. China is a growing economy and the country is participating more in global markets. Operating internationally will provide China with a better position for participating in those markets. "Chinese companies are larger, they're more ambitious, and they have more cash at this point," says David Michael, a senior partner at Boston Consulting Group. "They also realize that they are increasingly playing in global markets, where to have viable position in the long run, you may need to achieve global scale."

While China clearly has an interest in pursuing international acquisitions, successfully closing foreign deals can be difficult. While the government of China is working to support deals, its involvement can also send warning signals to other governments that may be concerned about issues of foreign investment and national security. Haier, for example, is reportedly unwilling to turn to the Chinese government or Beijing-backed investment agencies to help finance its bid for GE's appliance unit because such a move might draw the attention of the US government agencies that blocked a recent effort by Chinese technology giant Huawei to acquire computer networking hardware company 3Com.

Global M&A trends are difficult to predict in today's turbulent markets, but it seems likely that China will continue to be a significant player in the international deal market. With money to spend and an appetite for material resources, China can be expected to pursue deals to support its growing industrial economy.