What does the buying binge mean for American CFOs? Among other things, it means there are more potential buyers studying their companies and their competitors for possible acquisition. For that reason, finance chiefs have to be prepared for bids from companies they may never have heard of. Markets are going to be disrupted. Prices may fall dramatically. Supply-chain dynamics may change. As it broadens into more sectors and gains momentum over the next two years, Chinese M&A is likely to roil markets further.
Through acquisitions, the Chinese will seek to build on strengths and shore up weaknesses, namely in the areas of branding, sales, marketing, and technology, says Kalpana Desai, managing director for M&A at Merrill Lynch in Hong Kong. There are other forces at work as well. “The domestic market is very competitive,” says Desai. “It makes sense for Chinese companies to expand their product reach beyond their own borders.” In a classic case of turnabout-is-fair-play, the United States looms as a natural target for the Chinese because of the vast size and wealth of its market. China is encouraging companies to go abroad by providing ample low-cost loans to companies.
Most of the Chinese acquisitions in the near future are likely to involve natural resources, such as oil, natural gas, metals, ores, and coal, according to investment bankers involved in evaluating target companies for the Chinese. Just days after CNOOC gave up its bid for Unocal, China National Petroleum Corp. (CNPC), an oil company fully owned by the state, announced it had bought PetroKazakhstan, a Canadian firm that is a major oil producer in the Central Asian country of Kazakhstan, which borders China. That $4.2 billion deal followed a string of other multibillion-dollar deals by Chinese government firms to develop oil and gas fields in countries such as Sudan, Venezuela, and Australia. China is “reaching out beyond its borders to procure assets, in particular, reserves that will be important for its future development and growth,” says Mark Renton, head of Asian investment banking at Citigroup in Hong Kong. (Citigroup advised CNPC on the transaction.)
Consumer-products and technology companies are also likely to be targets of Chinese M&A. To date, there have been only two high-stakes, high-profile deals. TCL Corp., China’s largest television manufacturer, was one of the first to act on global ambitions. In 2003, it forged a joint venture with TV maker Thomson of France, which owns the iconic American brand RCA. Earlier this year, TCL said it had acquired full ownership of the venture. In late 2004, Lenovo Group Ltd., China’s biggest computer manufacturer, spent $1.75 billion to buy the money-losing personal-computer division of IBM Corp. With sales of about $12 billion, Lenovo now holds a 10 percent stake in the worldwide market for PCs. IBM retained a 13.4 percent stake in the combined company, which is the third-largest PC manufacturer in the world, after Dell and Hewlett-Packard.
No Pillage or Plunder
Although few in number, China’s acquisitions to date offer a fascinating glimpse into the brave new world of globalization. So far, Chinese M&A seems to be an almost courtly activity, hardly the sort of pillage-and-plunder feared by U.S. politicians during the debate last summer over CNOOC’s bid for Unocal. Indeed, the Chinese are moving almost gingerly to integrate their new assets, possibly because they are new to the game.