Asset prices inflated by the low interest rate and expansionary monetary policies of some central banks have not deterred mainland Chinese companies from snapping up assets around the world in the past three years, according to a research report.
Figures from deal tracker Dealogic showed that the volume of China’s outbound mergers and acquisitions hit a record US$50.5 billion for the year to date at US$50.5 billion from a year earlier, up 12 percent. Although the total volume of deals has gone up, the number of deals has dropped in the period.
The average size of overseas deals involving Chinese companies has increased from US$117.6 million in 2011 to US$175.1 million in 2012 and US$197.3 million in 2013.
The top five outbound M&A sectors by volume, according to Dealogic, are oil and gas, food and beverages, utilities and energy, mining and real estate.
Notable deals announced this year include China National Petroleum Corp’s US$5 billion purchase of an 8.33 percent stake in the Kashagan oilfield in Kazakhstan and Shuanghui International’s US$4.7 billion takeover of American pork producer Smithfield Foods.
Other deals that have attracted attention include property conglomerate Dalian Wanda Group’s acquisition of US cinema chain AMC Entertainment Holdings for US$2.6 billion, car parts maker Wanxiang Group’s takeover of defunct American battery firm A123 Systems for US$257 million, and Geely Automobile’s 11 million pound (US$17.75 million) purchase of Manganese Bronze, maker of London’s black taxi cabs.
The offshore push began to gather steam in 2008 as Beijing adopted a “going out” policy to try to spur an economy labouring under the global financial crisis. With its US$3.5 trillion reserves, the cash-rich central government encouraged companies to buy international names or high-tech assets. The belief was that Chinese companies would be able to capitalize on the strengths of foreign firms to more quickly strengthen their own brands and reputations. They would gain the know-how they needed to overcome bottlenecks in development.
Better technology would also benefit the nation’s push to shift the mainland economy from a low-cost export-led model to one focused more on domestic consumption. To that end, Premier Li Keqiang told the World Economic Forum in September that Beijing would relax renminbi convertibility and approvals to smooth the way for M&As. He also signalled Beijing’s intention to allow greater opening of China’s financial sector, which remains dominated by state-owned firms.
There’s no government target for foreign acquisitions and, unlike Japan’s foreign trophy hunt of the late 1980s, which included buying the Rockefeller Centre and Universal Studios, Chinese companies seem to prefer putting their eggs in various baskets.
Japan’s bitter experience of asset bubbles bursting in the 1990s has been the subject of much debate among policy makers in China, who want to avoid following in Tokyo’s footsteps. Without a clear understanding of the value of their acquisitions and a clear purpose for buying them, many Japanese firms overpaid for the assets and had to sell the trophies off when they failed to bridge cultural divides and make money.
Chinese companies are already starting to run into such problems. China’s SAIC Motor failed to cope with the powerful union at SsangYong Motor after it bought 51 percent of the South Korean company for US$571 million with the help of the Shanghai municipal government in 2004. SsangYong went bust in 2010.
According to Thomas Herd, managing director of management consultancy firm Accenture’s North America mergers and acquisitions group, small deals have done better than big ones.
“That’s probably because smaller deals minimize a variety of risks, such as building executive and board alignment,” Herd said. Simply put, an ambitious M&A effort can distract and drain the resources of even the biggest and most capable acquirers, he said.
Kandy Wong is a Hong Kong-based China business writer. She has previously worked with various Hong Kong and international English-language media organizations.
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