Chinese companies seeking merger and acquisition (M&A) opportunities overseas are likely to be drawn to Taiwan’s technology firms and rising brands in Southeast Asian countries such as Indonesia, a senior executive at Mayer Brown JSM said.
“Technology is a big driver for China’s outbound M&As,” Mark Uhrynuk, partner at Mayer Brown JSM, told EJ Insight in an interview. “That’s an important part of any strategy for a Chinese entity that is going to become a successful global leader, particularly in the technology industry.”
Some Chinese manufacturers are seeking to purchase foreign companies to acquire intellectual property rights, including patents and brand names as well as management knowhow, Uhrynuk said. “It doesn’t surprise me that some Chinese enterprises are looking at Taiwan for opportunities in this area, as it could be a rich hunting ground.”
He believes there will be more cross-strait commercial ties, M&As and joint ventures over time.
In early August, it was reported that Huawei Technologies Co. Ltd., China’s largest telecommunication equipment maker, was planning to acquire some Shanghai-based production facilities from Taiwanese smartphone vendor HTC Corp. (2498.TT). However, HTC chairwoman Cher Wang dismissed the rumors, Taiwan’s Apple Daily reported on Aug. 13.
Lenovo Group Ltd. (00992.HK) has been holding talks with HTC for a strategic investment since August, several Chinese newspapers reported earlier this month, citing unnamed sources. Options include forming a joint venture or swapping shares by the two parties while keeping the HTC brand. But HTC’s Wang also denied the reports, China Business News said on Oct. 10.
Lenovo is actively considering a bid for the entire stake of struggling smartphone maker BlackBerry Ltd., and has signed a “non-disclosure” agreement that allows it to look at the Canadian company’s books, the Wall Street Journal reported on Oct. 18.
“Lenovo is a very good example of how a strategy of internationalization can be successfully employed by a Chinese entity, including using outbound M&A, to become a world class industry champion,” Uhrynuk said. A key milestone for Lenovo was when they acquired technology, management knowhow, and international capabilities and market share in a deal with IBM in 2004, he said.
Chinese companies are also fighting M&A battles in Asia against their counterparts from Japan, Singapore and Malaysia. Indonesia is one of the top targets.
“While there remains some focus on the resource-based opportunities in Indonesia, there are a growing number of opportunities in other sectors, particularly those relating to consumer goods and services. Early investments in these sectors could benefit from the significant and rising middle class in Indonesia,” he said.
“Going out” policy
Over the last decade, China has become increasingly active in global M&A markets. Spurred by Beijing’s “going out” policy, many state-owned-enterprises (SOEs) have snapped up natural resource suppliers in Africa, Canada and Australia.
Last year, China recorded a non-financial outbound direct investment (ODI) of US$77.22 billion, up 28.6 percent from a year ago. That was about 30 times the US$2.5 billion it reported in 2002. The ODI was US$18.72 billion in 2007.
According to the 12th Five-Year Plan announced in March 2011, the central government said it will give equal importance to the growth of ODI and foreign direct investment (FDI) so that the country can make good use of both domestic and overseas capital to boost economic growth. In 2012, China received US$111.72 billion in FDI, down 3.7 percent from the previous year.
A growing number of Chinese privately owned enterprises (POEs) are looking for consolidation opportunities and to improve operational efficiency while becoming international competitors by going outbound, Uhrynuk said. They have a great desire to attain global leadership by stepping up outbound acquisitions, he said.
“Over the medium term, Chinese SOEs will continue to focus on target companies in the resource sector [energy, mining and power] while POEs are likely to continue to focus on targets in the industrial and consumer sectors [automotive, technology, food, media and fashion],” he said.
Bosideng International Holdings Ltd. (03998.HK), China’s largest down apparel firm, acquired a 96 percent stake in Greenwoods Menswear Ltd. for 40 million yuan (US$6.57 million), it said in a press release on Oct. 11. The target company owns the Greenwoods and 1860 brands in Britain.
In 2014, a still-recovering and fragile economy in Europe should continue to make the region an appealing M&A destination for Chinese firms as well as other Asia-based multinationals, sovereign wealth funds and other financial investors, Uhrynuk said. Some European real estate companies, energy and infrastructure firms and financial institutions could represent opportunities, he said.
Lately, the potential for tightening liquidity as a result of tapering appears to have resulted in an increase in M&A activities in the US as acquirers seek to take advantage of current low interest rates, he said. In the long run, however, the impact of tapering could lead to a slowdown in the US economy, which could generate more uncertainty and have an adverse impact on global economic recovery and the M&A markets, Uhrynuk said.
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