19 July 2018
Chinese firms will achieve more by keeping a low profile during key overseas acquisitions.
Chinese firms will achieve more by keeping a low profile during key overseas acquisitions.

Overseas M&As: What China firms need to bear in mind

Chinese companies have been stepping up efforts on overseas acquisitions in recent years. In this, they are often accused of taking advantage of market downturns to grab assets on the cheap. Apart from this, the firms also face other troubles.

To ensure success in the M&A deals, companies need to bear in mind that they should demonstrate not only their “hard power” but also the “soft power”, making the other side feel comfortable and see potential for future synergy.

Chinese enterprises must follow the example of Japan, which switched to a low-key approach in overseas deals after some high-profile acquisitions during the 1980s and 1990s sparked huge criticism. 

Now, these comments are pertinent as Greece’s new left-wing government, which took office late last month, has signaled plans to halt the privatization of the nation’s largest port of Piraeus. Chinese shipping giant Cosco manages the two main container terminals at the port under a 35-year concession signed in 2008.

It’s not the first time a Chinese acquirer has encountered political risk in a targeted foreign company. In November last year, the Mexican government suspended a high-speed rail project that was set to be undertaken by Chinese firms. The project had initially been awarded to a Chinese-led consortium, but was canceled following complaints about legitimacy and transparency of the bidding process.

Therefore, political risk — in addition to the asset valuation and profit margin — is a key element for Chinese companies who are looking for M&A deals overseas. 

Last year, Chinese firms made seven M&A deals in Africa, mainly in raw materials. And Europe was the top designation for them with 66 deals. Of this, 22 were in industrial sector and 10 in consumer-related businesses. In Latin America, Chinese firms made six deals last year, covering consumption, healthcare, industrial, raw materials and telecom. And one energy deal has been struck in Russia.

Emerging markets offer great opportunity for Chinese firms which are eager to build an overseas presence. But they should be wary of political uncertainties in Latin America and Africa, as well as potential risk in mature markets like Europe.

In the past, Chinese companies have been targeting firms that have been marginalized by developed economies. However, they fail to unleash the expected synergy due to project risk and political factors.

Potential political risks on M&A deals include, but not limited to, power shifts or civil unrest. Local laws and regulation could also get in their way. In 2013, China’s Huawei was forced to drop a planned acquisition of US server technology company 3Leaf’s assets, after Washington voiced national security concerns.

Ralls Corp., a Delaware-based firm controlled by China’s Sany Group, was rejected permission to acquire four wind-farm projects that were located near or within restricted US Navy airspace.

Meanwhile, successful deals such as Lenovo’s acquisition of IBM’s PC business and Shuanghui’s purchase of Smithfield Foods Inc, the largest pork producer in the US, also had their share of setbacks.

China faces the challenge of absorbing its excessive capacity as it undertakes economic restructuring. Therefore, Beijing hopes to open up new markets utilizing the strategy of “One Belt, One Road” to help fix the overcapacity issue and export China’s industrial and manufactured products.

Amid this situation, the moves of Chinese companies in foreign markets will be watched closely as Western nations are struggling to restore their economic growth momentum. One should not be surprised if more firms become easy targets for political attack in foreign markets.

This article appeared in the Hong Kong Economic Journal on Feb. 2.

Translation by Julie Zhu

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Senior investment banker

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