24 August 2019
China National Chemical Corp. has agreed to pay US$7.7 billion for Italian tire-maker Pirelli, the latest in a string of global brands being acquired by Chinese firms. Photo: Reuters
China National Chemical Corp. has agreed to pay US$7.7 billion for Italian tire-maker Pirelli, the latest in a string of global brands being acquired by Chinese firms. Photo: Reuters

Chinese firms have decent track record of overseas buys

China National Chemical Corp., which could soon face the task of integrating Italian tire-maker Pirelli after its US$7.7 billion bid, can take heart in the knowledge that Chinese buyers have made a decent fist of growing global brands in recent years.

Backed by cheap funding and a huge home market, an army of mostly state-owned Chinese companies has marched beyond its borders, snapping up assets in a decade-long US$391 billion shopping spree, Reuters said.

Their record in the resources field is likely to be patchy, mainly due to a slump in commodity prices, but the outcome elsewhere is much more encouraging.

For non-resources companies, Reuters reviewed China’s 25 biggest overseas acquisitions of three years or older to determine the evolution of share price, revenue and margins. For seven of the deals there was insufficient information because either the target, the acquirer or both were unlisted.

But for 14 of them, all three measures improved for either the target or the buyer.

Success stories include the landmark 2004 purchase of International Business Machines’ personal computer unit by Lenovo Group, the 2010 purchase of Ford Motor’s Volvo car unit by Geely Automobile Holdings, and Dalian Wanda’s 2012 purchase of US cinema chain AMC Entertainment.

Only four underperformed, including SAIC Motor’s purchase of South Korea’s Ssanyong Motor in 2004 and Shandong Jining Ruyi Woolen Textile’s takeover of Australia’s Cubbie Group in 2012.

Chinese firms’ inexperience in foreign acquisitions can raise doubts among targeted companies about integration, bankers and industry players say, which can in turn lead them to pay over the odds to convince a target.

In other cases, Chinese bidders are simply more aggressive buyers.

In January, for example, Fosun International bought Club Mediterranee at a 62 percent premium to the average EV/EBITDA multiple of Club Med’s four closest peers.

But Chinese buyers don’t just put lots of money on the table, they also put a lot of thought into what they buy, said Keith Pogson, senior partner for Financial Services, Asia-Pacific at EY.

“The Chinese tend to have a better idea than foreign rivals of what their Chinese consumers want, of what would work in China,” he said.

Lenovo’s IBM deal is the most prominent success story. Eleven years on, Lenovo has grown into the world’s biggest PC maker, confounding the doubters with a fivefold rise in shares and growing operating income by an average 28 percent a year.

An insider who worked on the deal said Lenovo understood it had to quickly integrate its target without destroying IBM’s corporate culture. It kept, for instance, two operational centers, one in Morrisville, North Carolina, the other in Beijing, and retained most of the management.

“Maybe most important … was that we spent as much energy on bringing together our cultures as we did on our processes and business functions,” Lenovo chairman and chief executive Yang Yuanqing told the news agency.

Geely also let Volvo have its own management team in Sweden.

“The Chinese can be quite hands off with their overseas operations, and typically leave the existing foreign management in control,” said David Brown, Private Equity Leader for Greater China at PwC.

Chinese companies have announced about 3,800 foreign acquisitions, according to Thomson Reuters data, hitting a peak of US$70.4 billion in 2008, just before the global financial crisis. Last year the figure was US$55.5 billion.

About 48 percent of such deals went into mining and energy, as China spent freely on resources to fuel its booming economy, but Chinese companies have been increasingly going after targets in manufacturing, financial and consumer sectors, which confront them with unfamiliar challenges.

“Deep pockets don’t necessarily give you the ability to run businesses efficiently. That’s what better Chinese companies are beginning to learn,” said Oliver Stratton, managing director of venture capitalists Alvarez & Marsal’s Asian practice.

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