It used to be that American companies were busy expanding in Asia. These days, it is the other way around

Jul 3, 2013

Asian Acquirers Change Focus

By Cynthia Koons

It used to be that American companies were busy expanding in Asia. These days, it is the other way around.

In the space of a few weeks, Chinese meat producer Shuanghui International Holdings Ltd. struck a $4.7 billion agreement to buy Smithfield Foods Inc. and Apollo Tyres Ltd. made a $2.5 billion offer to purchase Cooper Tire & Rubber Co. Those deals, one at the end of May and the other in mid-June, are the biggest Chinese and Indian acquisitions of U.S. companies on record. Bankers say the moves show that Asian buyers not only increasingly believe they can manage foreign companies, they are also confident about the underlying U.S. economy.“Asian buyers are looking for brands, technology and know-how in a vibrant and developed economy,” said Richard Campbell-Breeden, Goldman Sachs Group Inc.’s head of mergers and acquisitions for the Asia-Pacific region, excluding Japan. “They are in general less interested in Europe because of its structural issues. The U.S. is a more attractive destination because its economy is in much better shape.”

The U.S. was the most popular destination for Asian acquirers in the first half of the year, based on the value of the deals that were announced. Their buying comes at a time when the country’s unemployment rate has fallen to 7.6%, compared with a record 12.2% in the euro zone, and the Federal Reserve has said it may reduce the size of its stimulus program in response to rebounding economic growth.

Asia’s deal making in the U.S. shot up by nearly 70% in the first half from the same time last year, according to Dealogic, the result of deals like the ones for Smithfield Foods and Cooper Tire & Rubber. Investors also picked up marquee property assets between January and June: The Government of Singapore Investment Corp. bid $1.14 billion for MSR Resort Golf Course LLC’s Hawaii, California and Arizona resorts, and a prominent Chinese developer and a Brazilian banking magnate paid $1.4 billion for a 40% stake in the General Motors building in Manhattan.

All told, buyers in Asia, excluding Japan, did more deals in the U.S. in the first half—$18 billion—than they have ever done before, putting them on track for a record year.

U.S. buyers only spent $6.3 billion in the first half of the year buying assets in Asia, a slowdown. In four of the past six years, deal values exceeded $10 billion.

What is notable is the type of acquisitions that Asian buyers are doing. It used to be that Asian companies were generally on the hunt for natural resources and assets like real estate, but the Smithfield Foods and Cooper Tire & Rubber Co. deals show Asian buyers are taking other approaches as well.

“We are seeing more acquisitions of operating businesses,” said Dieter Turowski, co-head of Morgan Stanley’s investment bank for the Asia-Pacific region. “This reflects a changing mind set. Asian companies have become more willing to undertake acquisitions which entail management and integration challenges, something that until recently we had only seen from Japanese companies.”

Still, the newfound optimism could be tested in coming months.

China’s new leaders have shown a stricter approach to lending lately. The People’s Bank of China withheld cash from the interbank lending market in June as part of a push to redirect bank lending away from what are known as shadow banks, informal lenders like leasing companies.

Efforts by the government to restrain credit growth could reduce the amount of funding available for deal activity, though bankers note that international banks could pick up some of the slack left by Chinese lenders.

“With Chinese privately-owned enterprises looking much harder for financing cross-border deals, international banks with a strong balance sheet and appetite to lend will play a key role” in funding deals, said Mark Dowie, head of corporate finance at Standard Chartered PLC.

There has already been some evidence that foreign banks are prepared to lend to Chinese companies looking to do deals. China Mengniu Dairy Co. Ltd. bought a majority stake in smaller rival Yashili International Holdings Ltd. in a deal worth around $1.6 billion that was financed entirely by foreign banks, a person familiar with the situation said.

Deal makers say that the credit clampdown shouldn’t be much of an issue for the major Chinese banks, who have helped to fund many of the recent deals. For example, Morgan Stanley provided $3.9 billion of the financing in the Smithfield deal and the New York branch of Bank of China provided another $4 billion.

“The larger [Chinese] banks have plenty of deposits and are still in a good position to lend,” Mr. Turowski said. “My presumption is that large outbound China M&A will continue to get funding from Chinese banks, although international banks may well play a larger role going forward, as we have seen in some recent deals.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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