Chinese Acquisition Appetites Shift From Resources

Chinese Acquisition Appetites Shift From Resources

CYNTHIA KOONS

Oct. 23, 2013 8:42 a.m. ET

When it comes to global mergers and acquisitions, China has long been seen as a buyer of natural resources but not much else. But bankers increasingly expect to see companies in industries like technology, real estate and food buying assets overseas, spurred by government policies and readily available financing. The increasing shift in appetite for hard assets or technologies has been noticeable in recent weeks, with Chinese personal-computer maker Lenovo Group Ltd. 0992.HK -0.48%considering a bid for struggling Canadian smartphone maker BlackBerry Ltd. BB.T -0.12%, which The Wall Street Journal reported last week. Should Lenovo pull the deal off, it would be one of the highest-profile deals done by a Chinese player on the global stage.A BlackBerry acquisition by Lenovo, which bought IBM‘s IBM -0.01% PC business in 2005, wouldn’t be a one-off.

Chinese conglomerate Fosun International Ltd. 0656.HK -3.40% announced plans to buy One Chase Manhattan JPM -1.08% Plaza in New York City for $725 million last week. That comes on the heels of Chinese biggest-ever outbound deal by a private company, when Chinese pork company Shuanghui International Holdings Ltd. agreed to buy Smithfield Foods Inc. for $4.7 billion in May. The number of overseas deals done by private companies or non-state-owned publicly listed companies has been rising fairly consistently since 2004, when 45 deals valued at $3.7 billion were done by such players. So far this year, 238 overseas deals valued at $24.3 billion have been done by China’s private companies.

It used to be that the country’s big state-owned enterprises did the bulk of China’s overseas mergers, and the need to secure resources was the main objective of deal-making activity. But as China’s economy matures, the resource angle is narrowing. Energy deals comprised 30% of overall outbound deal activity in 2010 but by 2012, this fell to 24%, according the latest Mergermarket and Paul Hastings report on Chinese outbound acquisitions.

“Mining and oil and gas have been accounting for the bulk of outbound M&A in the past but we’re starting to see that percentage drop even though the volume [of resources deals] is still very strong,” said Ken Wang, RBC Capital Markets’ head of natural resources in Hong Kong.

“We see interest in deals in agriculture, the food industry, the automobile industry, entertainment, theaters, real estate, technology—other sectors that are all related to consumers,” he said. “As more and more people start to consume and the economy is shifting, people say, what can we get from the West?”

Government policies have also been supportive of private companies buying overseas assets. Last year, 10 government departments jointly issued opinions about actively encouraging private companies to do deals abroad. One sign of such support: The government now allows private companies to use onshore assets to secure foreign-currency loans from Chinese banks.

For the takeover of Smithfield, Paul Hastings’s Hong Kong-based partner Vivian Lam said state-owned Bank of China 601988.SH 0.00% was quick to offer up $4 billion of financing, a sign that government policies to promote outbound acquisitions are starting to work.

“Chinese policies in that area definitely helped that,” she said.

The Shuanghui deal could go a long way toward encouraging other private companies in China to do deals overseas.

“In the acquisition of Volvo [by Chinese car maker Geely in 2009] and the Shuanghui deal, the buyers are relatively smaller than the seller but they’re able to use a competitive international financing structure to make the deal happen,” Shanghai-based White and Case partner Alex Zhang said.

Mr. Zhang said interest in international deals from private-sector players is the highest he has ever seen.

“Private companies feel they have been squeezed out by the big state-owned enterprises. They have very limited room for growth in the Chinese market,” Mr. Zhang said. “Having a platform outside China, in the long-term, they’re going to benefit from that.

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.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: