Friday, June 24, 2005

WSJ : Meet China Inc.: Topping Japan Inc. of 1980s

Corporate China Shows Muscle As Host of Global Bids Emerge, Marking Only Start of Deal Flow

By HENNY SENDER Staff Reporter June 24, 2005

Four years ago, Goldman Sachs Group was trying to help PetroChina, a Chinese energy company, buy the Indonesian assets of Devon Energy. "At the time, nobody thought we were serious," recalls Johan Levin, co-head of mergers and acquisitions for Goldman Sachs in Hong Kong. Today, by contrast, "the first people on any buy list will be Chinese."
In the past week, as two Chinese bids have emerged for companies in the U.S., one in manufacturing and one in energy, everyone is taking Chinese interest seriously. There will be many more such expressions of interest to come. While there are echoes of Japan Inc. of the 1980s in these offers, Chinese bids for companies and assets both in the U.S. and globally will be far more substantial and sophisticated.
Corporate China's quest for natural resources and manufacturing know-how, brands, distribution and technology is backed by massive, low-cost credit lines from domestic banks, particularly China Development Bank. Funding isn't a problem. The war chest China Inc. brings to bear in acquisitions could lead to higher-than-expected bidding wars on some fronts, as some feel is the case concerning Cnooc's $18.5 billion bid for U.S. oil company Unocal.
"There is so much money in China," says Fred Hu, a managing director with Goldman Sachs Group in Hong Kong and Beijing. "It isn't only Ex-Im Bank or Development Bank. All the commercial banks in China have a big capacity to fund deals and are quite interested in providing support to increase their own clout." Any revaluation of the Chinese currency against the dollar would make U.S. targets even less costly for Chinese acquirers.
In the late 1980s, Japan's buying binge in the U.S. quickly became a contentious issue between the two countries. Chinese companies, recognizing their own weaknesses, are soliciting the help of some of the most sophisticated players around, many of them in the U.S. Many Chinese companies are turning to such U.S. private-equity funds as Texas Pacific Group, Bain Capital and Blackstone Group to help them both acquire and manage their prey.
For Wall Street, two recent offers -- Qingdao Haier's bid for Maytag and Cnooc's bid for Unocal -- mark just the beginning of China deal flow.
Huawei Technologies, China's answer to Cisco Systems and other leading telecommunications-equipment makers, is considering a bid for Britain's Marconi. Shanghai Automotive Industry, a leading auto maker in China, may follow its purchase of South Korea's Ssanyong Motor -- with core strengths in sport-utility vehicles and limousines -- by acquiring automotive-design boutiques in Italy and Germany to strengthen its capabilities both at home and abroad.
Citic Resources Holdings -- armed with a check for nearly $1 billion from China Development Bank -- is trying to do a deal for control of Thailand company Thai Petrochemical Industry. Aluminum Corp. of China, meanwhile, has a $1 billion line of credit from Export-Import Bank of China to acquire aluminum companies and assets.
Right behind China, with less capital but equally powerful allies, are Indian companies propelled by the same logic and needs. Indian manufacturing companies, often with powerful investors such as Temasek Holdings, an investment arm of the Singapore government, or Warburg Pincus, a U.S. private-equity company, are beginning to look at or buy everything from troubled textile companies in the U.S. (in the case of Welspun India) to a bus company in Spain (a target of Tata Motors).
While resources companies in particular are carrying out state policy, and all deals need official approval, it would be a mistake to think that Beijing is totally orchestrating their global march.
Their drive "is consistent with government policy to secure long-term supplies. But China is too chaotic and fragmented to think that there is one central coordinator. China does not have a single ministry like Japan's Ministry of Economics, Trade and Industry," Mr. Hu says. "A lot of what is happening is a bottoms-up phenomenon with companies under pressure from their shareholders to grow, and since they are cash-rich, to deploy that cash efficiently."
Until recently, bids by Chinese companies for international assets were in a different, smaller league than today. "In the past, China was less particular and perhaps less price-sensitive," Mr. Levin adds. Chinese buyers were confined to mediocre assets and companies. When they showed up, they had to pay more than other bidders, since they were perceived to lack credibility.
"There are a lot of what I call the 'silk purse deals,' in which multinational companies sold divisions which weren't profitable, and in many cases Chinese companies were the only logical buyers of these dog divisions," says Jack Lange, a lawyer with Paul, Weiss, Rifkind, Wharton & Garrison in Hong Kong. "Their owners could not make them profitable, but the Chinese use them to help jump-start their own international presence."
Today, the market is no longer demanding a China premium. At the same time, the Chinese have recruited allies to give them even greater credibility. Indeed, the China tag is fast losing its stigma status. Chinese companies have considerable strengths that make their offers more compelling than those of other bidders. For a start, they can acquire U.S. industrial companies (paying for them with low-cost capital available from local banks) and take them to lower-cost production bases in China. They can then make the economics of their takeover work even better by introducing their acquisitions to the growing China market.
Chinese companies are moving up the value-added chain. "Services will be an increasingly important part of the story," says Thomas Britt, a Hong Kong securities lawyer for Debevoise & Plimpton.
Chinese information-technology services companies are looking beyond their own borders in the same way that their Indian counterparts are. Consider CDC, a Chinese company that trades on Nasdaq under the ticker symbol CHINA. It has acquired Ross Systems, an Atlanta software company and Pivotal, a Vancouver-listed software company. Some of its top executives are returnees from the U.S., and Mr. Britt is one of its board members. "In these companies, the people themselves have direct experience of the U.S. and can be a bridge," he says.
The Chinese don't always succeed. China Minmetals is in talks with Canadian metals company Noranda on possible joint activities after its failed bid to buy Noranda itself.


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