Chinese acquisitions

China buys up the world
And the world should stay open for business
Nov 11th 2010

IN THEORY, the ownership of a business in a capitalist economy is irrelevant. In practice, it is often controversial. From Japanese firms wave of purchases in America in the 1980s and Vodafone s takeover of Germany s Mannesmann in 2000 to the more recent antics of private-equity firms, acquisitions have often prompted bouts of national angst. Such concerns are likely to intensify over the next few years, for China s state-owned firms are on a shopping spree. Chinese buyers mostly opaque, often run by the Communist Party and sometimes driven by politics as well as profit have accounted for a tenth of cross-border deals by value this year, bidding for everything from American gas and Brazilian electricity grids to a Swedish car company, Volvo. There is, understandably, rising opposition to this trend. The notion that capitalists should allow communists to buy their companies is, some argue, taking economic liberalism to an absurd extreme. But that is just what they should do, for the spread of Chinese capital should bring benefits to its recipients, and the world as a whole.
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The idea that an opaque government might come to dominate global capitalism is unappealing. Both Britain and America peaked with a share of about 50%. But they are under the guidance of a state that many countries consider a strategic competitor. Nor is China s system as monolithic as foreigners often assume. But a combination of factors huge savings in the emerging world. in 1914 and 1967 respectively. Historically.· · China East Asia Why China is different Not so long ago. and it is easy to see other countries becoming less welcoming too. Australia and Canada. oil wealth and a loss of confidence in the free-market model has led to a resurgence of state capitalism. not profit. State companies compete at home and their decision-making is consensual rather than dictatorial. Some believe China Inc can be more sinister than that: for example. might drive decisions. and some sectors defence and strategic . Even in natural resources. China is miles away from posing this kind of threat: most of its firms are only just finding their feet abroad. China s natural rise could be turbocharged by its vast pool of savings. They span the planet. Resources would be allocated by officials. The rich world has tolerated the rise of mercantilist economies before: think of South Korea s state-led development or Singapore s state-controlled firms. particularly in natural resources. which are active acquirers abroad. About a fifth of global stockmarket value now sits in such firms. are creating hurdles for China s state-backed firms. Such concerns are being voiced with increasing fervour. Its firms are giants that until now have been inward-looking but are starting to use their vast resources abroad. Private companies have played a big part in delivering the benefits of globalisation. allocating resources as they see fit and competing to win customers. it is not close to controlling enough supply to rig the market for most commodities. Once bought. directs deals and finances them through state banks. not the market. Chinese firms own just 6% of global investment in international business. top dogs have had a far bigger share than that. That would be a mistake. more than twice the level ten years ago. get technical know-how and gain access to foreign markets. it often appoints executives. Politics. natural-resource firms can become captive suppliers of the Middle Kingdom. and in time is likely to overtake America. Chinese firms are going global for the usual reasons: to acquire raw materials. Yet China is different. America thinks that Chinese telecoms-equipment firms pose a threat to its national security. Today this is largely invested in rich countries government bonds. tomorrow it could be used to buy companies and protect China against rich countries devaluations and possible defaults. When abroad they may have mixed motives. government-controlled companies were regarded as half-formed creatures destined for full privatisation. once open markets for takeovers. not an ally. As our briefing explains (see article). where it has been most active in dealmaking. It is already the world s second-biggest economy.

Not all Chinese companies are state-directed. Take Volvo s new owner. for instance are too sensitive to allow them in. that s fine. Indian and Brazilian firms have an advantage abroad thanks to their private-sector DNA and more open cultures. in a competitive market where customers could turn to other suppliers. Some are largely independent and mainly interested in profits. so its interests will become increasingly aligned with the rest of the world s. Often these firms are making the running abroad. Show a little confidence Chinese firms can bring new energy and capital to flagging companies around the world. Chinese companies could safely be allowed to own energy firms. and as that happens its enthusiasm for international co-operation may grow. but influence will not just flow one way. it would not matter. investing in local research and placating local concerns for example by listing subsidiaries locally. Volvo should now be able to sell more cars in China. To succeed abroad. America and Europe could use the money. To reject China s advances would thus be a disservice to future generations. But such areas are relatively few. That means hiring local managers. as well as a deeply pessimistic statement about capitalism s confidence in itself . Chinese companies will have to adapt. Geely. without the deal its future was bleak. for instance. What if Chinese state-owned companies run their acquisitions for politics. That has not been lost on Chinese managers.infrastructure. China s advance may bring benefits beyond the narrowly commercial. As it invests in the global economy. And if Chinese firms throw subsidised capital around the world. The danger that cheap Chinese capital might undermine rivals can be better dealt with by beefing up competition law than by keeping investment out. not profit? So long as other firms could satisfy consumers needs.

such as Geely s purchase of Volvo. proposing a multibillion-dollar takeover. state-controlled energy firms. She delivered a letter from Sinopec. a little wistfully. never to be seen again. A stunning young Chinese woman arrived at reception. This year buyers based in China and Hong Kong have accounted for a tenth of global deals by value.Chinese takeovers Being eaten by the dragon What it feels like to be bought by a Chinese firm Nov 11th 2010 A FEW years ago two executives of an international oil company were working late in its otherwise deserted office in England. Now it is really happening. one of China s giant. The executive adds. The first fiery breaths . She was very attractive. His firm was soon bought by another Chinese company. decked out in Gucci. that she then disappeared into the night in a car with local licence plates. Companies across Europe have solicited Chinese investment. a Swedish carmaker. one of them says. Bankers all over the world have touted lists of Western takeover candidates among China s big firms. including investments in oil and landmark takeovers in industry. Since then Western bosses have been tapped by Chinese firms at conferences in Toronto and Cape Town and received walk-in offers in Scandinavia. A decade ago China urged its companies to expand under the slogan go out .

which are largely state-controlled. China s high savings will also spur deals. a Chinese metals firm.· · · · · Related topics Business Emerging markets Asia China East Asia More deals are inevitable. and account for over a tenth of global stockmarket value. Britain owned 45% of the world s FDI in 1914. Wooden Chinese executives insist they are acting on purely commercial grounds. which act as portfolio investors. which includes takeovers and companies greenfield investments. In 2005 CNOOC. Today those savings are recycled into rich countries via sovereignwealth funds and the central bank. has a share of just 6% (see chart 1). In 2009 Rio Tinto. Most are still mainly domestic outfits. to build up technical and commercial expertise. Control of the world s stock of foreign direct investment (FDI). . are already some of the world s biggest. Listed Chinese firms. a Chinese oil firm. given China s rise. There have been fiascos. including Hong Kong and Macau. But China may and probably should diversify. an AngloAustralian mining firm. Companies often have surplus cash and banks surplus deposits. a Californian producer. Yet these transactions are tricky partly because of cultural differences and partly because of the role of the Chinese state. tends to reflect a country s economic muscle. buying mainly bonds. Western bosses hail a new era of co-operation. and to gain access to foreign markets. Public announcements of such deals are something of a charade. That shift will be accelerated by China s political aims: to acquire inputs. Rio s shareholders opposed the sale but many reckon that the Australian government did. labour and land. such as raw materials. withdrew a bid for Unocal. withdrew from a deal to sell a series of minority stakes to Chinalco. too. America s share peaked at 50% in 1967. after American politicians kicked up a stink. Today China.

They knew everything about me. The head of a mining firm grew fond of his. is not necessarily the most senior executive. You had to take your battery out of your mobile phone. A core of people ask good questions. alone. but even they. I had 52 hits from China on my home computer. I was shocked. Chinese companies power structure is a bit of a mystery to outsiders. Meetings in China can be attended by vast audiences. She was clearly an internal spy. or have been in negotiations to do so. but jokes. Chinese negotiators often use booze to break down barriers and to try to get the upper hand. Both sides try to make friends: Emotion and trust matter. often in hotels owned by the bidder. Although one Western executive says this distinction was evident ( There were party people and people who did stuff ). Most visitors are impressed by Chinese firms technical nous. many visitors say. says a European of hazy days he spent in a hotel dealing with the fine print. Most executives say they trusted their hosts. . in London to be faced with 30-40 people from the Chinese side. The most senior party man in a firm. But not all. There are no interjections when he speaks. What these people say provides an insight into both China s capacity to expand its companies abroad and the opaque workings of its state-backed firms. says a Briton. You were told the rooms were bugged. Power behind the chair The opacity of power is also reflected by the role of the titular heads of Chinese firms. Ten of the deals discussed were worth more than $1 billion. It pays to be wary. A popular theory is that they are controlled by a parallel hierarchy of Communist Party officials. Yet most visitors to China talk of charming figureheads. The impression they give is a mixture of awe at China s ambition and technical skill and a far more qualified assessment of Chinese companies ability to run international businesses. One arrived. he laughs. There they may be expected to make epic PowerPoint presentations to giant audiences. surrounded by minions: You feel the deference towards this guy. anonymously.The Economist has interviewed. This is a well-known tactic. The meat of the negotiation often has two parts: marathon sessions at an investment bank s offices. to make decisions. or desire. with people coming in and out continually. because authority within Chinese firms is opaque and arbitrary. and adds. A European says. even the handful of Westerners on the boards of big state-backed companies. the general secretary. often in London. and visits by target firms executives to mainland China or Hong Kong. for example at Sinopec: There are two chairs in the middle where you and he sit You say prepared remarks into the microphone and then everybody claps Girls serve tea The big chief doesn t negotiate. Another boss negotiating a controversial natural-resources deal found the atmosphere sinister. They would bring in people to try to get you drunk At one point I was sure they d brought in a lady from the switchboard. One boss found his counterpart to be an autocrat. Most targets of Chinese takeovers need an interpreter. executives past and present at 11 Western companies that have been bought by or have sold stakes to Chinese firms. most are just overwhelmed by the volume of bodies. seem to lack the authority. and to attend banquets and intimate discussions.

Someone involved in the Rio deal recalls meeting a bank in China and being staggered by their indiscipline. says a Westerner. has used the same 40something bilingual hotshot on several deals: he was very. $20 billion? It was unbelievable. Chinalco. are often described as indiscriminate financiers of China s overseas conquests. China s government-controlled banks. only to see the deal collapse because it lacked political consent. How much do you want: $10 billion. including site visits by hundreds of their staff. apparently. Likewise. But with one exception. says another. more than one Chinese firm has sniffed out the same target. then. In China you re dealing with the government. They compete for the Western firm s affections and preferred bidder status with officials back home. he says. been an acquaintance of Fidel Castro s) and receiving a clear signal that a deal was in doubt. In India you re dealing with companies. the state is far from being a predictable monolith. Another executive says a deal with ZTE. however. Once a preferred bidder has been picked. Often. a telecomsequipment firm. The process can be chaotic. that included state-bank financing struggled to win official approval. very good . held little sway with the central government. says one. A chairman says he negotiated for months with a Chinese mining firm. The preferred firm s negotiators often have some latitude to alter . a maker of telecoms equipment. calls the shots? A lieutenant who has lived outside China may lead the talks with the target s top brass. was a great gentleman who relied on his lieutenants for information . Who. was just there to keep protocol . which have been expanding abroad (see chart 2). You can feel it. However. A natural-resources boss says the head of Minmetals. Another executive says the head of Huawei. ZTE s bosses. Yet the same chairman recalls going to Cuba to meet a senior official of China Development Bank (whose father had. a big Chinese mining firm. They said.He just blesses the deal. there can be a flood of cheap cash. those interviewed thought the state was in ultimate control.

this apparently fiddly hierarchy can be decisive. Chinese firms also risk political fallout if they fail. Tell me your name Integrating an acquisition is just as important as price. Its takeover by CNPC of China was eased by a state visit by the president. Another European boss says his Chinese suitor struggled to deal with Western stockmarkets. Hu Jintao. They cannot take the chance to lose the deal. After a binge in the late 1980s and early 1990s. In the final stages they returned the draft contract riddled with amendments. is onside. Although to set up a foreign bid a Chinese firm has to jump through lots of hoops. systematically overpaying for foreign assets is a bad idea. he says. To get to the point of executing a takeover. I love you. Others are less complimentary. Their disclosure rules mean slipups are made public. The Chinese firm returned it clean. Some executives felt that their Chinese suitors had bargained astutely. but refer big decisions to Beijing. These include those of Canada and Australia. Japanese firms retrenched. One is that foreign governments are becoming increasingly wary of Chinese takeovers. a Chinese state-controlled energy firm went back to the ministerial level to raise its bid . Politicians may also work to smooth the waters. buying such firms can be costly because they command a scarcity premium. Another is more subtle: that the style of decision-making can lead Chinese companies to overpay and to struggle to integrate their purchases. I hope for their sake that they do a better job at negotiating. The Indians had no concept of materiality . was coveted by a Russian company. It has access to cheap finance. At key moments. though. China s state-backed system also has disadvantages. and were mired in nit-picking. a Chinese company must build up a huge head of steam. Once the deal is done a text message from China confirming a higher offer is not unknown there may be a signing ceremony in the target firm s country and then a banquet in China. PetroKazakhstan. Their sense of mission makes them transparent . It can ignore its share price. says one European executive of his experience selling a firm. and disparate institutional investors are unpredictable. As a result Chinese buyers prefer targets with a single big shareholder who can negotiate bilaterally. The price China pays is often dismissed as inconsequential: what are a few billion in the grand scheme of things? But even for rich countries. Someone who has sold four mining firms says the Chinese compared well with Western buyers. In future.the terms of a deal. says a European chief executive. However. and won. since its majority shareholder. to Astana. Some say they struggle to rein in their investment bankers. says an executive of the target. During the auction of a Western oil company. the government. attended by central . once it has done so it enjoys formidable advantages. One oil executive ran an auction of a firm that ended with an Indian and a Chinese bidder (both were state-controlled). a Canadian firm with assets in Central Asia. the Kazakh capital. They lost control of the situation. previously two of the most open markets for corporate control in the world.

You will leave the dinner completely drunk. Another veteran of the same firm jokes about the Beijing effect and says that having sold a business to them and worked for them for a year I don t really have a clue how they work. This isn t true of all deals. The former boss of another European acquisition says of the integration plan: On paper it looked quite good but it failed totally. He adds: Virtually all of the senior management have left and at the next level down people are looking [for new jobs]. business plans change. An architect of a failed deal says. They had done their homework. consensus. Natural-resources firms can become captive suppliers to China. The former boss of a European firm now owned by a Chinese giant says he liked his new colleagues but adds that the lack of open discussion caused friction. The bought firm s bosses may be asked to linger in well-paid but largely symbolic roles. More grog is compulsory. deference and opacity can cause difficulties. with its own legal status and name. he says. just a shell. The Chinese way . rather than selling on the open market. Never. An ex-colleague disagrees. The firm s engineers became frustrated as plans were sent to China and amended. In the longer term the DNA of Chinese corporations a sense of mission. never The decisions are taken somewhere else. saying the Chinese just took firm control. Over time. These can be compounded by a dearth of English-speaking managers familiar with working outside China. There would have been some great opportunities and some really big problems. Only one executive. says a survivor. says one. Decisions took months for even the simplest things . but nor is it unique. felt this initial group hug was insincere: the Chinese took over the day I walked out of the building Critical positions were replaced instantly. he says: It is a very stratified society. Usually the acquired company keeps some autonomy. The buyer s message that it would keep all staff was extremely simple and well received . An executive of a Latin American mining company recalls a blazing row between the two groups of geologists which was resolved when the Westerners realised their new objective was to maximise production. Those interviewees who experienced Chinese firms integration efforts mostly reckon they began well. never. though. recalls another. Nobody contests what their immediate superior says. It is difficult for Chinese firms to run foreign ones. at a North American firm. not profits. Their approach was very clever at first.bankers and government ministers. He says that almost all the key people left and adds that there is no company left at the headquarters.

better management will be essential. such as Nestlé or Unilever. In this. such as India and Brazil. Alternatively. It could make passive equity investments through China Investment Corporation.Does any of this matter? After all. And although many of the country s big firms may never resemble Western ones. often transcend nationality. And as China moves beyond digging stuff out of the ground at which it is fairly adept to more complex consumer industries. Yet from Chinese firms perspective an inability to retain staff is a problem. Technical and local expertise accounts for much of a company s value. have the advantage of private-sector credentials and more cosmopolitan cultures. The most durable multinational firms. companies from other emerging markets. Chinese companies could grow without buying. too. COSCO. has a concession to run part of Greece s biggest port. For all that. A pessimistic view is that China will have to find other ways of going out . a sovereignwealth fund. Western takeovers can be brutal. Joint ventures are another option. Huawei has developed without making large acquisitions. with diffuse private shareholders and independence from the state. let alone creative ones. Executives from two firms attest that its representatives take a back seat at board meetings. Chinese firms are becoming good at this. and a buyer is by and large entitled to do as it pleases. The boss of an oil firm with a Chinese partner says that its motivation is not to take control and that the relationship is harmonious. it is hard to believe that China s companies and politicians want to operate with one arm tied behind their backs. Several mining and oil bosses also argue that a healthy process is at work. in which China buys firms and the capital and skilled people thus released are recycled into new start-up companies. Until the wave of crossborder deals in the 1980s most firms went global by building operations from the ground up. Chinese construction firms have won contracts across Africa and eastern Europe. they may have to edge more towards this template in order to succeed . One of them.

Over the past two decades the old guard has taken a rusting industrial base and from it made gleaming corporate giants. . would prove far more effective than the present cohort of chiefs. in their 30s and 40s today. Most of the executives interviewed by The Economist also felt that the next generation of Chinese executives. which typically have less overt state direction.at large cross-border deals. China may also have to loosen its hold on its giant state-owned companies and ensure that their power structure is more transparent. In a speech this month a senior Chinese official emphasised the role abroad of China s private firms. To address other countries concerns about political control. Yet if those firms are to achieve their full potential abroad their creators may have to relax their grip. with more international education and experience.

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