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China—Buying, buying, busy buying

Finance Blogger: Anthony Harrington Anthony Harrington

While M&A activity in the US, the UK, and Europe is still way below pre-crash levels, China’s “outbound” M&A activity (acquisitions outside its borders) has ramped up strongly, according to a report by accountants Deloitte, “The emergence of China: New frontiers in outbound M&A.”

This will surprise almost no one interested in global M&A, but the Deloitte report is refreshingly free of the hysteria China’s spending spree on foreign assets has generated in some quarters.

That China has decided to use a portion of its massive foreign currency reserves to acquire external energy and mining assets has been obsessing several conservative US strategic think tanks for a few years now. But hey, that’s the nature of free markets. If you’ve got the cash, you can put in a bid. Unless, of course, national regulators step in to veto the purchase, usually on the grounds that the asset in question is “of strategic importance.”

Governments everywhere, the UK being a sterling exception to the rule (no pun intended), have a tendency to want to prevent their household name companies from falling into foreign hands. The French government, in particular, seems to find some astonishing things “strategically vital” on occasion, but the US Congress is also much given to protectionism when it comes to outsiders, especially Chinese outsiders, buying large US assets.

What seems to many to be “unfair” about the great Chinese spending spree is that, as the Deloitte report notes, “Chinese monetary authorities are encouraging state-owned enterprises to acquire energy, mining and utilities assets abroad.” Those shouting “unfair” point to the soft funding available to China’s state-owned enterprises, which makes it somewhat difficult for Western private equity or Western corporates to compete. For example, the China Development Bank recently loaned the state-owned China National Petroleum Corporation US$30 billion to give it a little something for its M&A war chest. Imagine what would happen if the US Government lent Exxon a similar sum for a similar purpose.

Certainly, a centrally run state can do things that Western governments would find a tad difficult. Deloitte notes that in May 2009, the China Development Bank announced that it would lend US$10 billion to the Brazilian oil company, Petrobras, in exchange for a guaranteed supply of oil over the next decade. That’s not a trick the UK could pull off very easily, for example. If it tried, the European Commission would be howling for scalps.

So just how solid has China’s outbound M&A activity been while the rest of the world was in dire turmoil? According to Deloitte, deal volumes moved up smartly from Q1 2009 to Q3 2009 (figures for Q4 are not yet available). In Q1 there were just 10 outbound M&A transactions. By Q3 this had ramped up to 26. The deal values for the first and third quarters were US$1.3 billion and US$8.9 billion respectively. The figures for Q4 promise to make interesting reading when they finally appear.

China is also getting involved in more and more billion-dollar-plus deals. The prime geographic target for China’s buying activity is North America, with 70% of the outbound acquisitions in Q3 2009 taking place there. But China is also buying in Asia and Australia and indeed, anywhere where there are commodity assets and energy assets to be had. Strategic questions aside, the management challenges associated with all this M&A activity are massive. It will be interesting to watch China’s post-merger integration record over the next few years. This is a game that will run and run…

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Tags: China , international differences , Mergers and Acquisitions , protectionism
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