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M&A prices look right to many in their plans to go global

By Zhou Yan (China Daily)
Updated: 2009-04-06 07:51

Chinese companies have never clamored more to "go global" than they are today as valuations of foreign firms plummet in the economic meltdown.

This year kicked off with a real heavyweight deal - Aluminum Corporation of China (Chinalco) investing $19.5 billion in Anglo-Australian miner Rio Tinto on Feb 12, the country's largest cross-border transaction to date.

In March domestic cellular services behemoth China Mobile and insurance giant China Life expressed ambitions to make inroads in overseas markets, striving for growing financial clout worldwide as assets abroad became cheaper.

Indeed, many Chinese entrepreneurs hold similar opinions, saying domestic enterprises will pay less to acquire foreign companies during the financial crisis and now have more bargaining power at the negotiating table.

"Should Chinese companies get intellectual property and sales channels in local markets through cross-border mergers and acquisitions, we will have a greater edge in international markets," said Yin Tongyue, president of home-grown carmaker Chery Automobile Co.

Chery is showing interest in overseas acquisitions to offset its weakness in middle and high-end models, and intends to take over Ford's Volvo unit, according to media reports.

"The timing is good for Chinese companies in overseas M&As due to low valuations of foreign companies and relatively higher capital available to Chinese businesses compared to some others abroad," said Howard Balloch, president of The Balloch Group (TBG), an independent advisory and merchant banking firm.

Balloch, who also served as Canada's ambassador to China from 1996 to 2001, said that even with the big-ticket Chinalco deal, total outbound foreign direct investment from China is still far eclipsed by the capital volume coming into the country.

"So it's simply a time when China has more cash," he said.

A recent survey by KPMG, which provides audit, tax and advisory services, showed that valuations in the Asia-Pacific region, including China, have dropped the least globally. But the study also expects the number and volume of global M&As to continue to decline through the third quarter of 2009 due to lower liquidity and a declining appetite and capacity for doing deals.

Yet Paul Chau, principal of KPMG China's corporate finance sector, noted that "we expect to see a number of cross-border deals across the region during 2009 as capitalized corporations take advantage of the current environment to make strategic acquisitions, a trend that is already emerging as we move into the new year".

Just a few weeks ago, Yao Jiang, spokesman of the Ministry of Commerce, released management measures on overseas investment to facilitate domestic enterprises investing abroad.

Under the policies, the commerce ministry will grant provincial authorities approval rights for 85 percent of the overseas projects. The application procedures will be simplified so that companies will get approval in three working days after submitting application forms.

Balloch said that although China has seen some failed big cross-border transactions, there remain many investment opportunities ranging from traditional industries to those with cutting-edge technologies.

TBG itself has active practices in natural resources, life sciences and auto parts investment at present.

"Auto parts companies, for instance, can go to North America during a particularly difficult time to acquire technology, brands, sales channels and distribution. They can rebalance production between China and abroad. But aggressive cross-border deals do have stumbling blocks.

Along with cheaper prices, uncertainties remain for Chinese enterprises in overseas M&As, and some companies are likely to face unpredictable challenges adapting to the global competition environment outside China, Yang Liqiang, professor of the University of International Business and Economics, told the State-owned China Internet Information Center.

"People acknowledge the emerging role of China, but it is fair to say that many Chinese companies are still investing tentatively and more likely to make deals at home or within the (Asia-Pacific) region," said Julian Vella, KPMG's regional head of corporate finance.

"From a single national company to a multinational firm is not a easy job. There're always obstacles from cultural and political fronts, but those can be overcome. And the important thing is to establish the firm as a local company, and be sensitive to local consumers. It's just like foreign investments coming into China," Balloch said.