In the latest round of M&A, Chinese private companies are snapping up everything from German cement-pumps and American car-parts to Savile Row tailoring. It is proving an eye-opening experience for those on both sides of the deals.
It is often said that the new wave of outbound investment from China is driven by strategic considerations. That doesn’t mean it’s always easy to spot them. Many in Britain were initially surprised when China’s largest groceries conglomerate, Bright Food Group, snapped up Weetabix this year, as Asian consumers are not known for their love of breakfast cereals.
Needless to say, when the pundits dug down deeper, they found plenty to admire about this £1.2 billion deal, which sees Bright Food gobble up a 60 per cent stake in Weetabix (also owner of the Alpen brand). The jury’s out on whether the Chinese and other Asian domestic markets will really warm to the concept of breakfast cereals. But look at what else Bright Foods is getting: access to distribution chains in Europe and the US, making it easier to get its own products on shelves; and nearly 100 years of quality food production know-how. As analyst Clive Black of Shore Capital observes. It is the perfect “marriage of young capital and old experience”.
Weetabix is symptomatic of the changing profile of Chinese M&A deals, says CF Lui, a corporate partner in Stephenson Harwood’s Shanghai office. Where once foreign acquisitions were motivated by the need to plug gaps in resource and energy supply, Chinese companies – across all sectors – have become much more focused on accessing established reservoirs of technology, R&D and intellectual property, “which would take years to develop from scratch” he adds. The shift is evident in the stats: A new Ernst & Young report finds that investment in energy declined from 82 per cent of total deals in 2009, to just 60 per cent in the first half of 2012.
That shift has led to a big change in the kind of company doing deals, says Lui. In the past, Chinese buyers were invariably state-owned companies or wealth funds. But increasingly, private companies and entrepreneurs are getting into the picture. Zhejiang Geely’s purchase of Sweden’s iconic Volvo marque from Ford Motor in 2010, for instance, was a game-changing deal that opened the floodgates to a stream of deals in Europe which, as Ernst & Young notes, remains the top destination for Chinese outward investors.
In particular, Chinese companies have been on a buying spree in Germany: mining a rich seam of troubled ‘Mittelstand’ companies: the mid-sized industrial manufacturers and component makers that form the backbone of the German economy. With 158 deals completed in 2011 alone, (compared with 110 by US companies), China is now Germany’s biggest outside investor. The most high-profile of these acquisitions was Sany Heavy Industry’s acquisition of Germany’s largest cement pump-maker, Putzmeister (a best-in-breed, 100-year-old company) for $653 million, including debt. The debt aspect of the deal is significant. “Many Mittelstand companies ran into problems during the financial crisis,” observes Berlin lawyer Christian von Stetten. “A Chinese investment can make sense and be a way out.”
Buying people, not photocopiers
The Ernst & Young survey of 146 senior Chinese managers, across a range of industries, highlighted that ‘protectionism’ is their top concern in global markets.
Deals like Sany/Putzmeister are helping ease those jitters. Sany has pledged to retain Putzmeister’s German home as its global HQ for concrete machinery, and maintain existing plants to capitalise on their ‘Made in Germany’ cachet. The goal is to boost annual sales from €570 million in 2011, to €2 billion in 2016. That wins local votes. “We prefer the Chinese because they have a long-term strategy, whereas Anglo-Saxon private equity firms are all about a quick turnaround,” says a local union leader.
“Buying a company is not like buying a photocopier machine. You need to know how to manage people,” says CF Lui. For him, the prime exponent of this is the former blacksmith turned China’s largest autoparts maker, Lu Guanqiu, whose Wanxiang Group now employs 30,000 in 22 companies in ten countries – notably the US, where he has assembled a mini-empire of distressed autoparts makers in the Midwest rust-belt, ripe for turnaround. “Other deals and players get a far bigger fuss, but sometimes the quiet ones are the ones to watch”.
Guanqiu is certainly a man of action. Every new week seems to bring news of another acquisition – the latest being A123 Systems, a struggling maker of advanced batteries for electric vehicles. Having built his empire up from scratch, he lives and breathes commerce. “My mind is full of business,” he remarked recently. “Human life is limited; you have to seize the time to work.” In short, he’s the type to persuade even the most red-blooded Yankee that, far from dealing with the faceless Chinese bureaucratof stereotype, Guanqiu is an entrepreneur built in a similarmould tothemselves.
CF Lui thinks it’s interesting to compare the current wave of Chinese takeovers with the Japanese wave thirty years ago. “It’s much less ad hoc” – and less trophy-driven, he argues. Private companies may now be making the running in foreign acquisitions, but they’re still backed by official government policy. Given rising wages and a strengthening yuan, Beijing is all too aware that ‘the writing is on the wall’ for China’s low-cost manufacturing era, and is ‘trying to move up the value chain’. That explains why Chinese buyers are being encouraged to buy best-of-breed companies covering the full gamut from Savile Row tailoring (Gieves & Hawkes), to America’s largest cinema chain (see Great Trader page 11).
The benefit for those on the receiving end of this largesse is clear. “A lot of these acquisitions are partial: they’re not 100 per cent takeovers,” says Lui – and the prize for Western shareholders parting with a percentage of equity is accelerated access to China’s huge domestic markets, which can prove ‘challenging’ to western companies going it alone. One example is the Club Med, which sold a 10 per cent stake to the Chinese investment company Fosun, and has since built a popular ski resort in north-eastern China.
China’s trump cards
Another reason why this current wave of M&A might be more long-lasting than the Japanese ‘binge’ of the 1980s is that Chinese companies, including overseas Chinese, are arguably better placed to bridge the cultural gap between east and west, says Lui. “There’s a lot more management expertise and bilingual, bicultural flair in firms like Li Ka-Shing’s Hutchison Whampoa, which derives half its revenues from outside China.” Not to mention the decades of experience built up in professional deal-making and international legalservices.
If the full force of overseas private equity funds, with access to deal flows around the world, were brought to bear, Lui believes the sizeable trickle of deals we have already seen this year could become a real torrent. When China first opened up to inbound investments thirty years ago, Hong Kong served as an instrumental gateway for foreign investors stepping into the Chinese market. Fast forward thirty years later, Hong Kong dealmakers could play the same vital role in giving Chinese entrepreneurs the springboard to expand globally. Doubtless there’ll be the usual scare stories in the more hysterical sections of the western press. But the hard evidence suggests that, for businesspeople on the ground, the actuality of dealing with Chinese firms is proving a very positive experience. And if they can bring new energy and capital to flagging companies around the world, bring it on.