Private companies face tough choice on overseas M&A
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To buy or not to buy, that is a question.
The year 2009 saw Chinese private companies -- mostly "nobody" before the global financial crisis -- being given a chance to merge some overseas industry leaders, who suffered heavy blow or even went bankrupt in the crisis.
GROWING CHINESE PRIVATE COMPANIES
The latest high-profile case involves Geely Automobile, a 12-year-old Chinese carmaker, which announced in November it would spend about 1.5 billion to 2 billion U.S. dollars on buying the 82-year-old luxury Swedish brand, Volvo Cars, from Ford Motor Co., who paid 6.45 billion U.S. dollars for Volvo in 1999.
In the last few years, Volvo's sales had declined continuously amid slump global auto market. In 2008, Volvo posted 1.5 billion U.S. dollars of loss.
But the Hong Kong-listed Geely is growing fast thanks to a big sale boom in China, which replaces the United States to become the world's largest auto market this year. China is expected to sell more than 13 million vehicles this year, up more than 40 percent from 2008.
Geely netted a profit of 560 million yuan (82 million U.S. dollars) in the first half of the year, up 110 percent year on year. It aims to sell 300,000 vehicles this year, up from 204,000 units in 2008.
Geely's robust sales have fuelled a big stock rally this year. Geely, whose price nosedived to merely 0.15 Hong Kong dollars per share on Oct. 31 last year, closed at 3.95 Hong Kong dollars on Friday at the Hong Kong stock market.
"Geely's market value totalled more than 30 billion Hong Kong dollars (3.87 billion U.S. dollars). There are banks which are willing to give Geely loans for merger and acquisition. So money is not the problem over Volvo's acquisition," Geely Board Chairman Li Shufu told Xinhua.
Ba Shusong, a renowned economist with the Development Research Center under the State Council (cabinet), the government's think-tank, agreed. "Chinese enterprises don't lack money in overseas merger and acquisition (M&A)," Ba said.
The global financial crisis has given Chinese enterprises a window of opportunity to seek overseas M&A since their relative economic power has been strengthened and they have good liquidity, according to Ba.
PROS AND CONS
Chinese businesspeople and experts say overseas M&A can bring benefits, but it also brings high risks, and so far there have been few successful M&A transactions finished by Chinese private companies.
The benefits are obvious since Chinese companies will be able to quickly acquire resources, technology, brands and sales channels of these overseas companies, said Ba Shusong.
"Chinese private companies have been facing shrinking profit margins. Overseas M&A can improve their status in the industrial chain and increase profit," Ba tells Xinhua.
But in face of tough M&A process, wide differences on cultures and laws as well as inability to integrate acquired companies, Chinese private companies -- most of which are young and fledgling -- often balk at overseas M&A.
According to a report titled "The Emergence of China -- New Frontiers in Outbound M&A", which was released by accounting giant Deloitte LLP earlier this month, Chinese purchases overseas had numbered 61 deals worth 21.2 billion U.S. dollars in the first three quarters this year.
But experts and Chinese businesspeople, including some involving in successful overseas M&A transactions, are less optimistic than the Deloitte report.
Li Wenfu, economic professor with Xiamen University, said so far there are few successful overseas M&A deals done by Chinese private companies.
In the M&A game, Chinese private companies are just too immature at both fronts of negotiations and management of the acquired company, he told Xinhua.
Li Zhenhui, president of Fujian Shuangfei Daily Che., which acquired parts of a U.S.-based cosmetics company last year, said the acquisition was basically "an accident" after the U.S. company went bankrupt.
Shuangfei, a supplier of skin care products in Southeast China, acquired two brands owned by its largest client the Miami-based Solar Cosmetics Lab.
"To be honest, at that time, we were very unprepared to make the acquisition," said Li. His first response was sending a team to the U.S. to demand the debt payment.
"The first choice was to take back all the debt. If not, then we would allow it to pay the debt in instalments. Acquiring Solar's assets was actually the last choice," Li recalled.
Before Solar's bankruptcy in May last year, Shuangfei was Solar's largest creditor, with the latter owing it about 1.43 million U.S. dollars.
Li maintained the acquisition decision has been right so far. But he also readily admitted difficulities in managing and integrating the acquired company.
The trickiest issue has been the relationship between Chinese and American staff and the two sides need a long break-in period, he said.
There are huge differences over management expertise, patterns of thinking, cultural backgrounds and business laws between China and the United States, Li said.
LESSONS
These are all reasons why Haitian International Holdings Ltd., a Zhejiang-based plastics machinery manufacturer, turned down its overseas competitors' invitation for "business restructuring" last year.
"We can afford the price it asked for, but we cannot digest the company," Haitian's president Zhang Jingzhang told Xinhua.
"We can even afford to buying two such companies, but we can't send out a proper management team. We are just inexperienced in handling any overseas acquisition," Zhang added.
Ba Shusong said the failure of China's first privately-owned bank Minsheng to acquire the California-based United Commercial Bank (UCB) served as a lesson of inexperience-caused loss for Chinese enterprises.
The UCB went bankrupt last month, resulting in a loss of 824 million yuan to Minsheng, which had 9.9 percent of stake in the UCB.
According to Ba, the U.S. has strict regulatory restrictions on foreign investment in U.S. banks. After the UCB was shut down last month, Minsheng had sought to acquire it but was rejected by the U.S. Federal Reserve, which meant Minsheng's investment failed completely.
"Minsheng is an international enterprise, but it still encounters difficulites in mastering U.S. laws, let alone many other inexperienced private companies," Ba said.
He said Japanese enterprises had experienced similar "golden chances" for overseas purchases in the 1980s when the Japanese currency value soared overnight.
However, "many of the Japanese investments ended up with a failure, which can serve as a warning to Chinese companies," he added.
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