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back to index backCHINAtalk December,  2004


Acquisitions in China: A View of the Field

A rising tide of acquisitions of Chinese companies may signal that a third wave of FDI is washing up on China's shores

In the past five years, international companies, including highly visible American companies like Amazon.com, Anheuser-Busch Cos., Inc., and Eastman Kodak Co., have begun to make acquisitions of Chinese companies a key element of their business strategies in China. Though these deals still make up a small portion of total foreign direct investment (FDI), the purchase of existing local companies presents a new alternative to traditional investments in joint ventures or wholly owned subsidiaries.

Foreign acquisitions of local Chinese companies surged in the first half of 2004 (see Figure 1). Following three years during which foreign acquisitions ran about $5 billion per year (10 percent of FDI), acquisitions nearly tripled in the first half of this year to $7.3 billion and will likely reach 15 to 20 percent of FDI for the year, according to M&A Asia . Acquisitions of local companies are fast becoming a third wave of FDI in China, following the prevalence of joint ventures in the 1980s and early 1990s and the surge of wholly foreign-owned enterprises (WFOEs) during the past 10 years.

Why would a foreign buyer undertake a complex and potentially risky acquisition in China, rather than a simpler, more easily controlled investment in a WFOE? The answer may seem obvious to companies looking for a quantum leap in market share and broader distribution in highly fragmented and already saturated markets: strong regional brands can be acquired for less than it would take to build the same company from the ground up. On the other hand, stringent regulatory limits on foreign equity share in the banking, insurance, and automotive sectors are forcing large players like General Motors Corp., Hongkong and Shanghai Banking Corp., and Nissan Motor Co. to structure their investments as partial, rather than full, acquisitions of Chinese companies.

And why are Chinese companies relinquishing strategic state-owned assets to foreign investors? The answer is that they have little choice. China's State Council is engaged in a fundamental and systematic restructuring and privatization of all but the largest and most strategic state-owned enterprises (SOEs) and is aggressively looking for both domestic and foreign investors.

To that end, the State Council formed the State Assets Supervision and Administration Commission (SASAC) in March 2003 and handed over equity in 185 national and thousands of provincial and municipal SOEs to this new commission. As the state owner of record, SASAC and its provincial branches will undertake a large-scale equity restructuring and divestment of underperforming SOEs at every level. This effort is visible in every region of the country, but is particularly intense in the crumbling industrial cities of China's Northeast and in the western provinces. The Great Western Development Strategy and Revitalize the Northeast initiatives are reaching out to foreign companies and business associations to promote foreign acquisitions of SOEs in virtually every industry. A wave of new regulations has been issued to facilitate both foreign and domestic acquisition of state assets.

by: Kim Woodard and Anita Qingli Wang. The authors wish to thank the Asia Venture Capital Journal and M&A Asia for their permission to use the data reported here on cross-border acquisitions in China.

Source: China Business Review (CBR) – www.ChinaBusinessReview.com


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Acquisitions in China: A View of the Field
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