Chinese outbound M&A activity
Chinese companies have burst onto the global M&A scene in recent years. High-profile deals like the 2008 purchase of CIFA by Zoomlion in partnership with Goldman Sachs, Hony Capital and Mandarin Capital Partners, the 2010 Volvo acquisition by Geely, and the Nexen – CNOOC deal in 2012 to name a few, have introduced a new generation of Chinese companies to the world. This new generation of aggressive Chinese companies is seeking to break out of the Chinese home market, and acquisitions are becoming a preferred strategy for quickly reaching global scale. At the same time, there is an increasing supply of potential deals, as established global companies review their portfolios and decide to divest from non-core sectors.
Chart 1: The total value of completed overseas acquisitions from China is increasing
(Source: The Resurgent Dragon searching for value in troubled times)
According to a Deloitte Report, Chinese companies have risen to prominence in global M&A, with the total volume and value of completed overseas acquisitions increasing significantly despite market volatility and a global economic outlook that has been far from certain.
Chart2: 2005Q1-2012Q3 Chinese outbound investment by sectors in terms of value
(Source: The Resurgent Dragon: Searching for value in troubled times)
Also according to Deloitte Report, energy & resources deals account for 66% of China outbound investment in terms of value, with a total of USD 187bln spent between 2005 and Q3 2012. Consumer business and transportation deals account for 8%, and manufacturing deals represented 7%.
On a high-level basis, the main drivers of Chinese outbound M&A can be summarized in three identifiable areas:
1) Securing raw material supply lines to sustain industrial production and infrastructure development;
2) Acquiring overseas skills, technology and intellectual property to enhance local industrial capacity, increase global competitiveness, and to beef up product portfolios and distribution channels for established and emerging strategic players;
3) To meet and capitalize upon growth and change in consumption patterns within the domestic market.
Regional perspectives: Western Europe has an uncompetitive advantage over the US, Japan and other countries
In terms of deal volume, mainland Chinese companies completed 210 outbound M&A deals in 2012, 19% less than in 2011. However, Western Europe continued to see rapid growth last year, with volumes rising 29% Y-o-Y, while North America, South America, and Asia saw declining transaction volumes. Western Europe accounted for 21% of outbound deals by volume and 23% of outbound deals by value in 2012, compared to just 10~12% in 2009. The largest deal completed in Western Europe in 2012 was that of China Three Gorges buying a 21% stake in Portugal’s state-owned energy operator EDP for USD 3.51bln.
Chinese investors would also like to look for assets in Japan, but due to political issues it is a difficult prospect. The common feeling is that Japan and South Korea have traditionally been closed to foreign M&A investment for cultural and structural reasons.
Companies in the United States are usually very large, with long industry chains and many stakeholders involved, so it is not easy for Chinese companies to carry out M&A deals in the US. Nevertheless, North America is considered the most attractive target for potential deals in the technology, media and telecommunications sectors, as well as for real estate acquisitions by Chinese buyers.
Europe has challenged North America as the most important overseas destination for Chinese buyers since 2012. The importance of mature Western European markets reflects the search for advanced technology and know-how. Western European companies are usually small or medium-sized with unique technologies that are suitable for Chinese investors to buy and manage. A good example is the purchase of CIFA, an Italian manufacturer of construction equipment, by Zoomlion, a Chinese rival, in 2008. CIFA’s core European markets dived during the recession, but it has given Zoomlion access to better manufacturing technology and a premium brand to sell in China. Germany has also become a natural hunting-ground for Chinese industrial companies looking to move up the engineering value chain.
Chinese companies can find a most favorable investment climate in Europe. There is no global strategic conflict between the EU and China, the trade account between the two regions is more balanced than that between the US and China, and the static economy will force more and more European companies to look at China as growth opportunity
Within Europe, the countries with the most appeal to Chinese industrial companies are Germany and Northern Italy, where industrial GDP represents 25~ 27% of total GDP. There also exists a vast majority of middle-sized companies which are very competitive in the niche market. Unlike the massive corporations in France, these middle-sized companies are easier to invest in, or to be invested and integrated.
Other regions in Europe
Since the fall of the Berlin Wall, Eastern European countries have been integrated within the EU. Their healthy growth was fueled mainly by Western countries; they do not have much indigenous branding or know-how. Southern European countries, such as Greece, Southern Italy, and Spain have a low industrial GDP that is mainly controlled by companies located to the North. The middle EU corridor spanning from Florence up to Hamburg, which also comprises Switzerland, Austria, The Netherlands, and Belgium will probably become the main target area. The middle EU industrial corridor is also very well connected in terms of supply chain and transportation, with large harbors in both North and South. France has a surprisingly small share of industrial GDP, around 10~11%, and an unusually large state sector, so in spite of its apparent overall attractiveness as a nation, the attractiveness for Chinese industrial investors is lower than average. The UK more or less deliberately lost most of its industrial base back in the 1980s while it built a formidable services sector during the Thatcher deregulation and liberalization era.
Outlook of Chinese outbound M&A
Chinese outbound M&A is only one part of an even broader phenomenon: the transformation of the global economy by a new generation of Chinese competitors. During this process, Chinese companies are becoming more and more focused on the geographic location of the target company, where they are able to enjoy preferential advantages in terms of tangible and intangible assets as well as policy. Western Europe will be under a strategic spotlight due to increasing interest by Chinese companies in the consumer, and the luxury market in particular.