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View from China

Walk softly, and carry a big wallet.
Wu Chen, CFO Magazine
August 1, 2006

In the rush to gain a foothold in a market of 1.3 billion people, multinationals are pursuing mergers and acquisitions in China more religiously than ever. Foreign companies have so far this year bought stakes in 248 Chinese assets, many of them state-owned, worth $14 billion, according to data provider Dealogic. In some cases, multinationals proudly play up the size of their prospective deals or the regulatory hurdles they intend to overcome. But the recent backlash against foreign-led buyouts means acquirers may now have to enter China more tactfully.

M&A still offers foreign investors faster access to market share than joint ventures or wholly-owned enterprises. Best Buy's recent purchase of a majority stake in Jiangsu Five Star Appliance, the fourth-largest local retailer of electronics and home appliances, is an example. For $180 million, Best Buy gains access to 136 Five Star stores in eight Chinese provinces. German industrial giant Siemens added 18 new entities in China in the past two years, 7 of them by takeovers. As Siemens China CFO Jill Lee puts it, "Increased acquisition efforts help us to reach the local market faster."

But the social tension that simmers beneath the rich/poor divide in China is now spilling over into foreign acquisitions. Some farmer-led protests against new developments have turned violent. Populist local economists and commentators have been attracting media attention by accusing the central government of selling valuable assets to foreign firms at huge discounts. Banking M&As are a typical target, because China had spent close to $45 billion to recapitalize some banks before selling small chunks of them to the likes of Bank of America and HSBC. No protests aimed at foreign acquirers have yet taken place, but the government is mindful of popular sentiment.

Public opinion may have led to the failure of Citigroup's high-profile bid for a controlling stake in Guangdong Development Bank, a provincial bank that was then in disarray. Citigroup hoped the promise of a bailout would make regulators lift the cap that tops single-foreign-entity ownership at 20 percent of a state-owned bank. But regulators held the cap firm, and analysts say growing disaffection with foreign ownership influenced the decision.

The take-away for foreign firms is that they should steer clear of public debate or aggressive self-promotion. The market for mergers and acquisitions will remain vigorous in China, as the government is only too eager to privatize its assets to help fund a ballooning social-security deficit. But would-be buyers should heed a Chinese saying: "Don't talk; just do it and you will make a fortune."

Wu Chen is editorial director of CFO China.




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