View from China

China Inc. has shown sophistication in outbound acquisition.
Wu ChenApril 1, 2008

Aluminum Corp. of China (Chinalco), China’s biggest aluminum maker and a diversified metallic and mining company, won instant fame when it orchestrated a successful dawn raid on February 1, acquiring 12 percent of Australian miner Rio Tinto for $14.05 billion. By far the largest overseas deal by a Chinese company, the acquisition suggests that Chinese companies are beginning to master the nuances of global M&A.

The timing of the deal was perfect, coming just a few days before BHP Billiton planned to announce its final offer to acquire Rio — a move the Chinese government had feared would increase BHP Billiton’s bargaining power vis-à-vis China’s steelmakers. The deal enables Chinalco to diversify its portfolio from aluminum and copper to iron ore, which is critical to its global strategy. By taking a strategic share, Chinalco has at least secured a seat at the table between BHP and Rio. Even if BHP ultimately prevails, Chinalco will still gain by forcing BHP to beef up its offer.

Remarkably, in just over two months and in complete secrecy, Chinalco’s merger-and-acquisition team managed to get approval from regulators in Australia, the United Kingdom, the United States, and Canada, while also securing financing from the state-owned China Development Bank.

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The Chinalco-Rio deal capped a series of outbound investments by Chinese companies in the past six months, including the acquisition by ICBC of 20 percent of Standard Bank of South Africa for $5.46 billion, and China Investment Corp.’s $5 billion investment in Morgan Stanley.

These companies have reason to be bullish. With the recent stock-market boom and proceeds from record initial public offerings, they have accumulated massive war chests. The board seats they gain by taking minority stakes in target companies enable them to rapidly learn first-hand about global best practices.

It’s premature to say that all of China Inc. is ready to enter the world arena. At this point, Chinalco is the exception rather than the rule for Chinese state-owned enterprises, many of which still lack the managers, organizational structure, or corporate culture to integrate an overseas acquisition. But the Chinalco deal demonstrates how quickly executives of Chinese companies have developed M&A skills. Their understanding of structural, legal, and regulatory issues is far more sophisticated than it was even five years ago. In terms of decision-making and management capabilities, they are almost on par with their Western counterparts. The Chinalco-Rio deal may well mark the coming of age of China Inc.’s global ambitions; one can only imagine how it will mature in the next five years.

Wu Chen is editorial director of CFO China.

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