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Three motives behind China's cross-border M&As

By Song Jingli (chinadaily.com.cn)
Updated: 2011-05-10 13:17

Source: A.T. Kearney

Securing raw materials, gaining up-to-date technologies and accessing new markets are the three main motives for Chinese companies to participate in cross-border merger & acquisition (M&A) activities, an A.T. Kearney study revealed.

The supply of raw materials is getting more and more important as China's economy grows rapidly, said managing director of A.T. Kearney Greater China Bernhard Hartmann, This trend can be shown by Sinopec's buying of Repsol SA's units in Brazil at $7.1 billion late last year, according to the global consulting firm.

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Gaining access to innovative technology also motivates Chinese companies to jump on the global shopping bandwagon. This can be seen clearly as China's 12th Five-Year Plan (2011-2015) calls for industrial upgrades in many sectors, said Hartmann.

Tapping new markets is also a major motive for Chinese companies, but a less important one compared with the motives of their peers from developed nations, the study shows. Accessing markets in developing nations, especially in China, is the top motivation for companies from developed nations, according to the study.

China is a late comer in the global M&A activities and is inexperienced. That's why Chinese companies had to pay higher prices if the news about a potential M&A case appeared, Hartmann said on May 5.

But China is to catch up quickly. The study shows acquisitions by Chinese companies are growing the fastest by far.

India, with 774 majority acquisitions, is in front of China which has 520 between 2002 and 2010, but the number of deals made by Chinese companies has grown (annual growth rate between 2006 and 2010 was 42 percent) rapidly while growth was stagnant in India.

"There is a larger pent-up demand from Chinese buyers," said the study's author, Joachim von Hoyningen-Huene of A.T. Kearney.

He added the consulting firm expects the number of transactions that come from emerging markets to continue to rise significantly in the coming years.

"Since 2005, the value of outbound M&A involving Chinese companies has significantly increased with a peak of $ 58 billion in 2008," Hartmann said.

China's outbound direct investment is set to overtake foreign direct investment within three years, China Daily reported on May 6, citing a senior Ministry of Commerce official, Zheng Chao.

"More and more Chinese investment overseas will be realized through M&A. And State-owned enterprises will lead the way," Zheng said.

China is becoming increasingly important in M&A activities on both the buyer and on the seller side.

Every fourth majority takeover of companies from established countries in emerging markets set their acquisition targets in China, according to the study.

"This underscores the dominance of China in the minds of top managers. Frequently, opportunities in other emerging markets are underrated and risks in China not sufficiently taken into account,", Hoyningen-Huene said.

"You cannot be global without China," Hartmann said, explaining why China is targeted and why M&A activities are increasing when many M&A cases have ended up below satisfactory.