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  • 1. 1 | P a g e Compare the acquisition by Indian & Chinese firms abroad in the last decade (2003-2013) Submitted to Dr. M. S. Mamik Singh Submitted by Santosh Garbham (12P229)
  • 2. 2 | P a g e Contents Macro-economic Analysis.................................................................................................................. 3 M&A Activities in 2006 ...................................................................................................................... 4 M&A Activities in 2007 ...................................................................................................................... 5 M&A Activities in 2008 ...................................................................................................................... 6 M&A Activities in 2009 ...................................................................................................................... 6 M&A Activities in 2010 ...................................................................................................................... 7 M&A Activities in 2011 ...................................................................................................................... 8 M&A activities in 2012 ...................................................................................................................... 8 India’s M&A Scenario in 2013............................................................................................................ 9 Trends & Patterns of M & A Deals in India ....................................................................................... 10 Current Scenario in China M&A ....................................................................................................... 12 PEST Analysis China......................................................................................................................... 12 Regulating M&A Transactions.......................................................................................................... 14 Outbound M&A development from China ....................................................................................... 14 Few big deals in the past 10 Years in China...................................................................................... 17 Evolutionary Practices and Patterns in China: .................................................................................. 18 Conclusion:...................................................................................................................................... 19 References: ..................................................................................................................................... 20
  • 3. 3 | P a g e M&A Trends and Patterns - India Macro-economic Analysis  India is the world 10th largest economy in nominal terms at US$1.8 trillion, 4th largest on a PPP basis, US$4 trillion  Country has been growing at 8 – 10% until 2011, currently 5.5%, still one of the fastest in the world for a large country  Service sector accounts for 57% of the economy, Industry 28% and Agriculture 15% Figure 1: Sectoral Contribution to Indian GDP  Demographic Dividend: o Population is 1.2 billion, very young, 70% below the age of 35 o India has a middle class estimated to be 300 million people. o Growth is largely internally driven by domestic consumption from the middle and emerging segments of society o Labour force: 500 mil, Agriculture 52% of employment, Service sector accounts for 34% and Industry 14% India is ranked fourth in the most targeted nations rankings of the Asia Pacific region in the first half of 2012 with USD 26.2 billion, down by 26 per cent when compared to the same period of 2011 (USD 35.2 billion). India‟s outbound M&A volume only reached USD2.8 billion in the first half of 2012, the lowest figure for a half period since the second half of 2009 (USD 1.1 billion) and down by an extremely significant 87 per cent from the record amount achieved in the first half of 2010 (USD 21.1 billion). These statistics cover a vast array of M&A activities including but not limited to acquisitions of companies, acquisitions of assets (divestitures), stake purchases, mergers, joint ventures, spin-offs & split-offs, privatization, government awarded personal
  • 4. 4 | P a g e communications services / wireless licenses, real estate property transactions, and buy-back transactions structured as public tender offers, as divestments or as a defensive technique in response to an unsolicited takeover approach, among others. Notable M&A deals for the first half of 2012 include the following: a. In the insurance sector, there were two notable deals (a) the buy-out by Japan‟s Mitsui Sumitomo of the entire 26 per cent stake that New York Life Insurance Company owned in Max New York Life Insurance Company; and (b) Nippon Life Insurance Company‟s acquisition of a 26 per cent stake in Reliance Capital Asset Management Ltd; b. Also of note was i-Gate‟s acquisition of the entire stake owned by Patni Computers (81 per cent). Notable outbound deals included Piramal Healthcare‟s acquisition of the Decision Resources Group in the United States, and Binani Industries‟ acquisition of 3B TheFibreglass Co in Belgium. More recent one is Infosys‟s acquisition of Lodestone Holding AG, a Swiss technology consulting firm. The sectors that dominated the inbound M&A in India during the first half of 2012 includedtechnology, insurance, professional services, and finance. Utility & energy, oil & gas, and retail were left far behind. M&A Activities in 2006 The India story continued to attract investors from overseas as well as from within India in 2006.Corporate finance activity in India witnessed 697 deals worth Rs 865 bn (US$ 19 bn) in 2006, a rise of 18% in deal value over last year. The average deal size for 2006 was around Rs 1,241 mn (US$ 28 mn).The purchase of Hutchison‟s Indian telecoms business was the biggest deal of the year. Information technology, telecom and finance deals have dominated all M&A activity with a share of 48%of total deal value. 0 20 40 60 80 100 120 Category 1 M&A Activities -2006 It Telecom Finance Oil and gas Pharma Cement Auto Media others
  • 5. 5 | P a g e M&A Activities in 2007 2007 turned into a remarkable year for Indian M&A, both at home and abroad. Spending more money on overseas acquisitions than foreign companies did in their own market, Indian companies have made their presence felt globally. Domestically 2007 saw another record year of deal activity, with total mergers and acquisitions (M&A) and private equity (PE) deals up 82% from Rs. 865 bn (US$ 21 bn) in2006 to Rs. 1,576 bn (US$ 38 bn) in 2007. As well as volume, both number (867 against 697) and average size of deals also rose significantly. The real story of the year is overseas, where Indians bought up companies in Europe and the USA, splashing out some Rs. 1,367 bn (US$ 33 bn).The largest PE deal of the year was Temasek Holdings, along with ICD, Macquarie, AIF Capital, Citigroup and India Equity Partners, acquiring a 10% stake in Bharti Infratel, a telecom tower subsidiary of Bharti Airtel, for Rs. 41 bn (US$ 1 bn).Other major deals included Goldman Sachs, Swiss Re and Nomura acquiring a 6% stake in ICICI Financial Services, a financial services holding company, for Rs. 27 bn (US$ 646 mn); and Carlyle acquiring a 6%stake in HDFC Ltd., a housing finance company, for Rs. 26 bn (US$ 643 mn).Unlike in the past when growth was led by a few sectors, 2007 has seen a more broadly based activity. The telecom sector overtook the IT Industry and dominated the M&A scene with a 33% share in the total deal value. It was followed by finance with a 15% share, cement and building material 7%, oil and gas 5% and metals 5%. One of the emerging sectors for this year has been aviation, shipping and logistics accounting for 4% of the total deal value.
  • 6. 6 | P a g e M&A Activities in 2008 The year of 2008 was badly affected by the global slowdown. The value of international investment dropped by over one-third in India. Globally M&A activity recorded a drop of 31%. This is especially true in the major growth industries of Telecom and Parma, where consolidation has increased and seems set to continue. The total value of M&A and PE deals for the year was down only 4% on 2007, at Rs.1, 511 bn (US$ 34 bn) – the first year to year decrease since 2002-03. Average deal size has survived the general downward affliction, recording an increase from Rs1.8 bn (US$ 41 mn) to nearer Rs.2.1 bn (US$ 48 mn).Telecom and Pharma have been stalwarts for India Inc., with the two sectors cumulatively responsible for almost 50% of this year‟s M&A deal value. Japanese acquisitions – telecom major NTT DoCoMo Inc.‟s entry into the country via its stake acquisition of Tata Teleservices, and Daiichi Sankyo‟s increased stake in Ranbaxy Laboratories Ltd – have proved to be highlights of the year. Out of the Rs.1027 bn (US$ 23 bn) that flowed through M&A deals this year, international investment contributed 65%, whilst domestic deals accounted for 35%. M&A Activities in 2009 After the collapse of Lehman Brothers, everyone can feel the tremors of global recession. The effect was showing on India too even though the economy showed signs of revival in the latter part of the year.The year saw 650 private equity and M&A deals with a total announced value of $16.9 billion. The value of inbound deals reduced from $13.6 billion in 2007 and $9.7 billion in 2008 to $4.6 billion in 2009. While the value of outbound deals was $1.8 billion in 2009 compared to $26.8 billion in 2007 and $9.94 billion in 2008. The year 2009 saw a surge of domestic M&A activity. The value of domestic deals 0% 20% 40% 60% 80% 100% Category 1 M&A Activities -2008 Miscellaneous OilnGas Engng cmnt and build Realestate Media Power Finance Pharmahealthcr Telecom it 0% 20% 40% 60% 80% 100% Category 1 M&A Activities - 2009 Banking Energy Telecom Manufacturing It pharmaceuticals
  • 7. 7 | P a g e disclosed has increased to $6.02 billion in 2009 even though the volume of domestic deals has decreased from 207 deals in 2008 to 187 in 2009. Oil and Gas, Telecom and Pharma, Healthcare and Biotech sectors were the leaders as far as sectorial values were concerned. These sectors garnered $2.53 billion, $1.78 billion and $1.04 billion worth of deals respectively. Together, they accounted for as much as 53% of the total M&A deal value during 2009. M&A Activities in 2010 Riding high on its instiable appetite for foreign assets, India Inc announced merger and acquisition deals worth a record of $55 billion this year, including a record number of billion- dollar transactions. So for this year, the total announced deal value, according to research firm VCCEdge – amounted to $54.6 billion, significantly more than previous high of $ 42 billion in 2007. This year, corporate India has announced 546 M&A deals. The total value of domestic deals in October 2010 was $40 million. 0% 20% 40% 60% 80% 100% M&A Activities -2010 Telecom Oil&GAS pharma&healthcare Metals&Ores FinancialServices Mining Others
  • 8. 8 | P a g e M&A Activities in 2011 The bleak economic prospects and turbulence in financial markets result in a drop in mergers and acquisition deals involving Indian companies in 2011. Barring private equity buyouts, most deal categories saw a fall in activity. Overseas buyouts by Indian companies plunged as the ongoing crisis in developed markets and the sharp fall have resulted in firms turning cautious.The value of India-focused merger and acquisition (M&A) deals touched USD 39 billion in the first nine months of this year, a significant 31 per cent decline vis-a-vis the corresponding period last year. Despite ranking among the Top 3 locations for M&A deals in the January-September, 2011, period, India was also the country that witnessed the maximum decline in the combined value of M&A deals. 2012 will surely be an interesting year to watch out how the future M&A deals shapes up. M&A activities in 2012 The value of M&A deals involving India rose 12% to US $ 43.4 billion in the calendar year 2012 with the largest volume coming in the fourth quarter and the average deal size amounting to US $ 91 million. Data compiled by Thomson Reuters shows that Indian acquisitions overseas rose 12% with deals amounting to US $ 11.6 billion while foreign firms acquiring Indian companies have declined 23% to US $ 15.3 billion.Domestic M&A deals stood at US $ 12.3 billion, up 69% over year 2011. Total cross border deals stood at US $ 26.9 billion down 11.6% over previous year. Of the US $ 43 billion total M&A value, fourth quarter saw deal value of US $ 17 billion, up 362% over corresponding period. The M&A deals was driven by the merger of Sesa Goa, a 55%-owned unit of Vedanta Resources, with Sterlite Industries in a deal valued at US$3.9 billion, the largest M&A transaction involving India this year. Concurrently, as part of Vedanta's restructuring move, Vedanta Aluminum and Madras Aluminum will be consolidated into the new merged entity called SesaSterlite.
  • 9. 9 | P a g e M&A activities totalled to US $ 97.4 billion in Bric countries (Brazil, Russia, India and China). India share accounted for 15.7% while China had the highest share of 36%. Among inbound deals, UK registered the highest value of inbound M&A deals targeting India with 48.7% market share worth US $ 7.4 billion. US and Japan accounted for 13.2% and 12% of market share. India’s M&A Scenario in 2013 India Inc's shopping spree witnessed a significant slowdown in the first quarter of this year as deal volume plunged 75 per cent over last year but the deal tally could pick up steam in the coming days driven by the government's push to attract FDI. According to audit, tax and advisory firm Grant Thornton, the total number of merger and acquisition transaction in the first quarter of this year stood at USD 4.56 billion, down from USD 18.39 billion in the same period last year. The quarter clearly saw decline in deal activity, possibly driven by interplay of factors given the macro conditions as well as the pressure on liquidity. Given the FDI regulatory changes in various sectors and Government's push to attract FDI, M&A deal activity should pick up this year. Interestingly, excluding the internal mergers and restructuring, M&A deal values in the first quarter of this year were up 14 per cent as compared to first quarter of 2012. In the first quarter of 2012, out of the total M&A value of USD 18.39 billion, merger and internal restructuring deals amounted to USD 14.43 billion. Inbound deals were the flavour of the very first quarter of this year as the total value of inbound deals wherein foreign companies or their subsidiaries acquired Indian businesses was USD 2.90 billion (through 29 deals) compared to USD 1.26 billion (by way of 36 deals) in first quarter of 2012. The total value of domestic deals in first quarter of 2013 was USD 1.41 billion (via 66 deals) as compared to USD 2.01 billion (71 deals) during the corresponding quarter in 2012.The total value of outbound deals (Indian companies acquiring businesses outside India) in first quarter of 2013 was USD 0.19 billion (21 deals) compared to USD 0.69 billion (26 deals) during first quarter of 2012.Pharma and healthcare space dominated both M&A activity in the quarter. MylanInc's acquisition of Agila Specialties (Strides's injectable business) for USD 1.8 billion was the top deal for the quarter.
  • 10. 10 | P a g e Trends & Patterns of M & A Deals in India With the increasing number of Indian companies opting for mergers and acquisitions, India is now one of the leading nations in the world in terms of mergers and acquisitions. Among the different Indian sectors that have resorted to mergers and acquisitions in recent times, telecom, finance, FMCG, construction materials, automobile industry and steel industry are worth mentioning. The situation of mergers and acquisitions in India has undergone a sea change in the last couple of years. In Indian corporate sector mergers and acquisitions of foreign companies by the Indian companies has been latest trend. There are different key factors like dynamic attitude of Indian entrepreneurs, buoyancy in economy, favorable government policies, additional liquidity etc. behind the changing scenario of trends of mergers and acquisition in India. The IT and ITES sector have already played a dominant role in global market. The other Indian sectors are following the same trends. The increase participation of the Indian companies in the global corporate sector has further facilitated the merger and acquisition activities in India Large investment banks are taking a back seat to trading and merchant banking. M&A is increasingly viewed by large investment banks as a means to winning ancillary assignments such as underwriting. One of the drivers for the continuation of M&A transactions with technology companies is that the largest technology companies have tremendous levels of cash. The Government of India has finally introduced a set of reforms to liberalise foreign direct investment policy in key sectors such as multi-brand retail trading, aviation, broadcasting and power exchanges. This marks a major step towards boosting investment in these sectors.
  • 11. 11 | P a g e Taking multi-brand retail trading as an example, global retailers can now enter the Indian retail market by investing up to 51%, with prior Government approval. Foreign investors must make a minimum investment of US$ 100 million, with at least 50% to be invested in „back-end infrastructure‟ within three years; at least 30% of products must be sourced from „small industries‟ (plant and machinery investment not exceeding US$ 1 million). The implementation of the policy has been left at the discretion of individual states in India. Some states including Delhi and Maharashtra have already approved implementation of the policy. The policy has been warmly welcomed by global multi-brand retailers who will now be allowed to explore joint venture opportunities with Indian partners. There will also be opportunities for related logistics, technology and infrastructure businesses. The Government of India expects the policy to have a positive impact on India‟s economic development, creating job opportunities, improving technology and infrastructure, helping farmers and small manufacturers, benefiting consumers both in terms of quality as well as price, and boosting real estate development.
  • 12. 12 | P a g e M&A Trends and Patterns- China Current Scenario in China M&A Merger and acquisition activity has increased dramatically in China over the last several years.While such transactions were virtually unknown a mere ten years ago, they are now anincreasingly common and important feature of China‟s economic landscape. The M&A routenow offers foreign investors a viable method of entering the China market. China‟s economic reforms and robust growth have fuelled the increased pace of M&A activity.China‟s accession to the World Trade Organisation has opened previously closed industry sectorsto foreign investment, and is gradually lifting operating restrictions previously imposed onenterprises with foreign investment, permitting greater access to China‟s domestic market. With the continued strong growth of the Chinese economy, M&A transactions offeringimmediate market access are becoming an increasingly attractive alternative to green fieldinvestments.Concurrently with this market reform, China has been restructuring its state- owned assetholdings. In a few industrial sectors, the State is encouraging state-owned enterprises toconsolidate into large integrated conglomerates, which are intended to be global leaders intheir fields, while in other sectors, the State is actively seeking to reduce the level of its equityholding. Consequently, a large number of state-owned enterprises are being made availablefor restructuring or partnering with foreign firms. These new potential targets offer foreigninvestors greater market entry options. PEST Analysis China i. Social forces China has amazing demographical resources, and is expecting to growth to “1,343,239,923” individuals, as of July 2012 (Central Intelligence Agency, February 21, 2012) . It is an important fact that Chinese population is rapidly growing and thus China will try to expand in other countries. Wang describes a change in the Chinese culture where they are becoming more materialistic. He explains that “rising consumerism in the urban China has featured the increasing complexity of consumer culture [where] shopping is no longer an unavoidable search for daily necessities but has become a social pastime”. The latter emphasis that China‟s market is developing and the needs of its individuals are rising to a new level, opening an entirely new and expanding demand. This will surely increase competition both internally and externally, bringing in foreign investors. Furthermore, this will open the door for new potential mergers and acquisitions. ii. Political forces Unlike other governments, China has sustained a communist government for more than half a century. The communist ideology has been part of a norm and is completely embedded in their culture and tradition. The main political party is called the Communist Party of China (CPC) and although there exist smaller parties, they have not been successful at growing in power. It can be argued that “China’s political system is inherently unstable and unable to respond to the wider changes taking place in society”. The latter describes a need for a change to move to a more adaptable and comprehensive political system, combating arising tensions from different sub-regions of China. Experts believe that China is on its way to a major transition and believes that the arrival of the “fifth generation of leaders […] which will be expected to rule for the subsequent 10 years“ will bring the needed changes to China. . Perhaps, this will ameliorate China‟s international relations. China has difficulties maintaining positive relationships with its neighbouring countries. Indeed, “China’s relationship with Taiwan remains problematic, with Beijing refusing to rule out the threat of force in the
  • 13. 13 | P a g e event of a declaration of independence by Taiwan” (China Commercial Banking Report, 2012, p. 8). One can see the same tension between China and Tibet. Theoretically, this should not ease the importation or exportation of goods to China. China has always been very cautious when working with foreign firms. They have implemented many regulations to protect themselves from foreign investors. However, in the early 2000, China agreed to sign the World Trade Organisation (WTO) although many believed that this would not “inspire [an] increased foreign investment in the emerging giant of the world economy” . The latter argument is due to the fact that they believe “China’s regulatory structure for foreign-funded mergers and acquisitions (M&A) is struggling to keep up with the emerging market for cross-border corporate control”. The regulatory framework shows that China is still too defensive and is hiding behind its regulations to still maintain some semblance of control over its economy. Another factor which may deter foreign investors is the fact that China is not respecting Human Rights policies which hinders its ability to create successful international relations. Many organisations assemble in protest against China‟s lack of respect for perceived global rules. This will especially affect the vision people might have of mergers and acquisitions with China, rendering a negative vision of any kind of alliance. Moreover, when dealing with mergers and acquisition, there is a strong need for developing strong relationships based on trust and it is plausible that China is not perceived as a trustworthy environment, due to the “growing corruption, widening inequalities, increasing rural poverty and environmental degradation”. iii. Economic forces “China is the fastest-growing major economy in the world”. Moreover, “in 2010 China became the world’s largest exporter”. The GDP of China was estimated at “$11.3 trillion”. China economy changes in terms of “gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, creation of a diversified banking system, development of stock markets, rapid growth of the private sector, and opening to foreign trade and investment”. China is reforming itself by gradually removing government market regulation and price fixing. This helps China to increase their international activities and to stabilise their economy. China is just known for their manufacturing excellence and not famous for R&D or high tech. This ideology is becoming more and more absurd. Wang explain that the increase in domestic income has attracted a lot of foreign investors and “intensified competition [which has] greatly inspired retail innovations in a relatively monotonous market, and led to the emergence of many new retail formats”. China is very active in the import and export business and this has left it vulnerable to market fluctuation and increased their exposure to foreign exchange risk. China‟s focus on exports “made it vulnerable to the global recession”. China suffered from the recent recession which created “major imbalances and environmental degradation”. Furthermore, this has also impacted the social environment “leading to job losses in China’s export sector and thus increasing social instability”. iv. Technological forces China‟s infrastructure is well developed in the major cities such as Shanghai. However, rural areas are still largely underdeveloped. In order for them to remain competitive, they seek technological improvement. “From the 1990s, retail technologies, such as computerised cash-register systems, point-of-sales information systems with universal product code (UPC) barcode scanning, and radio frequency identification, began to be widely employed”. Furthermore, Wang argued that major transformation and new technology implementation were mainly used in the consumer industry, such as by supermarkets.
  • 14. 14 | P a g e Regulating M&A Transactions Government agencies play an important role in Chinese M&Atransactions. There is a higher level of government participation inM&A transactions in China than is typical in other jurisdictions.Despite the recent relaxation of foreign investment restrictions,pervasive approval requirements remain a distinctive feature of M&Atransactions in China. In these transactions, PRC government agencies do not merely act as anti-trust or competitionregulators. Their concern is not limited to the economic consequences of a transaction. Theyplay a much broader role in reviewing and approving deal specific arrangements. In manyM&A transactions, government agencies act as both regulator and vendor, and will have socialconcerns that extend well beyond the commercial aspects of the transaction.The discretionary approvals required for an M&A transaction are not mere formalities, andmay take considerable effort to obtain. Understanding the applicable regulatory frameworkand the government‟s role in the acquisition process is important to successfully concludingtransactions in China Outbound M&A development from China Chinese M&A activities rose rapidly in the past decade. Before 2000, only SOEs(State-Owned- Enterprises) were allowed to buy small stakes in overseas energy company and companies with natural resources. Beijing called that yinjin lai (or “pull in”). In 2000, shortly before China signed the WTO, the Chinese government decided, in order to be globally competitive, to announce “zou chuqu” a policy that permitted Chinese companies to make acquisitions abroad. The result was that the number of Chinese M&As increased quickly and “shot from $1.6 billion in 2003 to $18.2 billion by 2006”. This caused worldwide unease about a Chinese takeover threat. However, the first wave Chinese takeovers ended in big failures, resulting in Chinese companies pulling out or selling off their acquisitions. After those failures, the target of Chinese companies steadily shifted to mainly asset based or R&D specialised companies.
  • 15. 15 | P a g e The reason for the first failures in M&A`s was that Chinese companies tried to take over companies in the EU in order to penetrate the market. Proper due diligence was missing and the companies taken over were in severe financial trouble already which the inexperienced Chinese companies weren’t able to turn around. The strategy of Chinese companies to buy foreign companies and grow sales, resulted in failure. The intention of Chinese companies was to buy western global brands and distribution relationships to combine it with Chinese’s low-cost manufacturing capacity. At the end, it turned out to be too expensive and failed due to errors from the acquirer. That fact led to regulation from the Chinese government to allow only companies with proper managerial capabilities and merger integration experience to attempt M&As. As a result M&As were shot down from the Chinese government e.g. when the unknown company Sichuan Tengzhong Heavy Industrial Machinery wanted to acquire General Motors’ Hummer division. In the second wave of Chinese M&As, the Chinese companies targeted heavy asset based companies such as coal mines. Asset based companies can be more easily assessed by engineers and thus due diligence is relative easy. Chinese companies don’t have to worry about brand evaluation and corporate culture as companies with tangible assets mostly have proven supply chains and hence operations can be left alone. Furthermore, the demand in China for the resources from those asset based companies is very high. Third wave: Chinese companies targeted companies with strong R&D focus and smaller companies because those companies were a good fit to the Chinese mass manufacturing excellence. Though R&D is more complicated to integrate, there is less risk involved. The willingness of the Chinese company to invest in R&D and the prospect to sell innovations to Chinese markets excites foreign researchers and thus the motivation is generally high to make a successful M&A happen. The combination of new innovative ideas for products and processes and the Chinese ability to scale the inventions and the low manufacturing costs are a good combination. Forth wave: Acquire foreign company and bring back to Chinese markets. The fourth wave is very promising and the future will show the results.
  • 16. 16 | P a g e Overall M&A in China (inbound, outbound and domestic) reached a peak in 2010 with US$ 209 Bil of transactions (up 27% over 2009) in 4,251 disclosed transactions. 2010 and 2011 also confirmed the healthy rise of outbound transactions: between 2009 and 2010, outbound transactions grew by as much as 30%, with 188 transactions and a combined value of US$38 Bil (up from 144 deals and US$ 30 Bil in 2009). In 2011, outbound transactions reached US$ 42.9 Bil, up 12% from 2010 (across 207 deals, +10% over 2010) . Yet, outbound transactions represented a mere 18% (in value) of the total China M&A market, dominated by domestic transactions. The local market – highly competitive and undergoing consolidation in many areas, grew by 6% to reach 2,947 disclosed deals in 2010 (US$131 Bil in value, up 41% over 2009). Despite a 10% growth in domestic transactions in H1‟2011 (reaching 1,616 deals), the overall China M&A market slightly contracted in 2011 to reach US$ 201 Bil in value (-4% from 2010). To explain the steady growth of China‟s outbound transactions, one has to look into deeply rooted factors: since the 1990s, China has engaged in a consolidation and restructuring process for strategic industries with the aim of creating national champions with global ambitions. China‟s State Council selected a batch of business groups to undergo trial reforms in 1991. 57 large groups were selected in key industries. By 1997, there were 120 of these large groups. To help them succeed, Beijing has been providing a set of powerful tools including highly favorable regulations (creating barriers to entry), local credit support and generous export credit and subsidies. For example, early 2009, the five main Chinese commercial banks issued about US$ 22 Bil worth of loans to support 11 different M&A deals . That included the massive US$ 21 Bil loan granted to Chinalco for its (failed) bid to Rio Tinto. The credit terms of this loan were amazing. Chinalco would have paid only 0.945% above 6-month LIBOR, when competing bidder, BHP Billiton, the world's largest mining company then, would have paid 3.45% above 6-month LIBOR for a 5-year bond or 3.9% above 6-month LIBOR for the 10-year bond. The Policies set out in the 12th Five Year Plan ratified in spring 2011 by the Central Committee of the CPC are a logical extension of these “go global” guidelines enacted 20 years earlier. The recent Policies are encouraging consolidations and restructuring, particularly in the Automotive, Steel, Cement, Aluminum, Rare Earth Metals and Chemicals sectors. The 12th Five Year Plan also strengthens and encourages Chinese companies‟ overseas ambitions in “Seven Strategic Emerging Industries”, such as energy efficiency and clean energy, environment protection, advanced materials and next-generation vehicles, IT, manufacturing and biotechnology. The largest outbound M&As are traditionally happening in the natural resources sector, the most strategic sector for the local manufacturing industry. Most transactions in the sector are beyond US$ 1 Bil, the largest being the acquisition of Addax Petroleum (Canada-based) by Sinopec for US$ 8.1 Bil in 2009 and the acquisition of 40% of Repsol YPF‟s equity in Brazil by the same Sinopec for US$ 7.1 Bil in 2010. In 2011, there were 16 outbound transactions above US$ 1 Bil in value (compared with 12 in 2010), 14 of these transactions occurring in the natural resources and energy fields. The manufacturing sector comes second: one of the largest transactions of 2010 was the US$ 1.8 Bil acquisition of Volvo by Geely. Smaller transactions (US$ 50-100 Mil) took place in textile, machinery, logistics, transportation, hospitality etc.Geographically, the US became the main destination for outbound M&As, with 32 deals in 2010 (vs 21 in 2009) followed by Europe (20 deals), Africa (17 deals) and Japan (16 deals). While Asia remained China‟s second largest outbound M&A destination (33 deals in H1‟2011), Europe transactions grew faster in H1‟2011 to exceed all 2010 transactions (30 in H1‟2011 vs 20 in 2010). Two very large transactions marked the end of 2011 and confirmed the trend that Chinese SOEs and large private enterprises are taking well advantage of a low euro and US dollar
  • 17. 17 | P a g e against the Yuan, that they recognize the strong brands and technology developed in the West and that they now have the confidence to go after much prized national assets, for example during a series of privatizations in Europe aimed at reducing budget deficits. In December 2011, China Three Gorges Group, the operator of the Three Gorges Dam (China‟s largest hydropower developer), announced the acquisition of 21.35% of Energias de Portugal (EDP) for a whopping EUR 2.69 Bil. EDP accounts for 9% of Portugal‟s GDP and is also the main power generator in Brazil, an attractive destination for the Chinese Group and Chinese SOEs in general. Earlier in December, HNA Group (the parent company of Hainan Airlines, a group claiming US$ 10 Bil revenue in 2010) acquired the world's 5th largest marine container leasing company, GE SeaCo, a transaction estimated at US$ 2.5 Bil. China‟s outbound M&A history has been marred by painful failures, reminding us that relationship and partnership building, lobbying and soft skills are critical tools that Chinese companies must acquire when conducting overseas transactions. The failed Chinalco bid on Rio Tinto in 2009 (and elder failed attempt of CNOOC at Unocal in 2005) served as a testimony that Beijing aggressive export-driven policies, via Chinalco and CNOOC, were perceived as “reckless”, “unfair” and even “hegemonic”, thus frustrating foreign parties‟ sensitivity and patience. The human aspects of the post-merger integration and local politics in the country were also very much overlooked. Trying to outmaneuver one‟s own regulator at home could also be fatal, like in the Tengzhong‟s failed bid at GM‟s Hummer in 2009-2010. Not only did China‟s MOFCOM not see a deep connection and synergy between the heavy machinery maker from Sichuan and the luxury vehicle manufacturer, but press releases mishandlings and attempts by Tengzhong to move the deal offshore in hope to save tax liabilities for GM were futile (and totally illegal ) as it would have been impossible to build a manufacturing plant onshore for Tengzhong-Hummer without MOFCOM and other authorities‟ approval. Learning from some of these historical failures, many Chinese companies have taken a more conservative approach by forming a JV or becoming minority shareholders in a target company before acquiring it entirely. Chinese companies also started to take integration issues seriously and to answer such key questions as: “what is the acquisition for?”, “what is the vision of the merger?” or “are there enough synergies between the two companies?”. A pattern, mainly related to the economic crisis in the West, also emerged: Chinese companies now tend to target weak or distressed companies with shareholders seeking an exit or companies needing entry into the Chinese market but who do not have the financial means to do so. Few big deals in the past 10 Years in China • 2004: TCL acquired Alcatel Mobile phone division. Starting with a JV, TCL acquired the remaining part of the JV in 2005 and turned around the company (total cost: EUR 110 Mil). Strong of its experience, TCL then acquired (2011) the main assets of France‟s Sagem Wireless, which included a 450-people R&D Center in China‟s Zhejiang province (disclaimer: Shanghaivest conducted this transaction). • 2005: Lenovo bought the laptop division of IBM for US$ 1.25 Bil and took over US$ 500 Mil of IBM‟s debt. IBM first took 18.9% of Lenovo and signed a 5-year cooperation agreement with Lenovo. Meanwhile, Lenovo took ownership of IBM‟s R&D centers in Japan, US and the Shenzhen factory (10,000 employees) and for five years, Lenovo products were supported by IBM after-sales organization and maintenance centers. • 2010: Fosun purchased 7.1% of Club Med (luxury tourism) for an estimated EUR 22 Mil and in 2011 purchased an additional 2.8%. The synergy was strong as China is becoming the first luxury market in the world circa 2015 and Fosun was on paper a good partner to help Club Med localize their concept to the local affluent population. Fosun later acquired 9.5% of FolliFollie,
  • 18. 18 | P a g e an Athens-listed luxury company for EUR 84.6 Mil. FolliFollie already had hundreds of stores in China, so it was already a local success story. • 2010: Zhejiang Geely announced they purchased Volvo (from Ford) for US$ 1.8 Bil. To win the deal “emotionally”, Geely reiterated that the company would retain its headquarters and manufacturing in Sweden and Belgium, and that the board would remain mainly Swedish, giving much freedom to Volvo‟s management. In February 2011, Geely and Volvo‟s CEOs also announced a US$ 11 Bil five-year development plan, including prospective China plants and the hiring of 1,200 engineers in Belgium. Evolutionary Practices and Patterns in China: M&A in china is growing; successful companies such as Haier, Lenovo are on their way to becoming truly global companies. American and European companies realize this and even start to fear a threat from those Asian companies. As already explained in the previous chapter, there are three major reasons for Chinese companies to expand abroad which are securing natural resources, acquiring technologies and know-how and fighting against growing competition in their home markets. Those Chinese companies that were successful abroad went through 4 stages in their M&A process. Learning phase à Build-up phase à Internationalisation phase à globalization phase (see figure). Challenges and solutions were different in each stage, with cross cultural challenges being especially important in the last two stages
  • 19. 19 | P a g e Conclusion: Global companies are more active in acquiring entities in China than in India, as the China focused M&A activity this year so far amounted to a whopping $ 84.3 bn, while India-targeted M&A volume was just $ 24 bn. According to global deal tracking firm Dealogic, India inbound M&A volume surged to $ 24 bn in 2011 so far, while China targeted M&A volume reached $ 84.3 bn in the same period. "India and China have been the most targeted nations by acquirors outside the region - posting volume gains of 191 per cent and 76 per cent respectively year-on-year," Dealogic said. The United Kingdom dominated the acquisition scene this year with $ 19.2 bn announced deals so far, surpassing the US for the first time since 2007 (in the comparable period). BP's $ 9 bn acquisition of Reliance Industries' oil & gas assets was the deal that pushed the United Kingdom to this coveted position. BP's $ 9 bn bid for 23 oil and gas blocks from Reliance Industries in February still stands as the largest inbound M&A in India so far this year and is also India's second biggest inbound cross- border deal on record. The UK is the top acquirer into India with $ 15 bn - much more than the value seen in the comparable period last year ($ 157 million) and accounts for 62.6 per cent of India inbound M&A volume in 2011 so far. China targeted M&A volume, which stood at $ 84.3 bn in this year so far, witnessed 13 per cent surge from the $ 74.6 bn announced in the same period last year. In terms of number of deals also there were 1,808 transactions this year so far, up 4 per cent from 1,733 deals announced in the same period last year.Other leading acquirer nations into India this year so far were the United States (18 per cent), Germany (6 per cent), Japan (4 per cent), Denmark (3 per cent), the report said. Though year-on-year there has been an increase in inbound M&A volume, on a quarter on quarter basis there has been a significant decline. India inflow M&A volume totalled to $ 3.9 bn in the second quarter of this year, down a whopping 81 per cent from the record quarterly volume of $ 20.1 bn achieved in the first quarter of 2011, Dealogic said.
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