1) China's outbound investment has historically focused on acquiring energy and mineral assets, but the government now wants to also support acquiring brands, technology, and management skills to help reform state-owned enterprises. 2) Valuing tangible assets like resources is simpler than valuing intangible assets, and integrating non-resource acquisitions poses significant challenges. 3) Going forward, Chinese companies will likely cooperate more with global partners in acquisitions, improve post-deal integration, and seek more professional advice.

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Skewed development
China's ruirar uurbuuno rrrvcsrr-rcrrr E.tq]- nii caregorres oiourbound lnvesr-
o utbou nd
growth, and the subject is agencies arid institutes are contributl
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investme nt
must be
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been ffi
meetings. For 18 months it has
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of both kinds of outbound aitivity to
rebatanced to
support the
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g ove rn m e nt's
(SOEs) into large, globally competitive "..-;:::: " " '
.nt.rpiir., *^r"d#"y, an'int.grrl p"rt o"';1 .;;1"::".:;;,;:;: :;;-.,. Simpte and tangibte
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ente rp rise of Beijingt "Go out" campaign. over
ar unrvers tv ot M
It's important to note that energy and
the last decade, the buoyancy of domestic stock mineral asset acquisitions present a very straight-
reform pLan, markets and credit windorvs at the large state banks forward valuation process. These involve tangible
says DeLoitte's provided capital for SOEs to buy commercial as- assets. Negotiationi are 6xed in a simple calculus:
se-ts they had not developed organically. Outbound reserves multiplied by market price, minus recov-
Ken DeWoskin M&A w1s the next phase of enterprise reform. ery costs. Of course, in reality it is not that easy,
- As the program evolved, the State-Owned
Assets Supeltsig" and Administration Com-
but determining a fair value of energy and mineral
purchases is simple compared to doing so for in-
mission (SASAC) clarified the strategic goals of tangible assets importa.ti for enterpri;e develop-
outbound investment activity to ment, such as brands-.
include brands, technology, innova- Add to that, non-tangible asset
tion capability,'channek% -"rt Chingse fifmS acquisitions present formidable op-
",,
and,globalmanagement,skills. erating challenges that go beyond
wiLt increasingly
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.rlow can we assess tne progfess resource efiraction, and overseas
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and direction of this campaign? cooperate with operations to develop market pres-
different kinds of outbound initia- srobar parrners in :1'"'":3,::s:,:'i::::'Xi,:::
*.:i?l"X'l'l;::ff::fl:'i:,il: where even the largest Chinese
tive. China has a long and largely agqgifing aSSgtS. enterprises lack deep experience.
in- -,- I
successfirl history of outbound in- Closely related are the difficulties
;;',*.;; ;;;'il;;; ;;";;;.i;- - They can combine -;;:1 ffi'ffi#i;'':i* ,r,.
sively to purch3sg energy and min- recent record has made clear.
feSOUfGeS fOf
eral resources. This was ano remarns We can expect three develop-
a diferent agenda from the SASAC Va[UatiOn and ments in outbound M&A focused
;:i'ffi':f:fJ&Tt'i ff;:n':- nee.otiation,
qulsitions is tolring resources ro find Synefgigg
and
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increasinglyio:perate with global
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Resource heavy integration ;ffiT43ilnT"ffi?fi:#:A
China bought over US$52 billion worth of assets in post-deal integration. A model for thls ii Indus-
overseas last year, up considerably on 2007. But trial and Commercial Bank of China's acquisition
2008 saw the virtual shutdown of the one category of a 20o/o stake in Standard Bank of South-A-frica.
of investment that was robust in 2007: frnancial Secondly, enterprises looking at sizeable non-
se-rvices. Tempting as the pricing was in the wake resource deals will likely become more open to pro-
of the global crisis, China was not buying. fessional outside assistance, from banks,icconnting
Between 2003 and 2009,73o/o of China's out- fums, and law firms that can lend assurance to varil
bound investment went into energy and minerals. ous stages of the process and identiSr risks.
In 2009 alone, that share rose to 94o/o, a dramatic Frnally, therJwill be more experiments with
tlryklry of investments primarily supporting the integrating existing overseas management teams,
SASAC agenda. The regulator had both encour- akin to Lenovo's purchase of IBMts PC division,
aged overseas purchases and cautioned the need but guided by lessons learned in that case.
for governance improvement and improved M&A Chinat outbound campaign will grow; but
capability before undertaking it. Chinat outbound achieving the balance demanded by the enterprise
investment activity seems to be moving away from reform agenda will bring innovations yet to be
the cause of enterprise reform. imagined. r
China Econom c Review . December 2009
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