For the first time on record, compared to U.S. buyers, Chinese companies are buying up overseas assets at a faster pace.
Select-service hotel portfolio from Starwood Capital Group LLC was agreed to be bought by China Life Insurance Co Ltd for $2 billion on Oct. 18. But this was just the 17th largest foreign acquisition by a Chinese company this year.
Chinese companies have spent a total $206.6 billion on foreign mergers and acquisitions so far this year at a growth of 212% compared with the same period in 2015.
Keeping China’s factories humming—the so-called old economy, supporting industrial production and a hunt for the raw materials needed to feed steel mills were the factors that started off China’s overseas deal making.
The appetite for foreign acquisitions grew with the growth of China.
The latest wave of mergers and acquisitions however are driven by China’s needs to transition to an economy driven by domestic consumption more than exports. And hence they’ve shifted focus to acquiring the brands and technology.
The types of companies China is buying have changed as its deal making exploded and that change is not hard to spot by a look at the industries of the target companies.
Acquiring iron ore deposits in Australia, energy producers from Canada and copper mines in Africa, China’s overseas deal making was dominated by state-owned companies before 2013. Energy and commodities companies comprised more than half of the purchases made.
But now, while government-backed buyers purchase chipmakers and crop technology, marquee assets like Italian football teams, American film studios and French fashion houses are being snapped up by private entrepreneurs.
A look at annual deal volumes by industry would help gain a better sense of how China’s targets have changed.
Following smaller deals in Central Asia, Europe and South America, energy acquisitions across the world have been made by China with the biggest being Cnooc Ltd.’s 2012 agreement to buy Canada’s Nexen Inc. for $14.3 billion. But in recent times, with a $4.7 billion deal for U.S. pork producer Smithfield Foods Inc. in 2013 and this year’s $821 million purchase of Italian soccer team AC Milan, it has started buying more consumer companies. And purchases like an IBM server business and chip designer Spreadtrum Communications Inc. were driven by China’s urge to bolster its technology prowess which has become a national priority.
Despite the fact that close government scrutiny within China and around the world is being conducted on the growing number of deals, experts are of the view that Chinese companies would be able to continue with the buying spree.
There has been rejection of Chinese acquisitions by western governments. The Committee on Foreign Investment in the U.S. is wary of any potential acquisition that could affect national security and has rejected some transactions in the technology industry. In Europe, the new U.K. government plans to create its own process for reviewing large investments in sensitive industries and German politicians expressed opposition to a Chinese takeover of robot maker Kuka AG.
Pricey backdoor listings on domestic exchanges have also been sought to be blocked by the Chinese securities regulator. This additional scrutiny could upset plans of those Chinese acquirers who wanted to make money by relisting their purchases on a domestic bourse at a higher valuation.
As China seeks to manage yuan outflows, China’s currency supervisor has started to hold up overseas money transfers. M&A deal closures could be delayed and the decision to approve cross-border fund transfers can now take weeks. For example, after getting caught up in the government process, its initial deadline was missed in the purchase of Qihoo 360 Technology Co., the largest privatization of a Chinese company listed in the U.S.
(Adapted from Bloomberg)