Capital-Rich Chinese Firms Look Abroad for Acquisitions

WSJ - sub required - no url | 12/17/01

[NativeNewYorker]

Whatever the fate of Citic Pacific Ltd.'s contemplated bid for PSINet Inc., a distressed U.S. telecom company, the attempt signals a new level of interest by major Chinese companies in making off-shore acquisitions.

"The Chinese are thinking big; China has capital and China is growing," says Michael Carr, head of investment banking for Goldman Sachs & Co. in Hong Kong.

"We talk to quite a few broad-based Chinese companies with an interest in acquiring companies overseas," adds Dennis Wai, a banker with J.P. Morgan Chase in Hong Kong. "They are looking everywhere now: Southeast Asia, Europe and the U.S."

To be sure, this isn't the first time Chinese companies have ventured abroad. More than a decade ago, Citic Pacific's Beijing-based parent pursued a natural resources strategy that included trying to buy up forests in Washington state and mines in Australia, while Shougang Iron & Steel bought an iron mine in South America. And many quasiarms of the government with free cash, such as China Venturetech, put their funds in real estate abroad, including office buildings in Los Angeles and expensive apartments in New York.

However, this time, the interest is more strategic and well thought-out, bankers observe. Instead of focusing just on acquiring assets or stashing cash abroad in one-time deals, today's potential acquisitions are being considered on the basis that they will help the buyer acquire competitive skills or broaden market access abroad. The idea is to sharpen China's manufacturing expertise and technological know-how.

The interest comes at a moment when the Chinese market itself appears saturated in a wide variety of manufactured goods and China's companies -- particularly its consumer electronics makers -- need to tap new sources of demand. In addition to the manufacturers, China's giant oil companies are also holding discussions regarding potential acquisitions, their coffers flush with hard currency from their public listings, bankers say (although these are more likely to be in marginal markets such as Sudan).

Felicitous Timing

The timing for cash-rich buyers such as China is felicitous. "Prices are way down," says Howard Chao, a lawyer who heads the Shanghai office of law firm O'Melveny & Myers. "It's a real buyers' opportunity."

While these are early days, the trend shows how quickly China's economic and financial relations with the world are becoming two-way. Not long ago, the investment bankers and lawyers spent all their time helping foreign companies make investments in China, rather than the other way around. In another departure from the past, financing isn't a big issue. Many companies have cash, whether from equity offerings, or from business operations. That is a big change from the days when funds frequently came from unauthorized speculation or understated export revenues and were parked offshore to escape the long reach of the tax collectors.

To many analysts and bankers, though, it may be too early to tell whether Chinese acquisitions abroad constitute a trend or just a blip. "The next and right step is consolidation at home," says Harry van Dyke, head of mergers and acquisitions for Morgan Stanley & Co. in Hong Kong. Mr. van Dyke points to Sinopec's $1 billion acquisition of Chinese oil refiner National Star, and brewery Tsingtao's acquisition of Five Star Beer as a beacon of things to come.

One reason domestic mergers and acquisitions seem more sensible today than in the past: Chinese companies used to be thwarted frequently in their efforts to expand nationwide by local protectionism. However, China's imminent accession to the World Trade Organization will put pressure on Beijing to eliminate such practices, and makes such domestic rationalization all the more compelling.

The skeptics also point to additional challenges involved in acquiring abroad, everything from dealing with opaque Chinese regulations on approvals for Chinese companies looking to buy overseas firms, to broad strategic concerns, as well as normal, day-to-day issues involved with running a company across the world.

Murky Rules

"The rules regarding Chinese investment abroad are very murky and hard to interpret," says Mr. Chao. "There are a lot of companies which try to do end runs around them." There is also uncertainty about approvals from the U.S. Indeed, the first acquisition to be rejected by the interdepartmental organization that vets deals with an eye to security considerations involved a Chinese company over a decade ago, according to Mr. Chao.

When Citic Pacific first began to look at PSINet in the spring, the collision between a U.S. fighter jet and a Chinese plane had just occurred. The timing wasn't auspicious. But now, the implications of the Bush Administration preoccupation with terrorism are uncertain, lawyers say. It could mean that national security concerns lead to a veto of an acquisition if sensitive technology is involved. Or it could mean that, in the interest of a harmonious relationship with an ally in the war against terrorism, any such considerations are suspended. That is why Citic Pacific thinks it needs a local U.S. partner to bid alongside it for PSINet.

Citic Pacific claims it has all the management it needs to turn around PSINet, according to people familiar with the company's thinking. For example, the head of its telecommunications operations in Hong Kong, Norman Yuen, came from Hong-kong Telecom (now Pacific Century CyberWorks Ltd.) But other companies aren't so confident about their ability to implement a merger successfully when it is an international transaction.

Legend Ltd., China's premier personal-computer maker and distributor, recently considered making a multibillion dollar acquisition in the U.S. by purchasing either Palm Inc. or Handspring Inc., both makers of hand-held computerized devices, investment bankers say. But Legend, which denies either company was a target, then backed out for fear that it wouldn't be able to manage its acquisition, bankers say.

Still, to many analysts and bankers, that decision also reflects the growing sophistication of Chinese companies. "A few years ago, they wouldn't have known enough to have those concerns," says a banker familiar with the canceled deal.

[tacticalogic]

This the same China that gets IMF loans on the cheap, and special treatment from the UN on human rights inspections because they are a "developing nation"?

[Digger]

Yep, and thanks to our leaders this will not change. Oh yes it will but you must vote outside the box. Ergo NO CHANGE.