Chinese are going shopping with export-accumulated wealth again. This time the target is more aspirational. Rather than Louis Vuitton bags and Prada shoes, they are putting part of the USD 3.5 trillion in foreign reserves to work by acquiring billion-dollar companies.
China’s appetite is growing for large, established foreign companies. Unlike Japan’s 1980s-era acquisition of trophy real estate, China has been cautious in overseas expansion, focusing mainly on strategically important natural resource such as oil and gas, forestry, and mining rights. Backed by favorable investment policies and financing from domestic policy banks, outbound M&A has increased more than six-fold to USD 65.2 billion between 2008 and 2012. China Development Bank’s USD 20 billion backing of China National Petroleum Corporation’s outbound investments is a highlight.
Although acquisitions have historically been resources driven, billion-dollar deals in the consumer sector are becoming more visible. We believe competition is the main driver. The introduction of foreign competition dating from WTO accession has dramatically changed China’s consumer landscape, raising consumer expectation and consciousness for safety, quality and design. However, taking growth for granted, many Chinese companies have neglected the need for product upgrades and investment in research and development. Suffering from shrinking market share, intense market competition and loss of consumer confidence, Chinese consumer companies need help to defend waning market leadership. Acquisitions provide the opportunity to leverage strong balance sheets, gain access to a consolidated supply chain and mature business operations. A prime example is Shuanghui International’s recent USD 4.72 billion acquisition of the 70-year old Virginia-based Smithfield Foods, which will unlock value for Shuanghui’s China operations through access to Smithfield’s processing technologies, distribution network, and insights to greater vertical integration.
Mega deals driven by strategic needs for growth have also become more prominent. As the Chinese market becomes increasingly saturated, businesses are seeking to enhance their ability to serve their home market through acquiring targets with a combination of brand, technology know-how, R&D capabilities, and management expertise. Given Lenovo’s successful acquisition of IBM’s laptop business unit, which more than quadrupled the company’s revenue in first year of acquisition, other Chinese companies have also been actively seeking targets. Bright Food and Geely both spent billions on their acquisitions of Weetabix and Volvo to establish footprints in the international market and acquire valuable foreign known-how to accommodate increasingly demanding Chinese consumers.
Lunar has benefited from this trend in its existing portfolio, and sees potential for future transactions driven from its company’s operational know-how and needs. Yeehoo has leveraged its domestic market share and brand name to acquire a substantial stake in childrenswear brand, I Pinco Pallino. Through this collaboration, we have helped IPP quickly establish solid ties in China’s first tier shopping malls and department stores. Within months of entry, we already have a number of stores ready to go, with the first store openings in Shanghai this September.
We believe that China’s outbound M&A efforts will continue and grow in aspiration. Although the current cross-border M&As are dominated by SOEs with strong political and financial backing, the opportunity for privately-held and private equity-backed firms to build stronger businesses, domestically and internationally, through acquisition is becoming increasingly evident.