In line with the Central Government's 'go-out?policy, companies with a strong base at home are increasingly proactive in seeking out merger andacquisition (M&A) opportunities abroad. Emma An reports. It's been another good quarter for Lenovo, the world's fourth-largest PC maker, which saw its quarterly market share of the global PC business surge to a record 10.4 percent in the third quarter of 2010. And for the sixth quarter in a row, the company has outpaced its closest competitors - HP, Dell and Acer.
Five years after the company pledged to build a global brand with its ground-breaking acquisition of IBM, Lenovo seems to finally be putting its money where its mouth is.
As the home grown PC maker celebrates its success on the world stage, another big mainland firm, automaker Geely, is facing its first major test since its high-profile $1.8 billion acquisition of Volvo from beleaguered US carmaker Ford seven months ago.
Issues surrounding post-merger "integration" and synergies have come to the fore in the recent debate between Sweden's Volvo and its new Chinese owner over the planned expansion of Volvo's business on the mainland.
Graver tests may yet occur for the two, as the prolonged and at times somewhat anguished integration process between Lenovo and IBM suggests. But though the sailing may not always be smooth either before or after a purchase, one thing is for certain - Chinese companies are increasingly on the lookout for M&A opportunities around the world.
"The trend is definitely going out," Carlson Wen, a partner at Jones Day, an international law firm, told China Daily.
In fact, China's outbound M&A has expanded rapidly since 2008. Despite the global financial crisis, the value of China's outbound M&A deals in 2008, totaling $50.33 billion, was double that of 2007, according to data tracker Dealogic. This is a sharp increase from $9.6 billion in 2005 and $20.9 billion in 2006.
And this trend has shown no signs of slowing, with Chinese outbound M&A activity hitting a new high in the first half of 2010. According to data released by PricewaterhouseCoopers, a total of 99 outbound deals were announced during the first half of the year, up 50 percent from a year earlier. Meanwhile, seven out of the 99 deals exceeded $1 billion in value terms, compared with only three a year ago.
Several factors were at work in setting the stage for this trend, Wen says. Assets all across the globe were being sold at a big discount to their valuations once the financial crisis started taking a toll. This created opportunities for many Chinese firms, most of which emerged from the global recession in sounder financial health than their Western peers.
Adding to this was the ample liquidity to be found in China, Wen noted. "Chinese companies are not tied to strict budgets the way they used to," he said.
And although the financial crisis may largely be over, the passion by Chinese firms for offshore acquisitions certainly isn't.
Instead, "a second wave of outbound M&A" may be just around the corner, said Lawrence Chia, head of M&A services at Deloitte China.
"Outbound M&A will remain active," Chia said. "As China continues to play an increasingly important role within the global economy, outbound acquisitions will be conducted more often as corporate players look to expand their overseas market share."
Energy and resources-related assets will remain the most popular targets, Chia pointed out, as many state owned enterprises (SOE) in the energy and resource sectors will continue scouring the globe to help meet the demands of the booming Chinese economy.
"China's desire to increase ownership across a range of natural resources remains undiminished," said Philip Partnow, managing director and head of M&A for China at UBS Securities.
"Oil and gas, and metals and mining will continue to dominate outbound M&A with multiple companies looking at assets globally," he added.
Big resource players, including China Petroleum & Chemical Corporation (Sinopec) and China National Offshore Oil Co Ltd (Cnooc) are leading the way in buying assets worldwide.
Just last month, Sinopec agreed to buy Occidental Petroleum Corp's operations in Argentina for $2.45 billion. The deal, announced on December 10, came less than two weeks after Cnooc's joint $7 billion bid with Bridas for a stake in Pan American Energy at the end of November.
The buying spree is a direct result of China's growing energy demand. According to CRU, an international consultancy group, China accounts for around 40 percent of global metals consumption and may double its imports of iron ore and coking coal over the next 10 years as the country's annual steel consumption is likely to double to 1 billion metric tons by 2020.
Meanwhile, the Chinese Academy of Social Sciences predicts that China's oil consumption will reach 10.6 million barrels per day by 2015, while imported oil may grow to account for 65 percent of total domestic consumption by 2020, matching the level currently seen in the US. At present, China imports approximately 55 percent of its oil.
A good part of that demand will have to be satisfied elsewhere given the limited supply of domestic oil, Wen said, thus creating ample reasons for mainland companies to go out and find it.
That will be further helped by the fact that China's major resource players are becoming increasingly pragmatic and are also able to provide attractive financing and an end-market for offtake, said Partnow.
