Ready for Chinese Merger Mania?


By Steve Rosenbush No longer content to serve simply as a cheap source of manufacturing, China's big corporations are using their financial muscle to acquire assets around the world. On June 22, China National Offshore Oil (CNOOC) offered $18.5 billion in cash for oil and gas giant Unocal (UCL), besting an offer from Chevron (CVX). That very day, China's largest appliance maker, Haier Group, offered $1.28 billion for Maytag (MYG), topping a bid from Ripplewood Holdings.

What's driving the offers? On one level, these bids are no different from deal-making in any part of the world.

THE GROWTH IMPERATIVE. "What we're observing is just the natural evolution of companies looking for growth. There's no grand scheme, no systematic approach," says James Root, an international-growth specialist at consultant Bain & Co. in New York.

But the timing and intensity of the current wave of acquisitions coming out of China to some extent reflects economic conditions there. China has an enormous need for natural resources. Its companies are looking to move upscale by acquiring established brands and distribution channels abroad.

And Chinese manufacturers are struggling to find ways to maintain growth as wages rise in what is becoming an affluent domestic market. One way to meet these needs is make acquisitions overseas.

EARLY STAGES. With its 1.3 billion inhabitants, China may find that social stability depends upon its ability to find growth abroad. "Establishing an economy based on broader competitive advantage in the global markets is an imperative. Failing to do so could foster unrest and uprisings on a huge scale," says Jeff Williams, head of investment bank Jeff Williams & Co.

Considering the economic pressures, China's role in the global M&A market is just beginning. Here's a look at some companies that might make appealing targets for China's newly acquisitive giants. No one's suggesting that any of these are in talks. But given the demands of the Chinese economy, these sorts of combinations might make a lot of sense.

Natural resources

Oil. China's need for oil has been a key factor in the rise of petroleum prices over the last few years. Its economy grew a thumping 9.4% in 2004, more than twice the pace of growth in the U.S. and three times that of Europe. While the government is trying to restrain growth before inflation kicks in, the demand for oil remains enormous. China produces about 3.4 million barrels a day, yet it consumes upwards of 5 billion barrels, according to U.S. government reports.

China is looking to buy direct access to oil reserves. Unocal, for example, would boost CNOOC's reserves by 80%, thanks to its investments in projects like a $3.6 billion Caspian pipeline that began operations in May. "I wouldn't be surprised to see China's oil companies approach troubled developing nations like Ecuador and Nigeria and offer to swap cash for access to their oil reserves," Williams says.

Lumber. China also has a huge need for lumber. The value of its imported lumber doubled between 1997 and 2003, from $6.4 billion to $12.9 billion, according to a report by the International Forestry Review. The country will probably be on the lookout for lumber companies that can convert trees to building materials. Companies with big lumber holdings, such as Temple-Inland (TIN) in Austin, Tex., could emerge as targets.

Consumer goods

As China's consumer culture evolves, its population wants the same products and services that people in other countries desire. The demand for furniture, clothing, and appliances is huge. Williams predicts lots of M&A activity in the consumer sector. He thinks Henredon Furniture Industries in Morganton, N.C., might make a good acquisition for companies in China.

In the clothing sector, Williams says Genesco (GCO), which produces brands such as Dockers and Johnston & Murphy, might be appealing. And he thinks that Sara Lee's (SLE) apparel brands, which include Champion and Hanes, would be "perfect" fits for Chinese makers.

If Haier succeeds in its bid for Maytag, it will help China meet its demand for consumer appliances. And if not? Perhaps tool maker Black & Decker (BDK) would do just as well.

Manufacturing

During the past decade, China has emerged as the world's hottest manufacturing center. Thanks to a huge supply of cheap labor, it was able to undercut rivals in parts of the world where unions and local economic conditions have pushed wages much higher. But that sort of advantage, once enjoyed by Europeans, Americans, Japanese, and Koreans, is fleeting. That's why Chinese companies are lowering their costs to create greater scale and scope and trying to sell to the higher end of the market.

Autos. China is trying to crack the global market for cars and tracks, just as Japan and Korea did in the '70s, '80s, and '90s. Big Chinese auto makers such as Shanghai Auto might try to acquire a brand from a major global manufacturer. One possible target is GM (GM), which needs to restructure to boost profitability. It might try to do that by selling off a lagging division, just as IBM (IBM) sold control of its PC business to China's Lenovo in a $1.25 billion deal completed earlier this year.

GM might want to sell or swap Buick, which is the most popular car brand in China, but out of favor elsewhere. Or DaimlerChrysler (DCX) might want to unload a brand such as Dodge.

Railways. The rail business also presents opportunities for acquisitions. Williams says he wouldn't be surprised if GE (GE) was willing to discuss selling the locomotive unit of its transportation business. And Canadian industrial conglomerate Bombardier might be willing to sell its rail business to focus on other products such as planes and snowmobiles.

As China's economy continues to race ahead, its companies will one day resemble the industrial giants that emerged from Japan and Korea in decades past. Just as Toyota and Honda are mainstream auto brands, and just as LG is viewed as a high-end maker of cell phones and kitchen appliances, China's behemoths will soon step onto the global stage in a big way. Rosenbush is a writer for BusinessWeek Online in New York


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