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JULY 27, 2005
By Steve Rosenbush China's Global Urge to Merge Acquisitions and international investment holds the key to high wages, job growth, and productivity -- all crucial to domestic tranquility Just a few weeks ago, it appeared that two Chinese companies were on the verge of making significant acquisitions in the U.S. Now, both deals are in peril. China-based appliance maker Haier (HRELF ) appears to have dropped out of the bidding war for Maytag (MYG ) in the face of a higher offer from Whirlpool (WHR ). And China National Offshore Oil's bid for energy company Unocal (UCL ) has stalled in Washington, where political sensitivities over natural resources always run high. Nonetheless, China remains poised to become a major player in the global mergers-and-acquisitions scene. Driven by fundamental economic and political needs, companies based in China will likely attempt larger deals over the next few years, especially in the technology arena. RURAL STAGNATION. The primary driver of China's M&A scene is social and political in nature. Beijing is worried about the prospects for political unrest. John Rutledge, a former economic adviser to President Bush, says disturbances and even riots in China are more common than many people in the West understand. While the Chinese leadership may not have to run for reelection, "it knows it can't hold onto power without raising the standard of living," says Rutledge, who now runs Rutledge Capital. Despite China's stunning economic growth during the past few years, the economic boom has yet to reach rural areas, where most of the country's 1.3 billion people live. Wages in the industrialized coastal cities, where about 300 million people reside, have been growing 10% to 20% a year and total the equivalent of about $3,300 annually, according to David Liu, managing director at investment banker Jefferies & Co. Liu says wages among the 1 billion people who live in the interior add up to about $352 a year -- approximately one-tenth of what workers in the cities make in trades such as construction. PUSHING PRODUCTIVITY. Through M&A, China can not only create economic growth but also help boost employment growth and raise wages. One part of that strategy involves Chinese companies buying troubled U.S. ones such as Maytag. With wages in China so much lower than those in the U.S., such deals also allow Chinese management to return broken-down U.S. companies to profitability, according to Liu. But that game can only be played for so long. Wages in China will rise over time, and other low-cost centers of manufacturing, such as Indonesia or various states in Africa and the Middle East, will emerge. To maintain its competitive advantage, Chinese companies must acquire technology that will make the country more productive -- the real key to improved living standards. TOP-TIER BUYS? That was the thinking behind Chinese computer giant Lenovo's purchase of IBM's (IBM ) PC division earlier this year (see BW Online, 5/9/05, "Lenovo and IBM: East Meets West, Big-Time"). It wasn't for the brand, which Lenovo only can use for a few years. It was all about the technology, according to Liu, who heads up the company's China business. Bigger tech deals are on the way. "Chinese companies need to acquire top-tier technology in the U.S. and Europe. Buying second- and third-tier companies doesn't really help, because they don't boost productivity. What they really want to buy is Intel (INTC )," Rutledge says. LARGER COFFERS. The process doesn't have to occur overnight. Chinese leaders in business and politics, unencumbered by democratic elections and quarterly earnings expectations, can afford to wait more patiently than their counterparts in the U.S. And a lot can change in five years. The Lenovo deal would have been unthinkable five years ago. China certainly possesses the financial wherewithal to make it happen. With $750 billion in liquid securities, the government has plenty of cash on hand. And the revaluation of the renminbi will strengthen the value of that currency in relation to the dollar, making it easier for Chinese companies to buy assets in the U.S. (see BW Online, 7/26/05, "China's Revaluation: Don't Fret"). Formidable roadblocks to big-tech deals would exist. CNOOC's Unocal bid has triggered a review in Washington that could drag on for the rest of the year, or longer. And it's not clear that Unocal, which has a large percentage of its oil reserves in Indonesia, not the U.S., is really so crucial to U.S. strategic interests. The political opposition to a takeover of a major U.S. tech company may prove even greater.
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