Foreign firms curb mainland pursuits

PUBLISHED : Wednesday, 26 November, 2003, 12:00am
UPDATED : Wednesday, 26 November, 2003, 12:00am

Chinese companies have seized the initiative in domestic M&A activity

Mainland companies are more likely to be bought out by a domestic rival than a foreign multinational, as increasing competition forces businesses to consolidate.

Deals between mainland companies accounted for 30.8 per cent of all mergers and acquisitions (M&As) in the first nine months, up from 20.7 per cent five years ago, according to a report by Todd Marin, JP Morgan's head of Asia-Pacific M&As.

Purchases of mainland firms by foreign multinationals fell to 15.8 per cent of transactions, down from 27.2 per cent five years ago.

JP Morgan expects the trend to continue because the privatisation drive and increasing competition are pushing unrelated domestic firms into each other's arms.

'The central government has issued numerous directives instructing local governments at various levels to loosen their control of state-owned enterprises,' the report said.

'Many less efficient enterprises have been acquired by their larger and more efficient competitors,' as illustrated by the continuing consolidation of the country's three leading airlines, China Southern, China Eastern and Air China.

Consolidation has also hit the steel industry, with No1 producer Baosteel vowing to squeeze into the ranks of the world's top-three steel firms by 2010 through acquisitions.

China has seen US$24 billion worth of M&A deals this year, compared with $29 billion last year and $9 billion in 1998. Domestic M&A transactions rose to $7.4 billion from $5.4 billion and $1.9 billion, respectively.

In addition, the government has accelerated the restructuring of state enterprises, in part due to the country's entry into the World Trade Organisation. Examples include the break-up of China Telecom Corp into northern and southern units and the restructuring of State Power Corp.

'With many industries still extremely fragmented and in need of a rational competitive environment, there is fertile ground for domestic consolidation plays,' the report said.

The traditional deal in past years involved a foreign multinational trying to gain entry into China by snapping up a mainland company. That pattern has been changing as multinationals weather the global downturn.

'Despite the increasing interest of multinational companies in China, acquisition of Chinese companies by multinational companies has remained essentially flat in the past three years,' the report said.

'This is due to the fact that multinational companies have been distracted by the economic challenges that they face at home.''

Foreign companies have made US$3.8 billion in acquisitions in China this year, down from $5.4 billion last year and $2.5 billion in 1998. However, JP Morgan cautioned the figures for cross-border mergers and acquisitions did not include partnerships.