Chinese Offshore Investment

How Chinese buyers are soothing fears amid record spree of overseas deals

Pledges to retain existing management and preserve independent oversight are part of China’s winning formula

PUBLISHED : Monday, 24 October, 2016, 3:05pm
UPDATED : Monday, 24 October, 2016, 8:27pm

When a Chinese home-appliance company announced a plan in May to become the largest shareholder in one of Germany’s most advanced robot manufacturers, the backlash was immediate.

German politicians and European officials denounced Midea’s offer for Frankfurt-listed Kuka, whose robotic arms assemble Airbus jets and Audi sedans. In a rare public appeal for alternative bidders, Germany’s economy minister argued that Kuka’s automation technology needed to stay out of Chinese hands.

Many Chinese companies have become much more adept at navigating international deals
Nicola Mayo, Linklaters

And yet in two months, Midea pulled it off. Thanks to a combination of political courtship, guarantees on jobs and security, and support from influential customers like Daimler chief executive Dieter Zetsche, Midea overcame knee-jerk opposition to the deal. By July the appliance maker had secured an 86 per cent stake, valuing Kuka at 4.6 billion (HK$38.8 billion).

The experience showed how some Chinese firms are learning to soothe misgivings about the country’s record US$207 billion overseas buying spree. While Sinophobia isn’t yet a thing of the past and practices among Chinese buyers vary widely, merger and acquisition (M&A) professionals say a new generation of savvy dealmakers is starting to emerge from the world’s second-largest economy.

“Many Chinese companies have become much more adept at navigating international deals in the last few years, and at soothing the concerns stakeholders might have,” said Nicola Mayo, a partner at London law firm Linklaters who specialises in China-Europe transactions. “In many of the larger Chinese companies, you’re dealing with managers who were educated abroad or have worked in international firms. They understand the concerns about China and know they need to move carefully.”

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That growing fluency is making Chinese businesses a more powerful force in the M&A world than ever before, particularly in Europe, which has accounted for nearly half of China’s overseas takeovers this year. While that’s a potential boon for slow-growth Western economies in need of fresh sources of capital, it also means stiffer competition for European and US bidders at a time when global equity prices are already near record highs.

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China’s most sophisticated bidders have developed a consistent playbook to minimise any backlash. Hostile takeovers are virtually off limits, while friendly offers are often revealed only after years of informal courtship. There are pledges to keep existing management teams in place, investment guarantees lasting half a decade or more and steps to preserve independent oversight.

For the Kuka deal, Midea pledged to maintain existing plants and jobs until at least 2023 – far longer than the norm for similar deals – and promised to keep customer data walled off from the Chinese parent company. It deployed vice-president Andy Gu, a social scientist by training with a doctorate from Cornell University in the US, to make those assurances face-to-face with the German economy minister’s senior staff, sources said. 

Meanwhile, Kuka helped ease any concerns among its customers, they said.

Midea has been quick to pounce on other opportunities as well. The Chinese company sent a letter stating its willingness to acquire General Electric’s appliance arm within 24 hours of an existing deal with Electrolux falling through, sources said. Though it lost in the end, the eventual winner was domestic rival Qingdao Haier, with a US$5.4 billion bid, rather than a more-established Western competitor.

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This year’s announced deals have also included China National Chemical’s (ChemChina) US$43 billion takeover of Switzerland’s Syngenta, which would be the biggest-ever foreign acquisition by a Chinese company. Tencent led a US$8.6 billion deal in June for Finnish video-game maker Supercell, while China Oceanwide said on Sunday it would buy US insurer Genworth Financial for US$2.7 billion.

The “acquisition wave out of China is still broadening and deepening”, said Joseph Gallagher, the Hong Kong-based head of Asian M&A at Credit Suisse.

While Chinese mega-deals have spanned a wide range of industries, the ChemChina-Syngenta transaction may be the most instructive as a guide to the country’s new approach to acquisitions. The offer created almost no controversy in Syngenta’s home base of Switzerland, even as it gave a state-controlled Chinese company a central role in the global food industry.

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The lack of opposition stemmed in large part from Syngenta’s enthusiastic endorsement of the deal, people involved in the transaction said. The takeover was structured to keep existing managers in their jobs, retain a Swiss headquarters and work towards a future re-listing of the company.

Early in negotiations, ChemChina asked Syngenta to propose a governance structure for the combined company, giving the takeover target an unusual lead role in the deliberations, the sources said. ChemChina pushed back on a few minor elements, but the structure proposed by Syngenta was largely incorporated in the final agreement, they said.

Syngenta spokesman Leandro Conti said the ChemChina offer ensured continued choice for growers at a time when considerable consolidation was taking place in the industry. 

“It is not a merger, but simply a change in share ownership,” Conti said. “It also ensures that ‘Syngenta remains Syngenta’.”

The process is not always smooth. For all the offers by a ChemChina or Midea, there are also deals like Anbang Insurance’s aborted US$14 billion bid for Starwood Hotels & Resorts Worldwide in April. Chinese property billionaire Wang Jianlin’s acquisitions in the US entertainment industry have triggered calls from US lawmakers for scrutiny of Chinese influence in Hollywood.

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Then there’s the 740 million offer for the AC Milan soccer team by Sino-Europe Sports Investment Management Changxing in August. The little-known Chinese consortium provided a false bank report during its initial negotiations, according to sources. Sino-Europe Sports said last month it “does not confirm it has ever sent such a document”.

Even the ChemChina deal has not been free of hiccups. Syngenta shares initially fell after a report this monththat China’s government was planning to merge ChemChina with Sinochem Group. The revelation came just as ChemChina and Syngenta were entering the final stages of completing their own deal, sparking concern that the transaction could face delays or further regulatory scrutiny.

The Chinese government’s influence on corporate decisions “can make sellers nervous”, said Hernan Cristerna, the global co-head of M&A at JPMorgan Chase, which advised Syngenta. He added that it was too early to tell whether Chinese acquirers would follow through on the promises they made to secure recent takeovers.

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“There’s a large vintage of transformative deals from the last 18 months where market participants will monitor” how well pledges are honoured to provide hints of future behaviour, Cristerna said.

Despite the uncertainties, China’s growing interest in foreign markets and technology means more cross-border takeovers are inevitable. Policymakers in Beijing have encouraged local companies to acquire overseas expertise as they try to shift the economy’s focus from low-end manufacturing to hi-tech industries and consumer demand.

“There’s no reason why China won’t look back at this as the trickle before the stream turns into a river,” said Kenneth Courtis, a former Goldman Sachs banker who is now chairman of advisory firm Starfort. “It’s going to happen and some will resist it for a while, but they will come to terms with it.”