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Cathy Holcombe

Peggy Sito

In a deal expected to open the door to wider mergers and acquisitions (M&A) activity in China, Emerson Network Power of the United States has bought out a mainland private enterprise.

The US$750 million transaction is believed to be the first 100 per cent sale of a private Chinese company to foreign investors.

Most investments in China businesses have been through joint ventures but a trend for full buy-outs, even of state enterprises, is expected to ensue as China prepares to join the World Trade Organisation.

'There are not too many 100 per cent deals by foreign investors. That's one of the good things happening from WTO,' M&A Asia  deputy editor Allen Lee said.

China is becoming a market of hope for investment bankers suffering from a sharp downturn.

M&A deals in Asia excluding Japan have fallen more than 40 per cent in the first nine months of this year, but China business is growing.

Banking sources said a deal worth more than three times yesterday's announced acquisition could be seen later this year - again the buyer would be foreign and the sale 100 per cent, but the company would be a state-owned enterprise.

The employee-owned company, Avansys Power, provides telecommunications and data network power conversion products to mainland telecommunications groups including its parent, Huawei Technologies.

A spokesman for Huawei said capital raised would be used for research and development in its core telecommunications equipment business.

He said the company had been competing with foreign rivals since it was established in 1988 'but the competition was expected to intensify after China's WTO entry. Therefore, we need to make ourselves more internationally competitive'.

Investors entering China's market have traditionally relied on a joint-venture partner, partly because that was largely the only option open to them, but also because mainland partners brought contacts and helped cut through bureaucratic red tape.

Joint-venture partners have a reputation for sometimes offering as many headaches as help, one of the reasons more foreign investors may opt for full buy-outs as the landscape liberalises with WTO.

Still, sensitivities remain, particularly for sales of state assets to more developed foreign rivals.

The Huawei deal was referred to not as an acquisition but as a 'share transfer' in Chinese, and participants tried to keep a low-profile. Neither JP Morgan, which acted for Emerson, nor Morgan Stanley, which advised Huawei, commented.

'What's remarkable to me is that the various regulators and policy-makers in China are allowing this . . . sale of business to overseas companies. But throughout the region regulators are lightening up,' an analyst said.

Like most things in China, the process was not always smooth.

Insiders said the deal took a long time to close as the parties 'had to deal with an amazing number of different regulatory bodies'.

While the deal size does not even put it in the top 10 M&A deals in Asia, excluding Japan, this year, it brightens the outlook for M&A in China.

This year foreign investment banks helped bring about two large M&A deals in which both seller and buyer were mainland companies, including Huaneng Power International's takeover of another listed power group.

There were $71 billion in M&A transactions in Asia excluding Japan this year, down 41.53 per cent from $131.77 billion for the same period last year, according to Thomson Financial/First Call.



Emerson deal marks first 100pc sale of China firm