China ready for acquisition and merger experts

FOLLOWING a tide of flotations of Chinese stocks overseas, analysts believe mergers and acquisitions should emerge as the next market in China for the foreign financial community.

Alfred Shum, Ernst & Young's executive partner for China operations, said the sheer size and number of China's state-owned enterprises meant there was a huge untapped market for merger and acquisition-related services.

As China tried to build a modern corporate system, it was inevitable that many conglomerates would emerge and at the same time other smaller entities would be restructured.

''There are more than 100,000 state-owned enterprises in China, and many of the less efficient would be the targets of merger and acquisition bids,'' Mr Shum said.

As corporatisation in China was carefully controlled by the Government, the process in China would prove more successful than the dramatic privatisation that was under way in eastern Europe.

Mergers and acquisitions among listed companies in China were not expected to develop rapidly - a Shenzhen company was fined by the regulatory authorities during its bid to take over the control of a Shanghai firm last year.

But Mr Shum believed the acquisition of unlisted companies by listed companies would become more common.

With access to the capital market, listed companies could expand their existing operations rapidly by acquiring other companies which were in the same industry, or in an industry that the listed firms intend to enter.

The second source of mergers and acquisitions would come from foreign investors that increasingly relied on buying an entire Chinese firm as a quick way to establish their presence in the market.

This is in contrast with a few years ago when foreign investors preferred to find a Chinese partner and set up a new operation under the form of joint venture.

Mr Shum said mergers and acquisitions would help speed up the reform of state-owned sector because less efficient companies would be able to improve themselves under a new system.

Mergers and acquisitions of state-owned enterprises would also be welcomed by local governments, which had to pay for debts of loss-making enterprises.

In addition, China's entry to the General Agreements on Tariffs and Trade (GATT) would put the less efficient state-owned sector under direct challenge from more effective foreign counterparts.

Mergers and acquisitions of enterprises provided an opportunity to improve the efficiency and competitiveness of these enterprises.

Although several cities had established centres for the transfer of enterprise ownership, foreign professionals said information was not enough for them to get access to the centres.

Ernst & Young, which is one of the seven foreign accounting firms allowed to set up joint-venture operations in China, was involved in the listing of Maanshan Iron & Steel Co in Hong Kong.

Stephen Chang, managing partner of Ernst & Young's China operations, said the firm had obtained the mandate for helping three other companies on overseas listings.

They were Wuhan Iron and Steel, Shanghai Huixing Shipping Co, and Nanjing Panda Electronics Co.

Mr Chang said as Huixing and Panda's businesses were more centralised, they could be ready for listing in the middle of this year.

Wuhan Iron and Steel could also be expected to list this year.