Cause Analysis of Failure of China Enterprise Overseas M &...

M & D FORUM
Cause Analysis of Failure of China Enterprise Overseas M & A
LIU Hong, QIAO Xiao
School of Economics, Capital University of Economics and Business, China
[email protected]
Abstract: Since the financial crisis, China's Overseas M & A set off an upsurge, but the process has a
mount of difficulties, so it naturally became the focus of research in domestic. Based on repressor that
encountered by china’s enterprise during overseas acquisitions in recent years, by using empirical
methods, to carry out a study of the reasons about the failure of China's overseas M & A , use three
major factors ,namely, the subject of overseas mergers and acquisitions, motivation, industry, as the
perspectives to make a in-depth analysis, and concluded that the main state-owned, strategic
resource-oriented and highly concentrated in energy, mining industry and other factors is the main
reason for the setback we have met. Then proposed many policy recommendations, to change the mode
of mergers and acquisitions from a one-time large-scale to a progressive acquisition mode, the
government should assume its service functions, to encourage private enterprises "going out" and put
more emphasis on technological innovation.
Keywords: Overseas mergers and acquisitions, Bottlenecks, Measures
1 Introduction
Overseas M & A allows companies acquire scale and synergy within a short time, while enhancing our
competitive advantage in the global value chain. However, in recent years, although China's enterprises
showed trend of expansion of overseas M & A, they suffered from various obstacles. In some resources
and energy M & A cases, was shut out by host country as reason that strategic assets were involved; for
some industries related to high-tech, was rejected because there was a threat to national security; and for
China's state-owned enterprises at the head of overseas mergers and acquisitions, also set the hurdle for
the block, the host company and the government has seriously hindered China's "going out" strategy and
the country's economic development. Therefore, the analysis of the failure of mergers and acquisitions
and to make appropriate policy recommendations will plays a very important role for enhancing our
international competitiveness of enterprises and national economic development.
2 Current Situation and Characteristics of China's Overseas M&A
From the development process of China overseas M&A for several years, they have a very obvious
feature, mainly summarized as the following aspects:
2.1 China's overseas M & A accounting for over 8% of the global scale
China's foreign exchange reserves ranking first in the world, and in overseas M&A, the amount involved
is also quite large. Many of China's enterprises overseas M&A involved large amount, in addition to
high-value targets themselves, many of them are caused by the idea that it was owned by government
and there will be a strong follow-up state finances, so it will propose a much higher quote than the
market-driven price (Table 1).
Time
2005
Table I: The list of some China enterprise overseas M&A cases
Unit: One hundred million U.S. dollars
Chinese Acquirer
Foreign M&A targets
the amount of Type of M&A
M&A
Lenovo
IBM
17.5
horizontal
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2006
2007
2007
2008
2008
2009
2009
2009
2009
2009
2010
merger
Sinopec
Russia Udmurtneft
35
horizontal
merger
CNPC
PK oil company of Kazakh
41.8
horizontal
merger
Aluminum Corporation
NPC
8.6
horizontal
Of China Limited
merger
Sinopec
Petro-Canada Tanganyika
17
horizontal
Oil
merger
China Oilfield Services Norwegian Awilco Offshore ASA 37.77
horizontal
Company
merger
Baosteel
Australia Mining Aquila
2.6
horizontal
merger
CNOOC
Indonesia’s assets of Spain's 5.91
horizontal
Repsol
merger
Minlist
Australian OZ Minerals
17
horizontal
merger
Sinopec
Addax
88
horizontal
merger
AVIC XAC
Austria FACC
1.3
horizontal
merger
Sinopec
ConocoPhillips
46.5
horizontal
merger
Source: China News, Phoenix, Sina Finance .etc.and finishing by the author
2.2 State-owned enterprises M&A accounted for more than 70% of China's ODI
So far, executive body of China's overseas M&A, mainly are state-owned enterprises, all walks of life
basically showed this feature. But in recent years, a small number of private leading enterprises have
begun to actively participate in, such as Wanxiang, Huawei and so on. China's status quo is decided by
the respective characteristics of the main body, the state-owned enterprises can play a better role in
overseas markets.
2.3 The amount of M&A in the resources and energy industry accounts for about 66% of the total
amount of ODI in China
China's shortage of resources, making China's Overseas M & A focused on this area, forming a
resource-oriented trend. However, the decision-making that we made based on the consideration of the
enterprises development was regarded as resource-saving by foreign, making the process of our
enterprises overseas M&A difficult.
3 China's Failure in Overseas M & A and the Analysis of that Reasons
The international financial crisis has brought a greater influence for every business, many of them
include some overseas companies have a large number of patented technologies, but also in trouble due
to funding constraints. In order to maintain normal operations, these companies are in full swing to find
the strong multinational corporations, to sell part or all of the stake. Additionally each government in the
crisis is relatively relaxed restrictions on technology-based M&A. However, despite this, the result of
China's overseas M & A was unsatisfactory. (Table 2).
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Time
2002
2004
2005
2008
2009
2005
2008
2009
2010
2011
Table 2: The list of some representative failed cases of China Overseas M & A
Some cases of overseas M &A of China enterprises
Results Reason
CNPC acquisition of Slavic oil companies of Russian
Failed
economic
security
Minmetals acquisition of Noranda
Failed
economic
security
CNOOC acquisition of Unocal
Failed
economic
security
Minmetals acquisition of Gaby copper of Chile
Failed
economic
security
China Nonferrous Metal Mining Group bought a majority stake of Failed
economic
Australia's Lynas
security
Huawei acquisition of Marconi
Failed
national
security
Huawei acquisition of 3Com
Failed
national
security
Aluminum Corporation Of China Limited injection Rio Tinto
Failed
national
security
Huawei acquisition of Motorola's mobile network infrastructure department Failed
national
security
Huawei acquisition of 3Leaf Systems
Failed
national
security
Source: China News, Phoenix, Sina Finance.etc. and finishing by the author
Table 2 listed some failures in recent years, but enough to illustrates the large number of China's
enterprises overseas M&A that die a natural death, according to data that released by international
reputable financial provider Dialogic, in 2009, the failure rate of China enterprises cross-border M&A
(referring to the ratio that cross-border transactions have been announced to be withdrawn, rejected or
left to its expired) is the highest in the world, up to 12%; 2010, this ratio fell to 11%, but still the highest
in the world. In contrast, the failure rate of U.S. and British companies in overseas M&A in 2010 are
only 2% and 1%.
China enterprises overseas M&A has a strong momentum, but from part of the cases that Table 2 shows,
a considerable part of the M&A is failed, so in order to better to go out of China's enterprises ,to take
advantage of this big resources international market, the analysis of the setback is an important task we
face.
3.1 M&A is blocked in the resource field
In 2005, CNOOC spent generous price of $ 18.5 billion to acquire US. Unocal Oil Cor., under the
circumstances of having tug of war with Citroen, intervented by U.S.government, withdraw the
acquisition finally; in 2003, CNOOC acquired shares of the Caspian Sea oil fields, but of mutation, Italy
ENI decided to exercise its priority of purchase right of Caspian oil and gas projects, this decision made
CNOOC lost the right to purchase the item, defeat in the forthcoming victory, although it is a normal
commercial decision, but they are all related to strategic resources.
3.2 M&A is blocked for technology-oriented motivation
In 2010, the event of Huawei's acquisition of 3Leaf Systems is well known in the industry, it is a small
invest Chinese companies did in the U.S. (the amount of its acquisition of 200 million U.S. dollars, only
involving more than 10 3Leaf employees), such small-scale investment also received the CFIUS’s
review; reminiscent event of Caofeidian investment Group invest optical equipment manufacturers Ai
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Muke (Emcore), and rejected by CFIUS. It is easy to doubt that its goal is not the simple technical
trading, but for China's high-tech industry, this is an indisputable fact.
Over 90% of China's SMEs are almost unable to bear the huge R & D investment, while a small number
of large enterprises due to lack of R & D personnel and many other factors lead to a lack of high-tech.
Thus at the present stage we are mainly introduced high-tech from foreign related industry to meet
market demand. However, the relevant U.S. law, if foreign M&A threat the US’s world's leading in
key technology areas, it will be regarded as a threat to national security, to obstruct or even prohibited.
In view of this, China's overseas M&A in the technical industry was examined by CFIUS (The
Committee on Foreign Investment in the United States, CFIUS) is inevitable. For example, China's
Huawei, ZTE and other enterprises, as the rapid development in recent years, they has possessed
considerable influence in its field worldwide, so the technology developed countries are sensitive to our
overseas M & A, worry that China will replaced their status, and change international economic rules
that has been dominated by the Western developed countries, surpass and thus hinder their economic
development.
3.3 The identity of investors as State-owned enterprises covered overseas M&A with political color
In 2009, the failure of "Century trading" involving the amount of $ 19.5 billion between
Aluminum Corporation Of China Limited and Rio Tinto , although the direct reason is Rio Tinto share
holders reject the Aluminum Corporation Of China Limited’s injection, but then also has profound
political reasons, according to a Reuters report, a Australia's opinion poll, showed that more than half of
people think they should resist China’s acquisition of mineral resources as Australia's economic lifeline;
in 2002, Shenhua Group is preparing to invest Menggu You Tolgoi project’s development, coupled with
the involvement of Development and Reform Commission, missed finally, has become a lesson for
overseas investment project of Chinese enterprises.
Since China encourage the policy of "going out", in recent years, the main body of China's overseas M
& A is huge and well-capitalized state-owned enterprises, the main reason for this situation are two
aspects, on the one hand, the risk of overseas M&A is huge, SMEs can not take risk; other hand, many
SMEs mainly engaged in manufacturing, it's survival relies on low-cost advantage, do not need to invest
in high-cost developed countries. Thus, what we see today is overseas M&A mainly leaded by
state-owned enterprises. However, in foreign governments and the media’s opinion, because of
controlled by the state, they have been seriously up to the level of hostile takeover that threat to national
security.
State-owned enterprises overseas M & A events suffered a lot of obstacles in recent years, especially
"China threat theory" advocated by some Western media, has been accepted by many people with no
doubt, after the financial crisis, many Western developed economies, like dominoes, or collapsed, or all
the way down, China's scenery here is fine, so some people with ulterior motives, followed by shouting
"wolf ..." mixture of all these factors misled the foreign media, enterprises, especially some politicians
regard state-owned enterprises as the Chinese government-owned enterprises, believe that state-owned
enterprises represent the Chinese government, and is manipulated by the Chinese government,
politicians in some countries make cross-border M&A , the pure market-led economic behavior, rise to a
degree that threat to national security, political penetration, to obstruct China's overseas M&A.
4 Conclusion
Tide of economic globalization, any country including China can not immune. With the overall strength
of China in recent years, overseas M&A will not be hang back because of difficult and inertia. In light
of above analysis, we can conclude that: (a) As China's overseas M & A focus on resources and energy,
strategic resources is the fundamental guarantee of sustainable development for a country's economy,
therefore, acquisition of these sensitive areas is likely to cause related country’s great concern; (b)
high-tech is an important exemplification of a country's international competitiveness, developed
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countries have investment barriers, Australia’s restrictions on banks and the aviation industry, Japan’s
restrictions on electricity and nuclear energy fields, etc.; (c) As majority of M&A body are state-owned
large enterprises, therefore, be put on the hat ,"a government background", by foreign politicians with
ulterior motives, especially some Western developed countries, fear the rise of China, fear of the world
economy leader's position was replaced, under the current context of main body of China's M&A are
mostly state-owned enterprises, on the ground of that, make our enterprises suffer more suspicion and
scrutiny.
China's rapid economic development, became the world's second largest economy, which makes some
country worry about, and want to contain China, set many obstacles in many fields, including China's
road of overseas expansion, the Government use various reason to obstruct, the real reason is fear of the
rise of China and catch up. Economic development is imperative, but also the foundation of a nation to
stand in the world, we should eliminate difficulties and steady progress. As long as the government and
enterprises form an organic system of organizations based on a common interest and the same target,
policy is fair, equitable, transparent and in accordance with market-oriented operating mode, our
enterprises overseas M&A will be able to be gradual and efficient implementation.
Author in brief:
Liu Hong, professor of international trade, School of Economics of Capital University of Economics and
Business
Qiao Xiao, master of international trade, School of Economics of Capital University of Economics and
Business
Tel: 13681380363
E-mail: [email protected]
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