Rise in Chinese-funded acquisitions could trigger more hurdles

"Cash rich" China companies and their global expansion ambitions to fuel mergers and acquisitions of companies, especially fading ones, but they could increasingly run into regulatory clearance issues overseas, observers say.
Written by Ellyne Phneah, Contributor

The Chinese acquisition of companies worldwide, especially "dying ones" is a trend likely to continue, and will lead to an increase in mergers and acquisitions, as well as partnerships with overseas companies, say market watchers. However, they note that this could mean a rise in regulatory challenges overseas due to national security concerns.

A Wall Street Journal report last month highlighted that Chinese companies were stepping up acquisitions in Japan, using the former's "growing wealth" to save a string of companies in the latter that were "desperate for funding". Accounting firm Grant Thornton also found that Chinese companies have also been in the spotlight in mergers and acquisitions in the technology space, with 26 percent of businesses planning cross-border acquisitions.

This is a trend that is likely to continue worldwide, Benjamin Cavender, senior analyst at China Market Research (CMR), remarked. It is a situation where there are a lot of large Chinese companies that are "cash rich" which have aspirations to expand globally and move up the value chain looking to push through mergers and acquisitions (M&A), he explained.

In many cases, these firms also know they do not necessarily have the internal expertise or know how to be effective on their own, so they are looking to acquire talent and gain access to technology through acquisitions, he said.

This trend is also reminiscent of when Japan had been "flush with cash" in the 1980s, Dan Olds, owner of The Gabriel Consulting Group, remarked. He added that Japanese firms "went on a shopping spree" which included some of the most well-known names in global business, along with real estate, mineral rights and other assets.

Chinese companies will continue to be opportunistic and buy stakes in companies that have problems, Michael Yoshikami, CEO and founder of U.S.-based Destination Wealth Management, noted, adding that this is already seen in the automotive industry and there is no reason why it will apply to the technology sector.

"It is likely that there will be more partnerships between U.S. companies and Chinese firms when capital is needed and global expansion plan is required for market penetration for the software or hardware product," he said.

They can also bring together sets of companies and complementary technologies in combination, which will give them an advantage in the world market, Olds added. The Chinese ownership will bring exposure and access to China's low cost manufacturing and vast customer base, he said.

"China has an additional challenge, a political one: M&A deals of significant size usually require regulatory clearance, in most countries. In the US and the EU, there has been reluctance--bordering on paranoia--about allowing Chinese-driven deals.."
-- Matt Walker,
principal analyst,
Network Infrastructure Telecoms,

Rising obstacles, laws against Chinese companies
However, there are also concerns around security over technology deals, Yoshikami warned, citing recent accusations by the U.S. that China was engaged in cyberspying. That said, nationalist viewpoints should not be underestimated and this will definitely impact investments by China in the technology sector, he noted.

Matt Walker, principal analyst at Ovum's Network Infrastructure Telecoms, had a different take. China would face an additional "political" challenge of regulatory clearance needed for M&A, he pointed out, citing that in the U.S. and Europe, there has been reluctance over allowing China-driven deals due to paranoia.

It is also expected that there will be more competition law against Chinese companies, and they will continue to face political oppression in some overseas markets, Walker noted.

Some of the opposition will be legitimate based on concerns about "playing fields not being level", while others will be driven by rivals looking for an edge, and willing to lobby politicians to get it, he explained.

Balanced regulatory approach needed
However, foreign investment is crucial in countries trying to grow or revive their industries, so it is important for countries to maintain a transparent and robust approach toward the use of competition law to instill investor confidence, Lim Chong Kin, head of Drew & Napier's competition and regulatory practice group, pointed out.

"Using competition law to block foreign entry discriminatorily may cause existing investors to reconsider their long term commitment to a country as there is always the fear that competition law can be used against them for non-legitimate purposes," he said.

The function of competition law is to protect the competitive structure of markets and not as a tool to "protect national champions or administer nationalistic policies," Lim pointed out. As such, if there are national security concerns, it is better for these to be directly addressed by specific security agencies rather than through the inappropriate use of general competition law by competition authorities, he noted.

Being a large market, Chinese ownership can give ailing large scale technology companies such as RIM and Nokia "a new lease of life", Olds noted. The combination of new capital and access to China's market could turn these brands around, he explained.

However, Walker was less optimistic over whether Chinese funds would be the answer for dying companies, maintaining that these companies had to "save themselves".

"Their problem is not a shortage of deep pockets, but a widespread lack of confidence in their direction," he said.

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