All About China's Overseas M&A Push

Amid the most severe crisis on Wall Street in more than half a century, the Bank of China announced Sept. 18 it will take a 20% stake in La Compagnie Financière Edmond de Rothschild of France, a family-held wealth management and banking business. This 236.3 million euro ($341 million) investment -- representing the first large-scale move by a Chinese bank into Europe -- was big news on its own. But it also was the latest example in a huge wave of investment by Chinese enterprises in foreign-based firms.

In the first six months of 2008 alone, Chinese outbound mergers and acquisitions, or M&A, reached $32 billion in 102 deals. The numbers eclipse the entire year of 2007 ($26 billion from 166 transactions) and dwarfs preceding years. As of mid-2008, China's total cumulative outbound investment approached $150 billion, and the rate of growth is unlikely to slow in the near to medium term.

Chinese companies have many reasons for undertaking cross-border deals. Some of the most common motivations include gaining access to resources, brand building and strategic rationale. Recent cross-border deals outside of the resources arena have also stemmed from Chinese firms wanting to move up the value chain or marching into international markets to serve their clients who are already outside China. For example, Lenovo's acquisition of IBM's (IBM Quote - Cramer on IBM - Stock Picks) laptop business allowed it to gain access to global branding and distribution. Still other Chinese companies have made acquisitions in order to enhance their operations, with such notable examples as Chinese car manufacturers acquiring U.S. or European auto parts companies and even well-known car brands (such as Rover and MG).

"A growing number of Chinese companies realize that their customers are globalizing and require services overseas," notes Raphael (Raffi) Amit, professor of management and academic director of The Wharton Global Family Alliance. "In order to remain competitive and hold on to their customers, these companies must establish a global footprint. Consider, for example, the issues faced by a leading IT services company based in mainland China whose customers include financial institutions that are establishing a global network of branches. ... The IT services company is following its clients and through M&A activity will be establishing its capacity to service the financial institutions and remain competitive. This example illustrates the foresight and strategic thinking of senior managers of leading Chinese companies who are, in many cases, learning how to operate outside of China. In my view, we are at the beginning of a globalization trend of Chinese enterprises."

So far, most of the cross-border deals have involved large, publicly traded Chinese firms that used to be state-owned enterprises. For most of these companies, the Chinese government is still a substantially large shareholder (in some cases up to 70-80%). "Because of these companies' critical mass, and given that they enjoy government policy directives and support, it is logical that they have been on the forefront of China's globalization efforts," says Erik Bethel, vice president of Shanghai-based merchant bank ChinaVest.

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