Chinese Firms’European Acquisitions on the Rise

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EUROPE’S undervalued assets are catching the eye of chinese firms as the focus of their acquisitions shifts from Asia and the U.S.

Europe welcomes such attention， with EU Ambassador to China Markus Ederer recently describing Europe as an ideal destination for investment while German Chancellor Angela Merkel put the topic at the top of her agenda on her most recent visit to China in September.

In the last two years， there has been a sharp rise in the number of Chinese enterprises， attracted by depreciating prices on the continent， that are investing in european companies. This is just the beginning of Chinese firms dabbling in the European market， and opportunities together with hidden risks are bound to test Chinese buyers and their targets.

Maturing Chinese Purchasers

“Two years ago， it was rare to see a Chinese company making an acquisition in Germany. However， this has changed. In the past two years， Chinese firms have made 18 acquisitions in Germany，” said Huang Yaohe， China Enterprise Funding and Acquisition Partner of PricewaterhouseCoopers. Their activities have covered minority equity investment， open market acquisition and acquiring private companies and non-performing assets.

According to Huang， though Chinese firms today have the know-how to act like mature international investors， a mere five years ago when they were just starting to dip into this area they found it difficult to clinch deals. Europeans were worried that once Chinese investors obtained the technical expertise of their firms they would close factories and flee because they lacked experience in dealing with the local workforce， investment banks and politicians.

But deals like the purchase of Germany-based global auto part supplier SaarGummi by a Chinese company in July 2011 put such fears to rest. Chongqing Light Industry and Textile Holding bought the company for 64.14 million， taking on a debt burden of 82.11 million. SaarGummi， who worked with the likes of BMW， Mercedes and Audi and employed over 4，000 workers， was on the verge of bankruptcy and a deal had to be reached quickly. Even so， the speed of management on the Chinese side aroused suspicions， and the local political parties were worried about the possible loss of jobs at a time of high unemployment. Today， reality has proved that the Chinese buyer had no intention of contributing to the high unemployment rate.

Small and medium-sized companies have become the favorites of many Chinese buyers. In the past， said Huang， Chinese enterprises mostly targeted large projects valued at billions of RMB， but now smaller projects around RMB 700 million are favored for their affordability and good quality. Huang has predicted， however， that this will change and the Chinese investment structure will become more diversified.

The growth in the two years leading up to this deal had been phenomenal. In 2010 China’s direct investment in Europe reached US $6.76 billion， doubling that of 2009， which itself had been 2.8-fold its 2008 figure. In 2011， growth was more modest， but still impressive at 22.1 percent， taking up 11.1 percent of China’s overall outbound direct investment. As these figures so clearly state， China’s investment in Europe has entered a phase of rapid growth， while the purchase volume in the U.S. has remained relatively stable.

Private Investments Stand out

China is recognized as one of the major sources of capital for investment in Europe， and policy makers in the EU are eager to attract these vital investors to spur on economic growth and fuel employment.

According to Wang Wei， president of the China Mergers and Acquisitions Association （CMAA）， a non-profit and non-governmental organization administrated by the All-China Federation of Industry and Commerce， private capital accounts for the major part of China’s rapidly-growing investment in Europe.

The CMAA organizes investigative trips to Europe participated by members from domestic enterprises and private equity investment institutions. “Usually over 40 members depart together， but very often two-thirds would stay in Europe for further investigation，” said Wang. “Official agencies in charge of investment and trade in Europe have come to China to conduct promotion activities to facilitate Chinese enterprises’ investment in Europe， and intermediaries such as private equity institutions have been even more active than the enterprises themselves. Some of these hope to become consultants for Chinese enterprises looking into making acquisitions in Europe， but most of them aim to promote their own acquisitions.” Currently， Wang added， most of the objects available for acquisition by Chinese investors are those owned by private equity institutions that bought them during the period from 2003 to 2009.

Fang Jian， a partner at Linklaters， believes that the involvement of private equity institutions has created a favorable environment for Chinese enterprises to make acquisitions in Europe. “Some private equity institutions are quite familiar with local business environment. They know how to negotiate with European fi rms， which is an ability that some domestic enterprises lack，” Fang said. Furthermore， private equity institutions can also provide fi nancing service for large-scale projects and sellers are inclined to give more credit to Chinese buyers when international private equity institutions are involved.

Chinese Buyers’ Preference

The many medium-sized and small family businesses in Europe have unique competitive edges in segmented industries， which have won them the courtship of Chinese buyers. However， it is difficult for Chinese purchasers to find targets， because owners of well-performing businesses are unwilling to sell their fi rms.

Chinese enterprises， especially large SOEs， are also setting foot in European utility industries via acquisition， something previously unthinkable. In 2009， the Greek government announced a privatization plan to reduce its fi nancial deficit， involving the sale of shares in the state-owned railway， water， post， energy and telecommunication enterprises and casinos， and China Ocean Shipping Company （COSCO） took over the Piraeus Port. China’s State Grid Corporation also acquired shares of Energias de Portugal （EDP） in similar circumstances. Now， as many European businesses and governments hit hard times， it is the perfect time for Chinese enterprises to purchase quality assets that promise stable returns. For those European fi rms demanding comprehensive overhaul to survive， however， Chinese enterprises do not yet possess the necessary management expertise.

Chinese enterprises also face powerful competition for profitable government assets from potential buyers from all over the world. Chinese buyers usually win the bid by offering higher prices than their rivals， but this should not be made a norm. They need to build their soft power and credibility. “Chinese firms should first learn to be a small shareholder or a dominant shareholder， and avoid being the sole shareholder considering the potential risks，” said Huang. “It’s important for them to have a local partner to help them become familiar with local business and political environments and business practices.”

Technology， Markets and Branding

Currently， technology-driven acquisitions are still predominant among Chinese purchases， but brand value and market are becoming increasingly weighty considerations. Chinese enterprises in the engineering machinery industry， for example， have undergone rapid development in recent years， but most are at the lower end of the industrial chain and have no say in the pricing of core components and parts such as engines and hydraulic parts. For them acquisition is an important way to obtain core technologies.

In 2008， Goldwind Science & Technology acquired Vensys， a Germanybased wind-turbine designer， whose development and design capacity has expanded Goldwind’s domestic and overseas markets. Although it has still not gained entrance into the German market， Goldwind has won multiple overseas orders of megawatt-level units by way of transfer of technology licensing.

“After gaining core techniques or brands most Chinese buyers choose to expand their domestic market instead of occupying the overseas market. Of course， if they get the chance it would be surely advisable to seize it， but the overseas market is definitely not their primary target，” Fang Jian explained.

Mentioning their recent acquisition of Weetabix Food Company， Cao Xiaofeng， chief fi nancial offi cer of Bright Food， remarked， “We’re helping the international brand enter the Chinese market， and the brand has brought us into the international market.” Xiang Wenbo， president of Sany Heavy Industry， claimed that via acquisition Sany obtained Putzmeister’s whole set of technologies and global sales network， which has been built over the past 52 years. “Previously， exports only accounted for less than 5 percent of Sany’s overall sales volume. The acquisition has helped us expand our market overseas，” Xiang said.

When it comes to branding， the situation is a little more varied. Some companies adopt the policy of maintaining the image of the existing brand when they make a new acquisition， such as when Zhejiang Geely Holdings bought Volvo， which is still seen as a Swedish brand. Others attempt to upgrade the image， but this can damage a well-established household name. Obviously， Chinese players still have a lot to learn about global acquisitions.

Stories of Chinese firms’ acquisitions in Europe are just beginning. Up to now most deals participated by Chinese enterprises are assets trusted with investment banks for public bids. Chinese firms won these deals because they offered higher prices than their rivals. They are rarely seen， like so many transnational corporations based in developed countries， hunting out promising targets and actively trying to acquire them.