Chinese M&A activity is still in its infancy
Chinese purchases of European and North American assets have dominated the headlines of late, but deal volumes are low, underscoring the nascent nature of foreign investment flows out of China.
Chinese M&A activity took a leap forward on Monday when state-backed China National Offshore Oil Corporation (CNOOC) closed the $15.1 billion acquisition of Canadian company Nexen, the largest Chinese acquisition of a foreign energy company to-date. China will secure access to Canada’s abundant oil and gas reserves with the aim of meeting burgeoning domestic demand, not to mention access to advanced technological expertise in the field.
Chinese M&A activity has had a lot of coverage of late. With the downturn in the global economy, cheap European and American assets have created opportunities for Chinese corporates to gain a foothold in the west and successful examples, such as Chinese automotive manufacturer Geely’s acquisition of Europe’s largest car maker, Volvo, in August 2010 have dominated the headlines.
But Chinese M&A activity in North America and Europe is in its infancy, with China's corporate culture not yet up to speed with the demands of international expansion, claim bearish analysts.
As Alex Eymieu, partner at CTPartners, Financial Services, Greater China, tells Euromoney:
|"By and large Chinese companies are buying distressed assets while they are not equipped to manage or integrate them. They do not use the right consulting firms for proper due diligence and integration planning nor do they have the right international infrastructure to manage the new assets. As a result, there is a high rate of failure when it comes to Chinese companies buying European assets"|
His note of caution continues:
|"Chinese companies may underestimate the costs involved and the difficulties surrounding integrating their companies with those in Europe and America. Cultural differences and languages are issues but also regulations and labour laws can create barriers for Chinese companies hoping to buy cheap European assets"|
And even though landmark deals such as CNOOC’s acquisition of Nexen grab the headlines, deal volumes this year have been modest, amid the eurozone crisis. According to Dealogic, in 2010, there were 133 M&A deals in North America and Europe led by Chinese acquirers, worth $71 billion. In 2011, although the number of deals announced reached 195, the volume decreased to $43 billion while 11 deals worth $9.5 billion were withdrawn from the market that year. Eymieu concludes:
|"The outflow of capital from China only really began few years ago, and the number is still small. [Deals by China amount to] around half the amount than any European country would spend in a normal year and insignificant compared to what the American companies would be spending when buying assets in Asia. The only reason there is a lot of talk about cross border M&A especially that from China into the west is because it is new, growing and the activity pattern is shifting. However, it must not be forgotten that volumes are still low and successful examples are hard to come by"|