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Despite the fact that multinational mergers and acquisitions on the mainland
have been soaring in the first half, aggressive pricing, dodgy accounting
and rampant fraud are not making it easy.
Nonetheless,
multinationals increasingly regard M&As as an avenue into China's consumer
markets, a relatively fast way to expand on the mainland, where organic
growth is hindered by a limited distribution system and protective local
governments that favour their own companies.
By buying into a local
or regional brand, they can more easily gain what is called a ``footprint'',
or market presence, in as many of these fractured markets as possible.
M&As started to soar
this year with 428 transactions worth US$25.9 billion (HK$202.02 billion), a
year-on-year increase of 275 per cent over 2003 after a marked fall
engendered by the global equities slowdown that started in 2000, according
to Dealogic, a global transaction information provider.
Banking and telecom
transactions are leading the field this year, according to international
consultants KPMG.
Nonetheless, buying in
has its drawbacks as a plethora of international companies have discovered
over the decades since Deng Xiaoping opened China's borders to investment in
the mid-1980s.
Managers have
discovered the companies they bought into have been shells, or management
has been incompetent or outright crooked, and ideas tested in the open
international market have simply been stolen.
Nonetheless, ``there
are more people looking for deals than deals available,'' KPMG consumer
markets partner Nick Debnam says. ``It's a difficult market.''
Despite the
difficulties and volatility, some companies with the right stuff have been
able to make a go of it, bankers and dealmakers say.
The over-abundance of
international companies hunting in a limited marketplace has produced
unrealistic price expectations among Chinese companies looking for suitors.
``You do a transaction
that pays two times book value, then every Chinese company is going to look
for a similar deal,'' the country head of a large European investment bank
said. ``People are jumping to conclusions very rapidly, they don't realise
the value of their real assets.''
Glen Steinman,
president of M&A consultancy firm Seema International, said he has had to
bring mainland clients down from what he deems a ``Nasdaq 1999'' mentality.
``For some it's very
do-able but for others you don't have a deal.''
That was particularly
true at the apex of overheating.
``Chinese companies
were looking for too much money,'' ING Barings head of China Hong Kong
origination Andrew Wong says. ``The market was so good everyone was making
money so the price they demanded was very high.''
Some companies have
used longstanding relationships they have developed with some mainland firms
as a way around the price impasse.
Belgian-based beer
juggernaut Interbrew recently acquired 70 per cent of Zhejiang Shiliang
Brewery, with whom they first made contact in the 1980s by offering
technical assistance and management training. Some of those trainees are now
senior executives.
``We worked with them
for 20 years so it was not so difficult to work with them [on this
particular deal],'' company spokeswoman Marianne Amssoms said.
Things go more
smoothly ``if you understand your partners and if you have the right local
contacts to do so'', she said.
And better sense among
mainland companies can prevail at times.
Debnam said that
Chinese companies as a rule have deal brokers round up the highest bidders
but that does not necessarily mean multinationals are always at the mercy of
aggressive price wars. In some deals, ``the top bidder didn't win because
the lower bid offered more autonomy or less layoffs''.
But bankers are
remarkably restrained in assessing the risks of M&As in China.
``It's not so
different than other countries but you do have to be a bit more careful not
every one has a big problem,'' Debnam said. ``Things do crop up with more
regularity than more developed markets.''
Firms involved in
recent M&A transactions sing a similar tune.
``Once you start
talking to a local partner it's not that different from any other
negotiation,'' Amssoms said. ``It's in line with negotiations in the
[international] brewing sector.''
That's despite the
fact that outright fraud is a regular occurrence.
One accountant working
on China deals in consumer markets said a company's listing prospectus
differed quite significantly from the financial data they had received.
``The company said not
to worry because the IPO data was just for show,'' the accountant said.
``And that was from the company's head lawyer.''
Stories like that have
not damped enthusiasm for M&As among multinationals. KPMG said 53 per cent
of firms planning to enter China plan M&As and 38 per cent of those already
on the mainland seeking to expand plan M&A activity as well.
Finally, changes
pending in the M&A landscape like the coming slowdown in the mainland
economy will bring fantasy pricing and the more unrealistic expectations to
heel, bankers said.
``When the market
changes they [Chinese companies] will have less bargaining chips and there
will be more targets available,'' Wong said.
But quality issues
will remain.
``I don't think the
path will change,'' Wong said. ``We'll see more assets for sale, some good
and some very bad.''
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