Multinationals in Merger Hunt Despite Risks The Standard 20/07/04

Tim LeeMaster

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.''


 Image © Lee Ka Sing | Design by Rachel Wong