The government-owned agrochemical firm, China National Chemical Corporation (ChemChina) announced an all-cash proposal to buy Swiss rival, Syngenta for $43 billion. This deal is expected to improve China’s food production. Now, the world is asking China, “How?” and “Why?”
China’s GDP hit a 25-year low in 2015 so why does the government still want to support such a large acquisition while the economy is declining?
The Chinese government has an objective to diversify its overseas industrial sector. Regardless, these deals do not make financial sense. All Chinese companies that are owned by the Chinese government have a mandate to go overseas for these purchases.
This can be very critical because companies like ChemChina are incredibly over leveraged. In the standard commercial market, they will not be able to receive a loan because they are in debt – over 10 times than the gross they will receive. Sometimes, up to three or four times is acceptable in the commercial industry, but not 10.
Why are the overseas companies willing to deal with these large Chinese firms even if they’re over leveraged?
According to Advisor Abbate, “They are essentially dealing with the Chinese government. When they are looking at a deal, they’re looking at guarantees by the Chinese government to be able to pay for whatever it will take.”
“My concern is if these Chinese companies have generated so much debt, it means they’re not well-managed. If they’re not well-managed in China, what makes them think they’ll be able to go overseas and buy a large company like Syngenta or the Italian tire maker, Pirelli and be able to manage them well?” questioned AA. There are many international stories about when inter-cultural acquisitions don’t turn out well. More so, the key problem towards China is the amount of debt that they have.
How will the acquisitions turn out? Is there a successful example?
In 2013, one of the major national oil companies, China National Offshore Oil Corporation, or CNOOC Group had problems and paid a record $15 billion for Canadian company, Nexon with 60% premium to Nexon share price, only to suffer from the slump in global oil prices. Based on Advisor Abbate’s analysis, “The only successful one was the acquisition when Lenovo purchased IBM.” Lenovo did a good job by not only keeping the Western employees, but even hiring more Westerners. The CEO, Yang Yuanqing, took a very slow step in merging the culture of East and West allowing the two companies to understand each other slowly.
“I believe that in the very near future, the Chinese companies, which are represented as major global investors are going to be highly damaged by the amount of debt they are carrying and the inability to properly manage.”
BETTER POLICY NEEDED. Right now, the only reason these companies can go around the world, buying these large enterprises is because the Chinese government is simply presenting a “blank check”. Meanwhile, the Western companies are being greedy, but not responsible sellers. The EU is planning to step in to oppose some of these acquisitions.
How will China or the Chinese government benefit from these acquisitions?
How can it be possible for companies that have nearly 80 times debt over their gross income be able to do this? Unsurprisingly, the Chinese executives have certain connections within the government to obtain financing. When doing business, they’re actually doing “PR” work. “I don’t believe that it will be a practice for China in the long run,” said AA.
With the slowing economy in China and with factories operating at 70% of their production capacity, it make sense that they would expand outside of their market so that they can leverage the 30% of inefficiency.
Last year, ChemChina acquired Italian tire maker Pirelli in a $7.9 billion transaction. How will this influence Italy?
Italy is a country of “crisis.” There has always been a shortage of liquidity because of corruption in the Italian government and a lot of money is wasted on “ghost projects.” The Italian government welcomes any type of foreign investment and why wouldn’t they? Pirelli made a good deal – the owners of the majority stock holders remain in charge, the investors (which were several banks) continued to maintain the stock into the company. China is a tremendous market, which continues to grow – it’s an amazing deal for the Italians.
China-based firm’s purchases of U.S. companies include: Haier Group’s $5.4 billion purchase of General Electric’s appliance business and Dalian Wanda Group’s $3.5 billion deal for Legendary Entertainment. Additionally, Astoria Waldorf has been acquired by China’s Anbang Insurance. How will these affect the United States? The world?
As the factory of the world, China’s actions are concerning many people. They may not necessarily have direct impact on their investments, but Western companies are going to react as a result of these acquisitions.
What a slowing economy really means to the West is – How many goods they are going to be able to sell China? China is already the type of economy where the citizens save quite a bit of their income. What will happen then?
Advisor Abbate 