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1、May 8, 2012Huilan JordanDi LuGongping YangColumbia University | School of International and Public AffairsChina Going Global - A Boomerang StrategyA Study of Chinese Outbound M&A in the Manufacturing SectorPresented by the SIRA Capstone Team:Yue Chen Alex Metelitsa Fei Qiao Yuhan ZhangAdvisor: Prof.
2、 Merit Janow, Columbia UniversityIntroductionWho is the Client?Business Development Asia (BDA) is an investment banking firm that advises on international mergers and acquisitions, distressed situations, private placement, capital raisings, valuations and financial restructurings. BDA specializes in
3、 cross-border transactions with a strong track record advising North American, European, and Asian firms on cross-border transactions.IntroductionWhat is the objective of the project?The goal of this project is to understand the current landscape of Chinese manufacturing companies, outbound M&A acti
4、vities; understand the internal drivers and barriers that affect these companies decisions whether to conduct greenfield investment or M&A; and project the future trend of Chinese outbound M&A in the manufacturing sector.OverviewIndustry & Geography focusDrivers Government Policy Financial Support F
5、oreign ReserveMicro-level Drivers Acquire Technology/ Brand Expand Market Obtain Management Know-howMicro-levelBarriersHow?Future?Government Approval Process NDRC/ MOFCOM/ SAFE/SASACIntermediaries Investment Banks,Law Firms andAccounting Firms1HH General TrendOwnership Structure Trend More Minority
6、HoldingInvestment Climate OverseasCase Studies Successes, failures & inaction Lessons from CSPremium TrendConclusionQ&ASection 1 ： Chinas Outbound M&A &#s in the Manufacturing M&AChinese ODI vs. the World TotalCtwWtmjgOOlfDwslUii) -ChmsOatowsai%ofvortdiMlRFislSource: UNCTAD & HSBC6Chinese Worldwide
7、Outbound M&A 一 Manufacturing Number of deals by country in 2005 1,000000 1.000001 -2.000000Source: Dealogic, gisChinese Worldwide Outbound M&A 一 Manufacturing Number of deals by country in 20072.000001-3.000000 3.000001 -6.000000Source: Dealogic, gis8Chinese Worldwide Outbound M&A 一 Manufacturing Nu
8、mber of deals by country in 20092.000001-3.000000 3.000001 -5.000000 5.000001 - 10.000000Source: Dealogic, gisChinese Worldwide Outbound M&A 一 ManufacturingNumber of deals by country in 2011 4.000001 - 10.000000 10,000001 - 15.000000 15,000001-21.000000Source: Dealogic, gisManufacturing is still rel
9、atively small part of overallOutbound M&A picture.China outbound M8A deal value (US$m) by sector, 2003 2010 Energy. Mong & Uthktm AnancM Senxes indirslnah & C 愤me* TMT Consumer Agnoiltuce Busmeis Ser*K Construction Ptwmd. Medc4l & Bidech1 TransporUbonRnoi Bute IraurvSource: CEIC, SIPA Team calculati
10、ons. But Outbound Activity is an increasing part of overall Chinese M&A activity in the Industrial SectorChina Ma|orltyXnteound/Xv*tound)Chinese Outbound M&A in Manufacturing: Deal Count and Avg. Deal Value Over Time20022003L200417515211425920052006200781362197373420082009201020114548432496813610912
11、9Year# of DealsAvg Deal Value (USD m)Source: Dealogic, SIPA Team calculations(E ase8ap o o o o o 0 5 0 5 0 0 3 2 2 1 15 0o o o o o o o2 0 8 6 4 2d 1iS-Boa J。怎qEnN17Deal Value Density 2002-2011S-E0 J。# PEB6664Top Manufacturing Subsectors 2002-2011Computers &Electronics-_MiscellaneousTextile- 一 Miscel
12、laneousAuto/Truck-_ManufacturersMachinery-GeneralIndustrialAuto/Truck- Parts & .EquipmentComputers & Electronics- SemiconductorConsumer Products- MiscellaneousMetal & Steel- ProductsSource: Dealogic, SIPA Team calculationsManufacturing Subsectors20062011Subsector#of DealsAvg. Deal Value ($m)Subsecto
13、r#of DealsAvg. Deal Value ($m)Telecommunications-Equipment35Computers & Electronics-Machinery-General Industrial2150Semiconductors1216.8Metal & Steel-Products276.8Auto/Truck-Parts & Equipment1069.9Computers & Electronics-Consumer Products-Miscellaneous729.5Semiconductors256.5Consumer Products-Househ
14、oldTextile-Miscellaneous228.1Appliances741.9Metal & Steel-Processing13.5Machinery-General Industrial622.9Machinery-Machine Tools114.7Metal & Steel-Products613.8Textile-Apparel Manufacturing143.6Computers & Electronics-Miscellaneous651.3Auto/T ruck-Manufacturers1284.2Chemicals-Plastic5387.9Constructi
15、on/Bldg Prods-Auto/Truck-Manufacturers5150.0Infrastructure17.9Machinery-Machine Tools420.0Chemicals-Specialty1501.9Agribusiness-Agriculture4111.9Computers & Electronics-Measuring Devices3T12.3Increased focus on bothMetal & Steel-Processing3977.5“Upstream (R&D) andAerospace-AircraftTelecommunications
16、-Equipment33186.03.5aDownstreamv (Distribution) Investment Overall increase in variety of subsectorsComputers & Electronics-Components20.1Chemicals-Diversified21088.0SourceDealoqic, SIPA Team calculationsMk_l_16Profit Margins in Different Stages of ManufacturingChina in the Global Value ChainStyiizM
17、 iiluslration17Section 2: Why is this occurring?What are the challenges?Why is this occurring?Macro - Favorable policies “Bringing in and going global as supplementary to the course of Chinas modernization. The “Going Global Strategy First announced by Jiang Zemin in March 2000 during the Third Sess
18、ion of the Ninth National Peoples Congress. Main purpose was to better use two markets and two resources domestically and internationally Consolidated at the Chinese Communist Partys 16th Congress in 2002 to acquire strategic resources and expanding into foreign markets Overarching goal was to incre
19、ase corporate competitivenessSource: CCPIT ResearchWhy is this occurring?Macro - Favorable policies (confd) 12th Five Year Plan (2011-2015): Chinese government will continue to support M&A activities and accelerate the going global process Follow the strategy of market orientation and self-willingne
20、ss of enterprises to guide enterprises to develop overseas investment in an orderly manner Encourage leading enterprises in the manufacturing industry to conduct outbound M&A to create internationalized marketing and sales channels, and establish famous brands Government will conduct thorough resear
21、ch on foreign investment climate, scientifically evaluate investment projects, increase enterprises ability of comprehensive consideration, optimize the cross-agency coordination system, and enhance the guidance and services to enforce the “going global strategySource: Chinese Why is this occurring?
22、Macro - Government financial support Policy Banks Funding Support China Development Bank: $117.6 billion loans with 438 projects by the end of 2010 Export - Import Bank of China: Loans tripled from 2006 to 2010 and reached 277.6 billion RMB at the end of 2010 China Banking Regulatory Commission (CBR
23、C) Opens the Door for M&A Loans in 2008 Previously, PBOCs Lending General Provision (1996) restricted equity investment loans CBRCs Guideline on the Risk Management of M&A Loans of Commercial Banks/ (2008) replaced the former regulation Preconditions on the deal: target company in highly related ind
24、ustry; high capital adequacy ratio for commercial banksMacro - Government financial support Chinalcos Attempt with Rio Tinto (2009/Australia) Chinalco: Worlds 3rd largest primary aluminum producer/SOE Sought $19.5 billion equity investment in Rio Tinto Assured a $21 billion 15-year syndicate loan 90
25、 BPs + 6 month LIBOR Rival BHP Billiton: 390 BPs + LIBOR Geelys Acquisition of Volvo (2009/Sweden, US) Geely: Non SOE automobile manufacturer with $628.25 million revenue in 2009 100% acquisition of Volvo from Ford valued at $1.8 billion $1 Billion US dollars Syndicate Loan from 3 state-owned banks
26、(Bank of China, China Construction Bank, Import-Export Bank of China)is this occurring?Macro - Co-movement between foreign reserves and OFDI23Why is this occurring?Why does the excessive stock of foreign reserves matter? Problems with Chinas 3+ trillion USD reserves Heavily weighted in US Treasury B
27、onds and US corporate bonds Lack of options in terms of “secured investments1; Causes domestic inflationary pressure Depreciation of USD and EUR = shrinking value of reserves Benefits of outbound M&A Avoid “putting all eggs in one basket” - risk diversification Though the OFDI-Manufacturing/Foreign
28、Reserve ratio is still small at present, the accumulation effect would be significant in the long term.Why is this occurring?Micro - Profit-seeking companies looking to acquire technology & brands; Expansion in foreign markets; Obtain management know-how, etc.GQOQraphAc growthBud gftoa prolila and r
29、epuatlonDtvorvtkotkm strategyClimb up or go downhe cMmInclIecH property rww lechnolOQvCost ynergiMAcquire brandTransfrmMlon stratyNatural rvsourcesmw mafcxiaHGovernment desirv to invest abroadOthor1 1%Source: KPMG Chinese CFOs Survey 201025Why is this occurring?Micro - two motivations for outbound i
30、nvestments in manufacturing Expand to foreign market Home market saturated, looking to establish position in foreign market Acquire distribution channel Seek downstream integration Example: Guo Lian (distribution) To be in a better position in home market Acquire technology Acquire management know-h
31、ow Acquire higher valued-added brands Example: Fosuns acquisition of Follie Follie Combination of the above twoWhat are the impediments/challenges?Microeconomic- level Business culture & language barriers Decision-making process Corporate governance Inability to conduct thorough due diligence Discre
32、pancy in accounting standards Slow process of learning and trust building M&As are like marriages Actively searching for targets, rarely take action Lack of public relations and lobbying effortsSection 3: How is it done?Share of SOEs by NumberNumber of Chinese Industrial Enterprises by Ownership% of
33、 total firmsFOREIGN: FOREIGNtarn E.COC RHG * raudvi UnM Ccvpmtm $twv Ccrpcnftcm. Cc*cM* Omr). Cocpmw JM OMmtw etcShare of SOEs by Total AssetsTotal Industrial Assets by Ownership % of total assets30Weight of Chinese SOEs and Non-SOEsSource: World Bank, 2010“The share of GDP owned and controlled by t
34、he state is approx.50%.vSOEs Non-SOEsSource: USCC,2012is this done?-Government Approval ProcessLong and complicated government approval process is unavoidableCompany A - SOE?SASACNDRC (Provincial & National)$100 million threshold & 4-6 weeksHrelim. aonroval /Company Aw/ a contractMOFCOM & Ministry o
35、f Foreign Affairs$1 billion threshold & 3-5 weeksJ-LSAFE32 15% upfront expenses allowed & 1 weekImplications of Government Approval Process Relatively small deal size to avoid government approval Set up sales agent in Hong Kong, accumulate foreigncurrency in offshore market, eliminating the need to
36、obtainapproval and foreign currencyIntermediaries Companies that have M&A investment plans hesitate to sign a strategic contract with any intermediaries before finding a satisfactory target China does not have a long history of paid professional services. Chinese companies generally do not trust pro
37、fessionalism of intermediaries Per KPMGs CFO survey, Chinese companies that have worked with intermediaries are more likely to value professional services Still in the market early stage, large intermediaries often provide free or low-fee services to be first movers in the market Professional servic
38、es help avoid potential risks but increase operation costs, which is up to the companys cost-benefit analysisOpenness to FDI*35Overall FDI Indexes, 2006 & 2012 2012 2006Screening or approval mechanisms; Restrictions on the employment of foreigners as key personnel;Operational restrictions, e.g. rest
39、rictions on branching and on capital repatriation or on land ownership.Openness in Manufacturing*2012 2006Source: OECD* OECD definition of manufacturing includes Food and other; Oil refinery & Chemicals; Metals, machinery and other minerals; Electric, Electronics and other instruments; and Transport
40、 equipment36Investment Environment in EuropeStable, predictable and transparent investment regime EU is the largest destination of FDI in global economy as of 2011 China only takes 1% of the total pie 15% of Chinese companies have an intention to invest in EU Most popular target countries are German
41、y, France, Italy and Spain The ongoing European Sovereign Debt Crisis provides opportunities for Chinese outbound investments: Leaders of European nations, including Italy, Germany and France, have said they will welcome more investment from China There are mixed signs on EUs attitude towards invest
42、ment from China Examples: Sany Heavy Industry to acquire 90 percent of Putzmeister for $426 million (Jan/12) Shandong Heavy Industry to acquire 75-percent stake in debt-laden Italian luxury yacht maker Ferretti Group for $491 million (Jan/12)Investment Environment in Japan Why Japan? Geographic prox
43、imity to China Known for advanced technology Low stock market value Why M&A? Many Japanese companies have advanced technologies, manufacturing techniques, and excellent R&D units. M&A allows Chinese companies to benefit from already-trained employees in Japan Through M&A, Chinese companies acquire b
44、rands that already exist. Corporate brand is very important in Japan. M&A lets Chinese companies acquire governmental licenses to conduct business activity. Chinese companies save time and effort.Investment Environment in Japan (cont-)Suning Appliance acquisition of Laox Co. (2009) Deal size: 1.9 billion JPY (RMB 145 million) M&A objective: utilize Laoxs brand value in Japan and obtain Laox/s retail sales know-howSuntech Power Holdings acquisition of MSK Corp. (2006,2008) Deal size: US$ 107 million (2006) for 2/3 interest,