Apr. 21 – Mergers and acquisitions in Asia have long been the subject of speculation; this is especially true in China, with stories of multibillion dollar deals and government interference; the most recent occasion being the failed Coke-Haiyuan deal.

The curious perception about M&A in China is that the market has been, or is expected to be, buoyant and that recent government involvement on anti-monopoly grounds has “killed” the Chinese M&A industry (PE firms and the like). The truth, however, is that M&A in both China and India remain strong. Few deals are expected to be as controversial as the failed Coke acquisition, which generated a lot of negativity about the ability to succeed in China, yet the real issue was the failure of Coke’s acquisition strategy. So why has the media hype over M&A in China been so off-kilter?

China’s negativity has long been an issue with international media, yet it’s a curious mix. On one hand, Lenovo’s acquisition of IBM’s PC business gets front page news, but at just a little over US$1 billion it was hardly earthshaking. Other Asian acquisitions at the time that were much larger warranted far less media attention. The negativity aspect too, has its problems. The failed Coke bid was spectacular in size and also in testing the new Chinese anti-monopoly laws, which were upheld. Yet the doom and gloom forecasts of “the end of M&A in China” have been premature. Here are just a handful of recent plays:

Spring Creek Acquisition Corp. announces shareholder approval for acquisition of AutoChina Group Inc.
Pfizer’s acquisition of Wyeth? They have a US$68 billion presence in China
Merck to buy rival for US$41 billion – Schering-Plough Deal is latest bid to diversify; Roche nears Genentech takeover
FTC: BASF required to sell assets in Ciba takeover
BASF Agrees to US$4.37 billion deal to buy Ciba
Sinosteel (one of the four large, state-run steel makers) wins its hostile bid for Australian iron ore producer Midwest

When looking at these headlines it is obvious that, far from being dead, Chinese M&A are still active as an investment strategy. However, what about the larger picture and the apparent contradictions?

M&A in China have also historically occupied a rather strange space in the legal services community, with many firms counting China Joint Ventures as M&A transactions. While it is true some assets are transferred, a JV is hardly either a merger or an acquisition since an entirely new company is created to place assets into. The structure of the investing partners businesses does not alter. This “graying” of the distinction over what constitutes inbound M&A in China has lead to a misperception that M&A are far more common than they actually are.

If we discount the formation of JVs in China as not falling into M&A categories, then the number of “deals” decreases sharply. The purchase of Chinese businesses outright has largely been limited to a handful of transactions and has never caught on as a mainstream investment strategy for most MNC’s in China. However, that may change at the smaller deal end as China businesses, buffeted by the global economic downturn, may look to well established partners or suppliers to buy them out as a means of survival – and for the foreign investor to acquire supplies and a supply chain at distressed prices.

There is also the misperception over Chinese outbound investment. With perhaps the exception of Lenovo’s purchase of IBM’s PC business, Chinese privately owned businesses have not invested overseas in significant numbers. Chinese institutions that have are almost exclusively Chinese state-owned enterprises instructed by the State to acquire strategic assets and resources, especially in the energy and raw material sector. Chinese businessmen are also not as well educated in matters of global transparency issues and are cautious about investing in overseas markets they have little to no experience in. It is one thing to develop a Chinese business in China and be able, as a Chinese national, to skirt around responsibilities; often with the collusion of local government. It is quite another to face a different set of rules, IFRS and other protocols, when operating a foreign subsidiary.

While the naivety of Chinese businessmen overseas will change, the truth remains that for the time being, language difficulties and an inability to operate to international standards present a glass ceiling beyond which Chinese businessmen have yet to effectively penetrate in large numbers. The wave of Chinese investors waving wads of cash at businesses overseas is still some way off.

The India comparison
These issues stand in contrast to the M&A markets in India. A report issued by Dynamic Orbits in New Delhi, who track inbound and outbound Indian, is positive on M&A in India. The reasons are to do with the more global approach the Indian executive tends to have over his Chinese counterpart: English language skills, a longer period operating in overseas business environments, and a domestic system that does not tolerate government collusion with business. If caught, Indian officials go to jail, and the media is also free to report on scandals as they occur. While India is far from perfect, the M&A industry in India is alive and well.

I wrote an article back in 2007 titled, “Has China’s Economic Development Hit a Glass Ceiling?”, and to me, it doesn’t seem as if the situation has changed much. One look at the Dynamic Orbits report shows that India M&A is strong, and gathering pace.

China’s M&A is not dead through regulatory interference, however the reasons for growth in inbound M&A in China has more to do with solid strategic planning and taking advantage of low priced Chinese businesses by foreign investors. Chinese outbound investment, unlike Indian M&A transactions, is nearly all state-supported and has very little to do with the private sector. It is, frankly, somewhat moribund and has never really existed as a true market for M&A services.

The two markets are starting to increase in terms of transaction flows, but one needs to have a very close look at the China dynamics before rushing to conclusions over sustainability. India meanwhile continues to conduct its M&A purely on the strength of market conditions – and that is why the Indian market for M&A is looking so attractive right now.