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May 12, 2016

China Inc. Tries to Buy the World

King of foreign M&A, at peak prices, funded by state-owned banks.

Not even five-and-a-half months into the year, Chinese mergers & acquisitions in other countries have hit $110.8 billion, nearly four times as much as during the same period last year, and surpassing the total volume of the entire year 2015 ($106.8 billion).

And so China Inc. has become the number one cross-border acquirer for the first time ever, ahead of Canada with $67.7 billion in deals, and the US with $53.1 billion.

The superlatives go on: the number of deals soared 79% year-over-year to 300, according to the Nikkei. Of these, 17 were mega-deals of $1 billion or more, up from six such deals last year.

The US, where equity prices have peaked after a seven-year QE-and-ZIRP-fueled rally, and where total M&A through April has plunged 21%, according to Dealogic, and where withdrawn or collapsed deals have hit a record high as of May 4 of $378 billion — well, that market has now become the number one destination of the Chinese shopping spree.
Chinese acquisitions of US companies have soared seven-fold from $3.9 billion last year to $31.3 billion so far this year, the highest total ever. It accounted for 28% of China’s outbound M&A activity.

The largest deal so far this year was aviation and ocean freight conglomerate Tianjin Tianhai’s $6.3 billion acquisition of technology products distributor Ingram Micro.
That deal, whose strategic logic – other than capital flight – remains somewhat hard to grasp for the uninitiated, brought China’s acquisitions in the global tech space to $17.6 billion so far this year, giving it a 45% share of global tech M&A, thus unseating the US that had dominated this game since 1995.

Then there’s consumer electronics maker Haier Group which bought GE’s home appliance business for $5.4 billion.

Some of the biggest buyers were state-owned companies funded by state-owned banks, including state-owned China National Chemical which plunked down $44 billion in February to grab Monsanto’s former target, Syngenta, a Swiss-based pesticide and seeds maker. It was the largest Chinese takeover ever.

Withdrawn or collapsed deals also set records: Chinese companies pulled 15 bids for a total of $24 billion, up from 10 bids and $1.6 billion last year at this time. The biggest bid that went awry this year was Anbang’s blockbuster $15.5 billion effort to yank Starwood Hotels out of Marriott’s claws.

And so China has become the global leader in outbound M&A, with impeccable timing….
Global M&A is down 19% year-over-year, according to Dealogic, buckling under the weight of sky-high prices, volatile stock markets, iffy junk-bond markets, skittish banks, and regulators that are finally and belatedly beginning to crack down on oligopoly or monopoly formations.

And stockholders, in the US at least, are coming out from under the ether. They no longer automatically appreciate these sorts of escapades. They’re once again beginning to recall that takeovers rarely work out for the benefit of acquiring companies – that instead they lead to write-offs, layoffs, down-sizing, loss of momentum, and market-share losses.

Some even are beginning to remember that takeovers are mostly a way of aggrandizing CEOs and their bonuses, and covering up their inability to grow their companies organically, especially when they blow money on share-buybacks and M&A for instant gratification, rather than trying to invest in long-term productive activities that would actually build the business and help the company grow.

Chinese companies are on a shopping binge for a reason. Backed by their government and their state-owned banks, they’re eager to diversify away from the yuan, fearing that it will fall further. They’re trying to lessen their dependence on the slowing Chinese economy, seeing perhaps how it is heading into trouble. They want to acquire technologies and enter high-value-added sectors. They want more influence in the global economy and have a say in the global rule-making processes. When the state-owned banks simply create the money for China Inc. to blow on foreign companies, price is apparently no objective.

Courtesy of Wolf Richter, Wolf Street

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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