M&A, Talking Point

“They suck us like vampires”

A backlash grows against Chinese state companies buying Western firms

“They suck us like vampires”

Stake through the heart: Norwegian manufacturer was sold to China

“A corpse supposed, in European folklore, to leave its grave at night to drink the blood of the living by biting their necks with long pointed canine teeth.” Such is the Oxford English Dictionary’s definition of a ‘vampire’.

There are many incarnations of these nocturnal predators, from Bram Stoker’s Dracula to trendier and more recent versions in vampire dramas like True Blood and The Twilight Saga. But Norway’s newspapers recently broke new ground on the genre by claiming loudly on their front pages that the Chinese were neck-biters too – albeit of the non-fictional variety.

“They are like vampires,” was the large headline run by Dagbladet, Norway’s second biggest selling tabloid. Other media also voiced similar concerns about the Chinese threat.

What’s sparked Oslo’s vampire fever?

The catalyst is the acquisition of a Norwegian firm by a Chinese one. In mid-January China National Bluestar agreed to buy Elkem from the Norwegian conglomerate Orkla. At $2 billion it marked not only one of China’s biggest acquisitions in Scandinavia, but also in Europe as a whole. It sees the Chinese firm – a subsidiary of state-owned ChemChina – buy one of the world’s most advanced production facilities for the silicon that goes into solar panels.

“It shows how China is using its growing financial clout to buy Western companies that provide access to specialist technology,” was how the Financial Times described the deal.

Norway’s local business newspaper Dagens Næringsliv was a lot less sanguine in tone, after interviewing union representatives from Rhodia, a French firm BlueStar had previously acquired. “Prepare for the worst,” the newspaper warned. “When the Chinese have learnt what they need, it is far from certain that they will need to keep the Norwegians on any longer.”

The analogy with vampires seems to have originated with Jean Granjon, a French union rep from BlueStar Silicones, which absorbed Rhodia. “We don’t see any positive future prospects with them. The Chinese are like vampires. They come and suck up our technology and take it back to China.”

Fellow trade unionist Eric Ulme adds there have been no new investments since the Chinese took over the French company in 2007, and there is “no transparency in terms of plans for the future”. Both believe the factory will be closed within five years, once the technology has been absorbed.

BlueStar president Robert Lu retorted to Dagens Næringsliv: “We are neither imperialists nor vampires. This is about growth and about doing business internationally. We are not merely a Chinese corporation but a global one, just like Elkem. We want to use the synergy between companies and develop the ideas of Elkem in China and Asia. We probably won’t be establishing new factories in Norway, but neither will we close down old ones.”

Not just in Norway…

The backlash in Oslo is by no means an isolated incident. Tianjin-based Xinmao S&T also prompted controversy in Europe’s corridors of power by trying to acquire cable maker Draka Holdings. It bid $1.3 billion for the Dutch firm – hoping to become the world’s top industrial cable maker – only to be rebuffed this month. As reported in WiC91, EU officials lobbied furiously against the deal, with trade commissioner Antonio Tajani saying: : “We have to make sure it’s not a front for something else, in terms of taking our know-how abroad or national security.”

In the wake of the pressure, Xinmao S&T retreated and an Italian firm bought the firm instead for the lower price of $1 billion.

If at first you don’t succeed, try, try, again…

China’s entry into the M&A arena is not new. Between 2007 and the first half of last year Chinese entities bought 400 foreign companies, spending $86 billion in the process.

However, what is changing is the pace and volume of the acquisition spree. Charles Wolf, a senior economic adviser at Rand Corp told Bloomberg TV this week that in the period between 2007 and the middle of last year, Chinese acquisitions only constituted 3% of total deals. But now he forecasts Chinese cross-border M&A could quadruple, a situation that will likely lead to “sensitivities” about new Chinese holdings, particularly in Europe, the US and Australia.

A company that’s already roused similar concerns in all three of those geographies is Bright Food Group. The state-owned firm was established in 2006 in an attempt to consolidate a swathe of government-controlled food and wine firms. It enjoys a strong market position in China and has a war chest for foreign acquisitions – thanks to solid domestic cashflow and access to cheap loans from the state-owned banks.

The Shanghai-based company told 21CN Business Herald it had formulated a three year plan to transform its business via international M&A deals. Thus far, the strategy hasn’t been a resounding success.

Bright Food was little known outside China until last year when it tried (and failed) to buy the sugar business of Australia’s CSR. In September Bright then expressed an interest in paying $3.2 billion for UK giant, United Biscuits – whose portfolio of brands includes British household names like McVitie’s biscuits and Twiglets. Once again no deal was consummated.

Most recently, it has tried to buy GNC, a US vitamin maker and retailer for $2.5 billion. The full status of that deal is unclear. The Financial Times says talks have ended; but Bloomberg reports they are ongoing.

Bright did manage to spend $58 million on a small New Zealand dairy, but if the GNC deal does fall through, it will have racked up an unenviable M&A track record over the last twelve months. To paraphrase Oscar Wilde: to lose one deal may be regarded as a misfortune; to lose two (or even three) looks like carelessness.

That lack of success is worth exploring. The more charitable may put it down to inexperience; those who credit Bright’s bosses with more savvy will say they walked away over price.

One thing is certain: state-owned status may give buyers like Bright plenty of cash, but can also act as a disadvantage. State-owned firms are used to dominant positions in China. Connections to government mean they often get their own way, which can create a culture of arrogance. A typical SOE executive might think, I have the cash to buy this foreign firm, so of course they must sell to me.

An understanding of how to bid in a way that reflects local concerns may escape that same executive. For example, would a British consumer still buy McVitie’s if they were owned by a Chinese firm? Would they suspect their favourite biscuits might soon be made in unsafe factories in China? It’s one thing when Kraft buys Cadbury’s (a blow to national pride, said the newspapers at the time). But there was never a concern that the product quality of the British chocolate maker would suffer.

If such an acquisition is to have a reasonable chance of success, the buyer also needs to focus more on its image in the host country. That’s especially the case with food M&A, thanks to China’s rather grim image in that industry. Any good PR executive will advise, in such circumstances, a campaign that’s designed to win over local consumers and assuage fears. Just having the money to buy Western food firms is only half the M&A battle for a company like Bright.

Indeed, your typical SOE executive may not even fathom that, poorly handled, Chinese ownership could kill century-old Western brands.

A badly managed state of affairs?

Some in the Chinese press have expressed a related concern: do these state firms have the management capabilities to be acquiring abroad? For instance, National Business Daily notes that Bright Food has been reducing its number of subsidiaries from 3,000 to 500. The company’s president, Cao Shumin, admitted to the newspaper that “a command from group headquarters is passed through five or six levels to subsidiaries, leading to deviation in the understanding of instructions, not to mention the implementation.”

How much harder would it be to manage an acquired firm with an entirely different culture and language? A McKinsey survey gives some indication, reports 21CN Business Herald. It shows that companies from China have lost money (a return of minus 3%) within two years of buying foreign firms. In comparison, the same study shows that Hong Kong firms made a positive return of 7%. The 21CN blames SOEs’ “fuzzy acquisition strategy” and compares the state executives responsible to housewives overwhelmed by a shop full of ‘on sale’ items.

The Prosecutorial View, a magazine, is similarly concerned that, for many Chinese firms, these overseas deals represent “vanity projects”. It says too that they often tend to be driven more by political and other factors and less by business logic. That makes failure all the more likely – especially when Western governments and media “always have deep prejudices against Chinese state-owned enterprises,” the magazine concludes.

Which brings us back to the case of Elkem. Oslo’s biggest newspaper, Aftenposten, began its article on the deal, tellingly enough, like this: “When Elkem is sold to China, it is in fact the Chinese Communist Party taking over the Norwegian company.”

That chimes with a common international perception that the links between the Party and the SOEs mean some kind of geopolitical conspiracy is at work. The Chinese state is seen as undertaking a long-term gambit to take over the world.

This view is simplistic and often wrong (a lot of SOEs operate in a pretty autonomous fashion and to the chagrin of Beijing, often making business decisions that contravene official policy).

However, it remains a deep-rooted view overseas. Unquestionably there is a little less sensitivity when it is one of China’s private sector firms making a foray abroad. This is seen as less threatening and more likely to be founded on business principles.

Securities Daily noted a similar theme in an op-ed late last year, arguing that to boost China’s success in foreign M&A, it was vital the private sector took the lead in dealmaking. Unlike SOEs, private firms will not “invite heavy criticism” overseas, the newspaper concluded. And since private companies are using “their own money”, they will “treat it more carefully” in making wiser, better executed acquisitions.

And the next M&A decision likely to cause a stir?

The boss of China’s biggest state-owned bank, ICBC, has told Capital Week that it expects its “proportion of foreign assets” to grow from 3% to 10% within five years. To this end, ICBC has just agreed to buy its first US bank, paying $140 million for an 80% stake in Bank of East Asia’s US unit, gaining branches in New York and California.

The deal still requires regulatory approval to go through.

It will be interesting to see whether US politicians make a stir over it. Or perhaps they’ll take the view that the American public already thinks the banking sector is full of bloodsuckers anyway.

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