The Beijing-based ChemChina offered $46.4 billion for Syngenta, a Swiss agribusiness, on March 24, and has extended the offer deadline twice till mid-September. “The deal is expected to be completed by year-end,” the Chinese state-owned chemical company announced in a July press release, adding that uncertainties remain since the purchase has to be approved by regulators in China, Switzerland and the US.
While ChemChina is worried if the deal will be done in the end, there seems to be more concerns about its ability to manage the assets well. As Chinese companies seek more cross-border M&A opportunities for growth, observers suggest they should slow down and spend more time to consolidate the acquired assets in an effort to make them profitable.
Surge in China’s M&A activity in developed economies
If completed, the Syngenta purchase would be the biggest-ever by a company in China, more than double China National Offshore Oil Corporation’s $17.7 billion acquisition of Canadian energy company Nexen in 2013. The acquisition will take the value of China’s outbound M&A activity to a record $96 billion in the first four months of 2016, surpassing 2015’s whole year volume of $59 billion, according to a recently issued J.P. Morgan report, which has a special chapter on the surge in China’s outbound M&A in 2015 and 2016.
As China’s economy decelerates at home and leverage risks of businesses become exposed, the sharp rise in outbound acquisitions is astounding the global market.
What everyone agrees, however, is that China has recognized the urgency to shift its economic growth away from reliance on exports and investment toward technology, industrial knowhow and consumption. The need for industrial upgrading and economic restructuring is seen by most Chinese economists as top drivers for China’s “going out” strategy.
“Acquiring prime assets in developed economies in North America and Europe would work as a shortcut for Chinese companies to gain technology and management expertise,” Tan Yaling, chief economist and president of the China Forex Investment Research Institute, a think tank based in Hong Kong told sino-us.com. She believes China’s structural problems have made it extremely difficult to catch up with western countries, but acquisitions would narrow the gap by gaining access to international good practices directly.
Besides the government’s unswerving strategy to “go out”, there are other short-term factors that may have driven the upsurge, like monetary easing by China’s central bank, sluggish domestic market crowded with over-inflated assets, and widespread expectations for yuan devaluation.
Last but not the least, some analysts believe the lower price earnings ratio of assets listed in developed markets is attractive to Chinese investors. “Investors usually appraise properties based on the indicator. Lower ratio indicates more space for stocks to increase in value, and vice versa,” an analyst who didn’t want to be named told sino-us.com, “The premium assets in North America and Europe could help to lower parent companies’ return ratio after consolidation of financial statements.”
China’s foreign reserves have dropped by a remarkable $800 billion over the past year and a half, fueling widespread concerns about investors losing confidence in the economy.
Many Western observers worry the momentum gained in the first half of 2016 may be unsustainable considering the country is further tightening controls on capital outflows and businesses are highly leveraged with weaker repayment capacity. The consensus is, Chinese buyers are left with limited financial resources.
Chinese analysts surveyed by sino-us.com, however, believe the surge is cyclical so it’s natural for it to slow down after a climax. Money, however, would not be a hindrance to “going out” endeavors.
Zhou Mi, a senior researcher with the Ministry of Commerce specializing on outward FDI in America and Oceania told sino-us.com China’s M&A size is still relatively small compared with its aggregate economic volume, “so policymakers would not see outbound investment as a threat of capital flight or cause for diminishing foreign reserves.”
“Despite some level of contraction, China’s foreign reserves remain relatively high compared with the rest of the world,” Tan Yaling noted.
Lu Zhengwei, chief economist with China’s Industrial Bank, shares the perception that money would not be a problem. “Chinese companies have diversified their financing channels,” he told sino-us.com, “Many Chinese acquirers are actually financing offshore or paying in yuan.”
Lack of experience in asset consolidation
Although ChemChina has gained support from Syngenta’s board and the management to be put on track to make the deal, an industry insider was quoted by the China Business News as saying that even if the deal goes through, ChemChina would face more challenges in asset integration and consolidation.
“ChemChina’s top-down management may contradict with market-oriented Syngenta. Regarding issues related to intellectual property, environmental protection, product quality and services, the two groups have quite different directions and standards,” he said.
Except for different decision-making mechanism, cultural divergence is another major challenge, according to Lu Zhengwei, who believes it to be the key factor behind the failure of many acquisitions of western assets by East Asian companies.
There is considerable difference between Oriental and Western cultures, and Syngenta is representative of distinct “European styles”. Western companies mostly have gone through long-term development and thus feature more mature and stable operations valuing soft power and humanity, such as integrity, diversity and respect for people. On the other hand, Chinese companies are still struggling, so they tend to favor pure performance indicators such as growth, leadership and competition.
Lu Zhengwei suggests Chinese acquirers should try to bridge the cultural difference. “If the issues could be addressed, there would be much bigger chance of success.”
US approval key to ChemChina-Syngenta deal
Syngenta said talks with regulatory authorities to win approval for the deal have been constructive and the Swiss company is confident the transaction can be closed on time, reported Bloomberg last Friday.
However, ChemChina’s bid values Syngenta at about 464 francs a share, about 20 percent above the closing stock price of 387.8 francs last Thursday. Syngenta trading below the offered price suggests increased doubts that the deal will actually go through.
It is very clear that US approval will be the key.
The Committee on Foreign Investment in the US (CFIUS) is led by the U.S. Treasury Department and includes officials from the Defense, State and Homeland Security departments. This time, the panel also includes United States Department of Agriculture (USDA), as the acquisition is accused by some senators in March of affecting food security and safety.
“The reviews by the CFIUS are opaque, and Chinese buyers had got deals blocked or been forced by public opinion to give up deals due to so-called national security reasons,” Zhou Mi told sino-us.com, “With limited information disclosure, review results could hardly be predicted. And companies’ investment decision-making may be influenced and thus suffer a loss.”
Lu Zhengwei told sino-us.com that political relations between the US and China could affect M&A deals, and the Bilateral Investment Treaty (BIT) that both countries are engaged in could stimulate mutual investment. He noted that China has been stepping up ‘negative list’ reforms in an effort to prepare for BIT discussions. “Although it is not a good time in the presidential election year in the US, even if both parties are desperate to make the talks fruitful, we could get nowhere in the background,” he noted, “If BIT discussions fail to go well, lots of uncertainties and risks would cloud future investments into each other’s country.”