Winton Dong

    dht620@sina.com

    THE latest Thomson Reuters data showed that China’s outbound mergers and acquisitions (M&A) hit a record high of US$101.1 billion in the first quarter of 2016, accounting for one-sixth of the global total during the period and nearly surpassing the country’s full-year record of US$109.5 billion set last year.

    Chinese companies’ bullish appetite for investing overseas was not dampened, but stimulated in April this year. On April 8, China COSCO Shipping Corp., the world’s largest bulk vessel and oil tanker operator by fleet size, became a 67 percent majority stake holder in the Piraeus Port Authority SA in Greece by paying 368.5 million euros (US$421 million) to the Greek Government. On April 12, China’s HNA Group agreed to buy Swiss airline catering firm Gategroup Holding AG for US$1.5 billion in cash, as the aviation and shipping conglomerate aims to step up its global expansion. The deal adds to a string of overseas acquisitions for HNA, which include plans announced in February this year to buy U.S.-listed electronics distributor Ingram Micro Inc. for US$6 billion and the US$2.5 billion purchase of Irish aircraft lessor Avolon Holdings last year.

    Chinese M&A activities in overseas markets mainly concentrate on infrastructure, machinery, high technology and service businesses. In February, China National Chemical Corp. inked the biggest overseas acquisition deal by a Chinese firm so far, buying Swiss seeds and pesticides maker Syngenta for US$43 billion, the largest recorded acquisition in the global chemical industry. Syngenta is one of the biggest biochemical companies in the world together with U.S.-based Monsanto and DuPont.

    According to Shen Danyang, spokesman of the Chinese Ministry of Commerce, the worldwide economic slowdown and change of landscape in the global industry chain have created opportunities for Chinese companies to purchase overseas assets. “Within China, a rather relaxed policy environment, abundant cash flows and a flourishing private sector all have spurred Chinese companies to learn from their foreign rivals and seek bargains worldwide via merger and acquisition,” Shen said.

    According to Linus Hilderbrandt, principal for the energy process industries of market consultancy A. T. Kearney China, overseas M&A is aimed at getting world-class knowhow and growth opportunities outside China. Moreover, such activities will surely bring more investment and create a large number of new jobs in target countries.

    However, subject to a domestic economic slowdown in China and the volatile international market, some analysts doubt the motives and determination of Chinese companies’ outbound expansion. They even cite Japan as a bad example. In the 1980s, during the peak period of its economy, Japan embarked on a property buying frenzy in the U.S., buying properties such as the Rockefeller Center in New York, Hotel Bel-Air in Los Angeles and many others in Hawaii.

    Several years later, Japan was trapped in an economic recession and forced to sell these properties at a loss of more than US$400 billion.

    Will haste make waste? Is China going too fast with overseas M&A?

    These questions have been lingering with me for a long time. From my point of view, a frank adviser is far better than a thousand yesmen. Surely differences between countries and cultures, consumer habits and monetary policies make investing overseas risky. To be frank, some Chinese outbound acquisitions several years ago in mining, ore, petroleum and other natural resources have already led to losses.

    The past not forgotten is a guide for the future. To avoid following Japan, the Chinese Government must take precautions now.

    Firstly, with a double-digit domestic growth rate for many years, Chinese companies, if they go abroad, should adapt to a business environment with an annual profit of only 2 or 3 percent. According to a recent survey, while making outbound acquisitions, Chinese companies offered average bids as much as 33 times price-to-earnings for target companies. That means their annual profit could be 3 percent at most.

    Secondly, while tapping international markets, Chinese companies, especially State-owned enterprises, should learn to abide by international practice and business routines. Some Chinese companies have already been barred from overseas markets because of financial fraud, strong political ties or sensitive backgrounds.

    Thirdly, compared with a strong cash flow and credit support, a company’s reputation, transparency and sales tactics are even more important in overseas mergers and acquisitions. For example, one month ago, Chinese insurer Anbang Insurance was frustrated by Marriot in its bidding for Starwood Hotels & Resorts, the mother company of Westin and Sheraton hotels. Despite the fact that Anbang offered a higher price, it eventually lost the bid.

    (The author is the editor-in-chief of the Shenzhen Daily with a Ph.D. from the Journalism and Communication School of Wuhan University.)