Multinationals increase M&A activity in China

Medical-device maker Medtronic Inc has recently announced two acquisition deals of Chinese companies, with the two deals worth nearly $900 million.

The United States-based company said at the end of September that it would acquire China Kanghui Holdings, a Jiangsu-based maker of orthopedic devices, for $816 million in cash. The deal was completed in mid-November.

In October, Medtronic — the world's largest maker of pacemakers — said it would buy a 19 percent stake in the Shenzhen-based LifeTech Scientific Corp for $46.6 million, with a $19.6 million convertible note representing an additional 7.4 percent stake.

LifeTech makes devices for minimally invasive surgeries for cardiovascular and peripheral vascular diseases and disorders.

Medtronic said that the acquisitions will help advance its globalization strategy, as well as expand its local presence and accelerate its access and competencies in China.

Like Medtronic, many international companies are showing their interest in boosting their M&A activity in China.

"Given the macroeconomic conditions globally and domestically, a transaction volume increase shows that multinational giants still have financial ability to do M&As, and Chinese companies are attractive to foreign buyers given their production strength as well as their marketing, and research and development resources," said Chen Fengying, director of the World Economics Research Center of the China International Economic Relation Research Institute.

According to Zero2IPO Research Center, a domestic research firm, during the first nine months of the year, the number of foreign companies' acquisitions in China dropped. M&A deals decreased to 32 during the first three quarters of the year from 51 a year earlier.

However, the average transaction volume of each deal increased to $141 million from $132 million.

Thomson Reuters data show that during the first half of the year, the deal volume of global M&As amounted to $1.1 trillion, down 21.5 percent year-on-year.

Zhou Tiru, a Zero2IPO analyst, said that multinational companies are more interested in companies in areas such as machinery and manufacturing, medical care, as well as retail.

"During the first half of the year, there were eight acquisitions by foreign companies in the machinery and manufacturing sector, compared with two a year earlier," said Zhou.

Sweden-based industrial group Sandvik AB completed its acquisition of an 80 percent stake in Shanghai Jianshe Luqiao Machinery Co Ltd.

The move allows the Swedish company to enter China's middle-end construction machinery market.

"We are always looking for suitable local companies. You will see similar investments in China," said Anders Nyren, board chairman of Sandvik.

The company's average annual sales growth exceeded 25 percent from 2002 to 2011. It now has 65 offices and 15 manufacturing facilities around the country, with sales amounting to 7 billion yuan ($1.12 billion) last year.

US-based Zimmer Holdings, which mainly makes orthopedic devices, acquired Beijing Montagne Medical Equipment Co Ltd for 350 million yuan in 2010.

Sean O'Hara, managing director of emerging markets in the Asia-Pacific region for Zimmer, said that the company is actively exploring opportunities for external development that can add value to its current business.

"We anticipate there will be more mergers as the Chinese market gets larger and attracts further investment," he said.

In the retailing sector, Wal-Mart Stores Inc has recently signed an acquisition deal with Yihaodian to control 51.3 percent of a local e-commerce website, in a bid to boost its online sales in China.

Last year, Diageo Highland Holding BV, a United Kingdom-based premium-drinks maker, paid 140 million yuan to buy a 53 percent stake in Chinese liquor maker Sichuan Swellfun Co Ltd.

"We have been looking for suitable M&A targets around the world, including China. We aim to obtain brand resources and marketing access to realize business growth," said a source at the company, who wanted to remain anonymous.

The market potential in China is luring foreign operators as they try to expand their business portfolios, and provide more tailored products, technologies and services for local clients, said Zhou, the Zero2IPO analyst.

New characteristics

Compared with the last round of M&A activity by foreign companies in China from 2006 to 2007, experts said that the new deals have different characteristics.

First of all, multinational companies in general are keeping the Chinese brands.

For instance, Chris O'Connell, executive vice-president of Medtronic, said that the Kanghui brand will continue to be used, and that the acquired business will still be managed by Yang Libo, Kanghui's CEO.

The acquisition makes Medtronic Kanghui the first business unit of the medical equipment company with headquarters outside the US.

The fact that the brand is being kept means that Chinese companies are becoming increasingly sophisticated, and that their brands already have market value, according to Zhang Guang, a researcher with Forward Business Intelligence Co Ltd.

"On the other hand, multinational companies are not just eyeing the production capacity and marketing channels of their Chinese partners, they are also measuring the targeted companies on their research and development capabilities," Zhang said.

The Medtronic's O'Connell and Zimmer's O'Hara both said that their criteria for choosing M&A targets are complementary products, services or market access, common corporate development philosophy and, most importantly, promising technological strength.

In September, Omron Corp, a maker of control equipment, automation systems, electronic components and medical equipment, acquired a 100 percent stake in Shanghai Best Electric Appliance Manufacturing Co Ltd.

"We want to join hands with Chinese companies with self-developed technologies and share our core R&D strength with them," said a statement by Omron (China) Co Ltd e-mailed to China Daily.

"Under the current circumstances of overproduction capacity and lack of innovation in China, 'technological marriages' are a necessary way for China's manufacturing industry to realize intellectualization, digitalization and integration. It's also a way for Omron to grow up and become strong in China," the Japanese company added.

Another new characteristic of the recent M&A wave is cautiousness.

Because of the gloomy economic situation, international companies have to be prudent.

Sandvik's Nyren said that the group will not do any big M&A deals in China in the next few years.

"Big deals are too risky," he said, referring to both the capital burden, and the time and strength consumed on cultural integration.

From 2000 to 2011, the group did about 40 acquisition deals in 20 nations and regions.

Diageo said that any M&A is a long-term decision, which should go through long-term planning, negotiation and discussion.

"We are looking for brands with a good reputation and a mature distribution network, so it's not an overnight decision. It's very complicated, we must be prudent and cautious," said the source at the company.

Unlike the last M&A round, many acquired Chinese businesses are now companies with good business records, and they are planning to enter the international market via the resources of the multinationals.

"We recognize there is a tremendous opportunity to accelerate our global vision by building on Medtronic's size, scale and expertise as part of this combined organization," Kanghui's Yang said.

He added that Kanghui hopes to leverage the platform of Medtronic to go global — first to developing nations in Southeast Asia and Latin America, then to mature economics, including the US and Europe.

Diageo is now also promoting the Swellfun brand globally. The Chinese liquor brand is now available in 42 duty free shops in international airports, seven international airlines and 11 overseas markets, including the UK. Overseas sales of Swellfun reached 250 tons last year, and Diageo expects the figure to rise to 1,000 to 2,000 tons over the next five to 10 years.

Risk prevention

"M&A is costly. Capital is one thing, the others include business strategy synergy, cultural integration and bilateral reconciliation in many aspects," said Bruce Liu, a partner at Roland Berger Strategy Consultants.

Omron said that besides a careful pre-investigation, the negotiation period should be shortened to increase efficiency under the prerequisites of risk prevention and procedure accuracy.

"Previously, many multinational companies purchased local players with poor performance. But they now prefer to buy businesses with strong technological backgrounds or even leaders of the industry," said Liu.