M&A targets show shift in economic priorities

Chinese companies pursue more than resources

Morning Whistle Group, an online portal that tracks overseas merger and acquisition (M&A) deals involving Chinese enterprises, recorded 91 takeovers of foreign businesses by local entities in the second quarter. Financial terms were disclosed for 70 of these transactions, which together involved more than $51.5 billion, a 40 percent increase over the previous quarter in terms of spending.

Morning Whistle data also suggest a shift in the sorts of targets which Chinese firms are pursuing overseas. According to information from the portal, foreign businesses involved in real estate, mineral resources and TMT (technology, media and telecommunication) were favored the most among Chinese buyers.

More than a decade ago, Chinese planners vowed to build a stronger economy by encouraging local corporate groups and companies to purchase overseas energy and resource assets. This "going out" strategy was seen by many as a central component in China's quest to secure the commodities it would need to feed its rapidly growing industrial sector.

Nowadays, Chinese investment money is being drawn toward a new set of assets, a shift which represents broader changes taking place within the country's economy. For starters, an increasing number of M&A deals involve high technology enterprises, a trend which will certainly help the country shift away from export-driven growth toward an economic model centered on innovation and value-added services.

Similarly, the second quarter saw Chinese companies investing less in overseas infrastructure, an area where they have traditionally been heavy spenders. Local enterprises funneled a recorded $1.26 billion into such projects during the period, compared with $7.3 billion into TMT assets, an upsurge fueled in part by big-ticket shopping sprees by Alibaba and Tencent. Nevertheless, this sum represents a decline from the $10.69 billion in TMT spending disclosed during the prior three-month period, when Lenovo Group Ltd and Giant Interactive Group Inc both notched hefty M&A deals.

But if Lenovo was the most active buyer in the first quarter, Alibaba undoubtedly claimed this distinction over the preceding three-month period. From May to July, there were only two M&A deals in the TMT industry involving disclosed capital of more than $1 billion, and Alibaba was behind both of them.

Two other big moves were also made by China Mobile, a company which had refrained from acquiring assets abroad since at least 2007. During the second quarter, the State-run carrier obtained 3G and 4G licenses in Pakistan for $516 million and also acquired an 18-percent stake in True, Thailand's national telecoms company.

In terms of geography, Australia, Britain and Canada lured the most Chinese M&A money, indicating the appeal that the Western world still has on local investors. Canada and Australia have long drawn Chinese money into extractive industries like oil production and mining, but now we are seeing a new emphasis on the high technology assets which these and other developed countries have to offer. Cooperating with Western peers will surely help Chinese businesses access the sorts of cutting-edge products that will facilitate their own breakthroughs and upgrades. Such a trend has obvious implications for the government's campaign to spur personal consumption. Equipment and know-how that makes it easier for local enterprises to churn out high-quality automobiles, consumer electronics and other sought-after products will give local businesses an edge when it comes to meeting consumer demand.

But as China's "going out" strategy reaches a turning point and more companies begin to look beyond the local market, there are still several challenges that need to be overcome. Spillover from vicious competition among domestic rivals, lack of funding availability, insufficient legal protections and an inability to absorb new technologies and intellectual properties - these are just some of the problems that could get in the way of foreign M&A deals.

The Chinese government should simplify related paperwork and procedures to encourage cross-border deals. Increased financial support, particularly for transactions in emerging industries, is also needed. And to discourage arbitrary investment, authorities should provide information and guidance pertaining to the corporate investment landscape as it exists outside of China.