29 Mar Why do Chinese, Indian firms buy foreign companies?
It’s no secret that Asian merger fever is a major trend. It seems the Chinese government holds endless foreign reserves, and is using that cash to acquire Western firms. China and India are showing the world they’re not just low-cost exporters, but also global M&A players.
We’ve seen examples with factories that made clothing and computers for American firms turning around and buying their overseas customers, such as the clothing factory Li & Fung in China, which purchased four of designer Liz Claiborne’s brands.
And while Lenovo’s purchase of IBM’s pc division wasn’t China’s largest acquisition, it certainly was one of the most newsworthy purchases.
Indian firms that were formerly outsourced back offices are purchasing their clients. The 2007 list of big-ticket purchases was impressive. In India:
Hindalco Industries bought Novelis, a Canadian aluminum company, for $3.6 billion. Suzlon Energy (India’s largest wind power company) nabbed REpower, a German engineering firm, for $1.7 billion. United Breweries, India’s largest beer and spirits conglomerate, snapped up Whyte & Mackay, the world’s fourth-largest distiller of Scotch whisky, for $1 billion. Wipro, one of India’s software giants, bought New Jersey-based Infocrossing for $600 million.
ICBC, a state-owned Chinese bank, put up $5.5 billion — China’s largest overseas investment ever — for a 20 percent stake in Standard Bank, South Africa’s biggest lender. China Development Bank announced a $3 billion investment in Barclays PLC to support the British bank’s bid for the Dutch bank ABN AMRO. In March, the Chinese government put together an investment fund that invested $3 billion for a 10 percent stake in the U.S. private equity firm Blackstone Group.
So what are Chinese and Indian firms actually buying? And how would we want to position our firms to sell to them, if desired?
First, we have to see who the customer is.
In China, we are dealing primarily with government officials, even if they masquerade as business people and have titles such as CEO or director on their cards. Prominence within the Communist Party enables them to have cash to commit to overseas purchases; the party will be highly involved in all dealings.
In India, we’re usually dealing with actual business people. They will, of course, have strong government ties, but many are true entrepreneurs or come from entrepreneurial families.
What do these new buyers want?
Chinese firms don’t necessarily demand management control of their acquisitions or investments, if the trend is any kind of indicator.
When an American company buys a business, it asks one of two questions: Will it make a profit? Or will it give us market share?
When Chinese companies make acquisitions, they often do it as a way to educate themselves about a specific market or industry.
Indian firms are quite different, and shouldn’t be examined through the same lens as Chinese firms. Indian firms clearly want control of the properties they buy. There is often a more strategic reason to make the buy, which fits into the parent firm’s business model.
What is the “win”?
Both countries want a win. And that looks different in different countries.
Tata’s (of India) acquisition of Jaguar and Land Rover (two former British brands that were owned by Ford) seems to make little sense financially.
These brands steadily declined in the last several years (Ford paid about $5 billion for Jaguar, and sold it with Land Rover for $2 billion).
Culturally, the acquisition makes sense, though. As a former colony of Great Britain, India is always showing the world that it’s a power to be dealt with.
And if Tata can turn around Jaguar, it will demonstrate it can revive the sick brand, doing it better than either the British or Americans. It’s more about pride than money.
Chinese victories are about policy, and going global. Chinese state-owned enterprises (SOEs) have been ordered to polish the Chinese reputation and spread Chinese multinationalism.
Last year, President Hu Jintao promised to “accelerate the growth of Chinese brand names in the world.” But since the acquiring firms from China are SOEs, they run into problems, and governments can block the purchase.
But they may buy a company — even if it’s inferior — just to make the Communist Party happy, which they must do.
In selling to India, be prepared to give up control. Seek a piece of the matrix that’s missing from Indian buyers, and fill the void.
When dealing with China, add value in a different way. Show an opening to Chinese brands, education of Chinese executives and willingness to work with the Chinese to teach them your business, market and industry.