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Money not everything when it comes to overseas investment
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16:42, June 15, 2009

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The world's third largest iron ore producer Rio Tinto recently revoked its 19.5 billion USD financing agreement with Aluminum Corporation of China (Chinalco) and instead formed an alliance with BHP Billiton, marking the failure of China's largest overseas acquisition deal. At the same time, GM, which recently filed for bankruptcy protection reached a tentative deal with to sell its Hummer brand to Sichuan Tengzhong Heavy Industrial Machinery Company, a little known private enterprise, triggering widespread discussion.

Since the beginning of the year, although the global economy has not bottomed out and variables in the external environment have increased, market trends have been clearer than expected. Many domestic companies have therefore stopped taking a wait-and-see attitude and are expressing a stronger willingness to invest in overseas companies. Statistics from the Ministry of Commerce show that mergers and acquisitions (M&A) during the first five months accounted for over 40 percent of China’s total overseas investment.

An official from the Department of Outward Investment and Economic Cooperation under the Ministry of Commerce (MOFCOM) said that "going global" remains an important strategy for companies this year. As the crisis has caused some foreign enterprises' assets to rapidly shrink, there are more opportunities for domestic enterprises to acquire high-quality companies and assets abroad. Investment costs have dropped, transaction conditions have improved and Chinese companies are thus more likely to have the advantage in investment. In the current situation, boosting export volume through foreign investment is undoubtedly a shortcut in developing markets. Chinese companies are also hoping to rearrange their position by increasing foreign investments.

However, as the saying goes, "buyers can never beat sellers." Clear proof of this was shown when China National Offshore Oil Corporation's failed bid to purchase Unocal Corporation four years ago and Rio Tinto’s recent breach of contract with Chinalco has given Chinese companies another lesson. Regardless of whether the decisive factors are commercial interests, political gambling or something else, they have all shown that Chinese companies lack experience, have insufficient talent and are not skilled at foreign investment operations.

Compared with domestic asset restructuring, the success of multinational M&As largely depends on changes in the global economic situation, as well as policies, laws and the cultural environment of the countries where the assets are located. The continuing spread of investment protectionism also poses as a new challenge to China's enterprises and increases difficulty in negotiations and the complexity of M&As.

What to buy overseas? Why?

Xing Houyuan, a researcher with the Ministry of Commerce, said risk control is directly related to the success of overseas investment. Although Tengzhong's takeover attempt of Hummer has not yet been finalized and no conclusion should be drawn, it should be remembered that sellers will not easily give away high-quality assets and blind and rash actions often lead to losses.

Overseas investment is not merely bargain hunting and investors must never think they have the luck of picking up "discounted goods." Most domestic companies are still beginners in the planning and operation of multinational M&As and noticeably lag behind developed nations. "It is by no means the case that those who have US dollars can succeed."

Hummer has approached Geely Holding Group on a number of occasions. Following thorough consideration, Geely finally chose to buy the world's second largest automatic transmission manufacturer, Australia's Drivetrain Systems International (DSI). DSI's capacity in producing automatic transmissions and its technologies are what China lacks the most at present.

"All overseas M&As carry risks and no deals should proceed unless they are suitable. Investors must not make a move simply because targets are cheap," said Li Shufu, Geely's Chairman.

Twenty years ago, Japanese companies advanced into the economically-battered US market in a high-profile shopping spree to purchase the US’ backward technologies and equipment, landmark buildings and the entertainment industry, but they ended up falling into difficulty and suffered heavy losses.

"Don't just take over the big ones. One must balance whether it has sufficient abilities," said Xing. Sometimes transactions are not difficult, but integration is. Germany's Daimler-Benz has spent many years of effort but has still failed to integrate Chrysler. China's acquisition projects involving TCL taking over Thomson and the Shanghai Automotive Industry Corp (SAIC)'s purchase of Ssangyong Motor Company both failed in integration.

Li Yongjun, a division chief at the Department of Outward Investment and Economic Cooperation under the MOFCOM, believes that the strategic goal and direction of an overseas merger or acquisition should be clearly defined and that the long-term development of the enterprise and the enhancement of its competitiveness should be regarded as top considerations in making overseas M&As. He also believes that M&As should not be carried out for a moment of glory.

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