Beijing gate-keeping disadvantages Chinese buyers
Chinese regulators might think that a tough stance on takeovers prevents domestic bidders from overpaying for overseas targets. This approach has helped prevent unwise deals. But, as the takeover of General Motors Co’s Hummer business shows, Chinese bidders may have to pay more to compensate for the regulatory risk at home.
Deep-pocketed Chinese buyers are increasingly appearing as potential buyers of assets overseas. But as well as grappling with protectionism in target countries, they also face unpredictable regulatory decisions at home. Foreign sellers are increasingly demanding that Chinese bidders pay more to compensate for these risks.
There have been many reports over the last few months that Beijing would not allow Sichuan Tengzhong Heavy Industrial Machinery to buy the manufacturer of gas-guzzling cars. The concern was that a deal would fly in the face of Beijing’s goal to reduce carbon emissions. There were also doubts about Tengzhong’s ability to manage a foreign brand.
The debate did not kill off Tengzhong’s bid. However, it may have lengthened the negotiations, which have taken a year. GM had little choice because it had no other credible bidders lined up. However, other sellers that have a choice of buyers are unlikely to wait that long.
Moreover, there is a possibility that Tengzhong might have been forced to pay a bit more to convince the seller that they can pull it off. The final purchase was reported to be $150 million for the ownership of the brand, though this does not include key technologies which remain largely off-limits to the Chinese.
Beijing has used its veto power several times in the past few years. For example, in July 2008 the cabinet rejected a request by China Development Bank to raise its stake in Britain’s Barclays Plc. That decision looked smart when market turmoil hammered Barclays shares a few months later. However, it has added to the nervousness among foreign companies about whether Chinese investors are reliable.
While it is important to have the regulatory checks and balances in place, Beijing can do its own companies a favour by acting more professionally. China used to be in shrouded in darkness. Now it is in a transition phase, where many people who have little to do with the decision making process are eager to express their views.
Foreign media, meanwhile, can also do a better job interpreting messages from Beijing. They need to understand that there is a big difference between the regulator, people close to the regulator, and the state media. All the conflicting messages only make Western sellers more nervous.
When there is a choice of buyers, Chinese companies are at a disadvantage compared to Western rivals. Beijing Auto almost missed the deadline to bid for GM’s Opel, probably because it had to talk to various constituencies first and agree on a proposed price. This is not to say that U.S. protectionism and regulatory hurdles have not thwarted Chinese bidders. But China’s lack of responsiveness and inflexibility make it even more difficult for Chinese companies to win highly competitive bids.
Some might argue that this is a good thing. After all, most mergers and acquisitions fail to justify their purchase price, and competitive auctions tend to have an even lower success rate. However, it might come as a surprise to the Chinese government, which is encouraging Chinese companies to make more strategic acquisitions abroad, that its gate-keeping could be hurting the very companies that it wants to protect.