Changing China

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from Breakingviews:

Beijing gate-keeping disadvantages Chinese buyers

Hummer H3

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.

from Summit Notebook:

First, be confident

As China Inc shops for assets almost everywhere across the planet, some people know what they want. Others are just hurrying to grab some company that's become undervalued during the global financial crisis.
At the Reuters China Investment Summit in Hong Kong, we asked one of JPMorgan's top deal advisers -- Brian Gu, head of M&A for Greater China -- if he had any suggestions for cash-rich Chinese. His answer was simple: First, be confident.
    "For any M&A, they need the confidence that they aren't getting into anything that's messy. They have to demonstrate strong integration and a capability to absorb those assets," said Gu, a biochemist-turned investment banker.
    "A lot of companies want to make minority investments because they just don't have the confidence to handle a full-blown integration." Instead, he said, companies are taking a phased approach -- buy 20 percent, send some representatives to get to know the managers and then make the decision later on whether to buy the whole company.
    In fact, not many Chinese overseas acquirers have shown much confidence, including Lenovo -- whose chairman once said that it may take years to see whether the purchase of IBM's PC business would succeed -- and China Minsheng Banking Corp. Minsheng bought a minority stake in UCBH and the shares of the American company sank during the financial crisis.
    Gu was unenthusiastic about Chinese companies buying into distressed assets. "With distressed transactions, it's easier to see them buying into simpler assets, such as natural resources or large capital equipment assets", he said, adding he believes China Inc knows how to value and operate natural resources better than other, more complicated businesses.
    "(Chinese companies) don't have to be involved in turning around a distressed company. That's why you see a lot of action in those sectors rather than making bold moves where you buy big operations that involve hundreds of thousands of employees."
    Just months ago, a little-known Chinese company called Tengzhong surprised markets with its plan to buy GM's troubled Hummer unit. The deal is now still subject to final agreement between Tengzhong and GM as well as Beijing's approval.
    Now, the question for Tengzhong -- is it confident it can succeed with Hummer where GM has already failed?

Photo Caption: Brian Gu, JP Morgan's head of M&A for Greater China, speaking at the Reuters China Investment Summit.