White Paper: Acquisitios by Chinese companies in US

By Andrew M. Ross
0 Comment(s)Print E-mail China.org.cn, February 20, 2012
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Acquisitions by Chinese compnies in the United States:

The case for moving forward now?

An accelerating number of Chinese companies are engaging in acquisitions and control investments, joint ventures and start-ups in the United States to carry out certain of their strategic goals and take advantage of attractive opportunities. It is generally understood that a large number of other Chinese companies are also considering doing so, in each case of course for their own purposes. Although the appropriate U.S. transaction for any particular Chinese company may satisfy strategic objectives and offer attractive opportunities, some Chinese companies hesitate to proceed for varous reasons, including a lack of relevant knowledge and experience in doing deals in the U.S., the lack of relationships with experienced attorneys and other advisors in this area as well as concerns regarding the U.S. transaction process and whether there is any potential adverse impact under U.S. law on the non-U.S. business of the Chinese company.

The thesis of this paper is that:

  • For Chinese companies, U.S.transactions can offer valuable business opportunities which can be achieved for a positive overall outcome.
  • Neither the transaction itself nor post-transaction operations need create significant legal burdens on the Chinese companies' own activities.

This paper discusses various business and legal issues regarding Chinese deals in the United States, with the purpose of demonstrating the foregoing.Some observers note that the U.S. economic downturn makes it a particularly good time to seek U.S. businesses.While several topics discussed herein are pertinent to outbound deals to any non-Chinese country, the focus of this paper is on the United States, and the author believes there are significant reasons to consider the U.S. as the primary focus of opportunity for Chinese companies, other than in the case of certain exceptions such as raw materials. In general, for convenience,reference will be made to "acquisitions" of U.S. companies by Chinese companies, but much, although not all, of the same analysis applies to investments, including control investments, by Chinese companies in U.S. businesses and, to varying but generally a lesser extent, joint ventures, licensing deals and start-ups.

Reasons to go Global and China's U.S.Transaction History

There are many reasons for Chinese companies to go global, and in particular to do so in the United States. Each Chief Executive Officer of a Chinese company should have a keen understanding of the strategic objectives and potential benefits, if any, to be derived by his or her company in doing so. This paper will identify some of the most common objectives for many companies.Moreover, the right deal can accomplish mulitple objectives. All recognize that the Twelfth Five Year Plan is supportive of Chinese companies going global in general and especially in particular sectors. In part it states under the heading "Accelerate the Implementation of the Strategy of "Going Out", "Based on the market trend and the principle of autonomous decision-making by enterprises, guide enterprises of various ownership structure to invest and cooperate overseas in an orderly manner. (emphasis added)"

One potential reason to go global is to obtain otherwise unavailable goods and services. Examples can include talent generally, especiallyintellectual capital, as well as intellectual property and research and development capabilities and facilities, although of course in many cases Chinese companies are leaders in various IP and research sectors and may not need this.Another reason is to acquire a company in a similar line of business, such as a seller of similar goods, and in addition to continuing to sell the target's goods in the U.S., also sell them in China through the Chinese company's existing distribution network and furthermore use the acquired U.S. company's existing U.S. distribution network to distribute the Chinese company's goods in the U.S. Another reason can be to acquire products that flesh out or improve a Chinese company's existing product line such as valued international or U.S. brands or improve its competitive market position; and in the case of some transactions in the U.S., bring the Chinese company physically closer to its customers. Going global can also increase market share and increase brand recognition. Another benefit of doing deals in the United States, even under current circumstances, is the fact of the U.S.'s stable political and economic environment which facilitate business planning and activities. Please see Annex A which contains a partial list of Chinese transactions in the U.S. This is a significant list of deals, many by companies with which many persons may not be familiar, but each company with its own business reasons for its deal.

The first point to note from Annex A is that the rate of deals is increasing, and is doing so dramatically. A second point is that as a percentage of the total number of deals, small to medium size deals make up the majority, although there are a few larger ones, and the buyers are generally not SOEs.Third, the industries of the acquired companies cover a broad range, from technology, apparel, consulting services, auto parts, hotels and many more. Also with the exception of one company all the buyers are mainland China companies, these are not passive investments but are acquisitions or control investments, and while a few joint ventures are listed, there are many others which are not. This also does not include purchases of housing or land or pure start-ups, so the total size of China to U.S. capital transactions is much larger than this list suggests. Many studies and reports have been issued on the size of Chinese investment in the U.S. and their numbers vary, but they all show significant investment, and perhaps more important, predict continued and substantial growth.

Moreover, in 2011 several Chinese companies announced their intentions to enter into deals in the U.S., including Shanghai Pharmaceuticals, with its publicly stated reasons being to seek new drugs to expand its product line and noting declining overseas prices and a strong Yuan, Bright Food Group, China National Materials Co. (Sinoma) and Fosun Group, which stated it is looking at consumer brands. The point is that many Chinese companies are going global in the U.S., more and more will be doing so, and for those Chinese companies for which this makes sense and which proceed to do so,they will be in very good company.

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