Chinese conglomerates are swooping on distressed US companies in record numbers and often paying twice their domestic value.
The People’s Republic is using private companies to buy troubled US assets, often out of Chapter 11 bankruptcy, targeting brand names and intellectual property in eight key sectors: technology, cars, energy, metals, mining, agriculture, biotech and aerospace.
The Chinese are still smarting from a very public bruising the US delivered seven years ago when the Chinese National Offshore Oil Corporation was forced to withdraw its $18.5bn bid for US oil giant Unocal. The oil bid was the largest foreign acquisition attempted by a Chinese company and created a political furore in the US Congress.
The latest assault, to spend some of the $3.2 trillion the country has in foreign reserves, is often channelled through private companies which are happy to pay a higher multiple – five or six times earnings – than US rivals. Americans would consider this too expensive but they look cheap by comparison with a similar Chinese company valued at between 10 and 12 times earnings.
Between 2008 and last year, the Chinese spent almost $12bn on 159 US deals. Latest figures for this year show they have already spent $3bn on 14 acquisitions.
A report last month from Morgan Joseph TriArtisan, a US investment bank for middle-market companies, said: “…we’ve seen a substantial increase in activity from the east. Chinese investors have represented potential investors of corporate assets in nearly a quarter of in-court transactions in which we were involved during 2011.”
The report said the Chinese government is reluctant to invest directly in the west and prefers to use its influence on companies that are closely linked to the state as they buy technologies or intellectual property that add value in the Chinese manufacturing process.
David Miller, a managing director in the restructuring group at Australian bank Macquarie, said: “This [Chinese buying of distressed US companies] is a fairly new phenomenon that has only happened over the last two years.”
But he expects Chinese acquisitions of distressed companies to increase around the globe, although in some jurisdictions the bankruptcy procedure may be more complicated than in the US.
Miller said: “One common theme that will emerge is that Chinese buyers want technology, brand names or intellectual property that they can use in their home markets.”
Last year, investment firm China Private Equity Investment Holdings and Hong Kong’s Max Era Properties acquired the intellectual property of Evergreen Solar after the US solar panel manufacturer filed for bankruptcy. They were not interested in the manufacturing facilities.
Consultancy Rhodium Group said in a report in December: “China’s renewable energy industry is facing serious overcapacity, shrinking profits and trade frictions. Going abroad allows firms to diversify risks, tap new markets and adjust their business models to cope with structural adjustment at home.”
Chinese companies usually pay cash, giving them an advantage in a US bankruptcy court. Miller said: “They are asset buyers who take a long-term strategic view. They may be willing to pay a higher valuation than US buyers because the growth potential in their home market is so much greater.”
Last May, an unidentified Chinese investor saved an office tower in Manhattan from foreclosure by putting in $265m of equity and debt.
In 2010 Aviation Industry Corp of China’s automotive arm, Avic Auto, and Beijing E-town International Investment and Development, an investment fund for the city of Beijing, acquired Nexteer Automotive a loss-making parts manufacturer in Saginaw, Michigan, from General Motors. Zhao Guibin, chairman of Avic Auto, told the Wall Street Journal in an interview two months ago that the firm was looking for more acquisitions: “If there is a good opportunity we will consider a second acquisition and more.”
James Hadfield, vice-president in the financial restructuring group at Morgan Joseph, said the Chinese government has accumulated $3.2 trillion in foreign reserves by keeping the yuan cheap against the US dollar to boost exports. These reserves are invested in US Treasuries which are paying low interest and the government wants to transform the economy from relying on low-cost workers to one based on higher value manufacturing and intellectual property.
Chinese entrepreneurs also want to diversify their wealth by placing money overseas, despite China’s strict guidelines on foreign investments.
China’s US expansion could raise security concerns for the US authorities. The Committee on Foreign Investment in the United States, an inter-agency government panel chaired by the Treasury Secretary, has the right to block or set conditions on an overseas acquisition if it is harmful to US national security. The CFIUS may raise concerns if foreign acquirers are state-owned or if a technology could boost a foreign military power.
Hadfield said that although Chinese buyers might need CFIUS approval this has not slowed down any deals. He cited Cirrus Industries, a US light aircraft manufacturer, in which the buyer, Aviation Industry Corp of China, received CFIUS approval in less than three months instead of the more typical six to nine months. Hadfield said: “CFIUS approval has not been an impediment in any of the deals we have worked on and may be less of a hurdle in middle-market deals.”
US politicians are also supportive of Chinese investments which they say will help lift the US economy. When US Vice-President Joe Biden visited China last year, he said: “President Obama and I, we welcome, encourage and see nothing but positive benefit from direct investment in the US from Chinese businesses and Chinese entities. It means jobs.” Gary Locke, who became the US ambassador to China last year, has also stressed that the Obama administration encourages Chinese investments for US job creation and to boost exports.
Hadfield expects restructuring of US companies to continue in sectors such as print media, housing, aerospace and commercial jets despite the improving American economy. Bankers believe this will provide further opportunities for Chinese buyers.
It is a far cry from 20 years ago when the Japanese snapped up trophy properties in America and caused outcry when the Mitsubishi Group bought the Rockefeller Center in midtown Manhattan.
The difference is that the Japanese wanted tangible assets, the Chinese are more interested in intellectual assets.
