Chinese Companies Display New Deal-Making Prowess DEALBOOK

By Cyrus Sanati

The Olympics will give China a chance to celebrate its status as a political and economic heavyweight. The Games also come as the country has been raising its profile in the deal-making business.

While the volume of mergers and acquisitions around the world was down 30 percent in the first half of 2008, compared with a year earlier, transaction volumes were up 5 percent in Asia, in large part because of aggressive buying by Chinese companies, according to data from Dealogic.

In the first half of 2008, Chinese companies announced plans to buy a combined $42 billion in foreign assets. That is a little more than five times the volume in the first half of 2007. In fact, it is equivalent to the combined volume of all the foreign takeovers by Chinese companies from 2000 through 2006.

It is hard to separate the state from private companies in China. Indeed, the largest deals have involved companies that take their orders from the government in Beijing, even though they have private shareholders.

This was a prime consideration when China National Offshore Oil Corp., or Cnooc, tried to buy the U.S. energy company Unocal in 2005. At the time, Washington balked at the notion of Chinese government control over oil and gas assets in California and elsewhere in the United States. The $18.5 billion takeover deal was eventually withdrawn because of the political backlash.

But the Chinese have been biding their time. Chinese state- controlled companies have been snapping up vital assets in Western financial businesses and commodity exporters for the past few years. They have enlisted the help of nearly every major investment bank in the United States and are increasingly using local experts like China International Capital of Hong Kong to help facilitate deals in the region.

Just last week, China offered more proof of its deal-making prowess – it staged its first successful hostile takeover. Sinosteel, one of the four large, state-run steel makers, won its hostile bid for Midwest, an Australian iron ore producer. The deal was small – valued at a little less than $1 billion – but nonetheless significant, as it showed that the Chinese are willing to go to the mat for what they want and are not afraid to use government connections and access to government coffers to make sure deals stick.

The Chinese sent a delegation to Australia to coordinate the deal and secure government approval. Once it got the go-ahead, it pushed full steam ahead, outbidding an Australian company that would have reaped big synergies from the deal.

The Chinese were willing to pay a high premium for the company, in large part because it supplies iron ore for the country’s hungry steel mills. Iron ore prices are a top concern to the leaders in Beijing, as prices have skyrocketed – up 65 percent alone in 2008.

The Chinese have already shown their willingness to use deals to restrain the rise of metals prices by preventing miners from banding together. In February, Aluminum Corp. of China, or Chinalco, teamed up with the U.S. company Alcoa to buy a 12 percent stake in the Anglo-Australian miner Rio Tinto in an effort to fend off an unsolicited takeover by BHP Billiton, a rival miner.

Clearly, the Chinese are becoming more sophisticated deal makers.

So will this usher in an era of aggressive Chinese deal-making across the globe? That remains to be seen. So far, all but one of the 10 unsolicited and hostile deals offered by Chinese companies for foreign targets since 2005 have focused on natural resources. The one exception was when the Chinese insurer Ping An made a successful, unsolicited bid to take a 4.2 percent stake in Fortis, the Belgian-Dutch financial-services group.

For now, it seems that the Chinese are most determined to secure commodity assets. But that could quickly change. Let the games begin.

Originally published by The New York Times Media Group.

(c) 2008 International Herald Tribune. Provided by ProQuest Information and Learning. All rights Reserved.