China’s acquisition spree is risky
China is on a shopping spree. On 12 January, Chinese property developer Dalian Wanda bought control of Hollywood film producer Legendary Entertainment for $3.5 billion. Just three days later, the appliance giant Haier acquired General Electric’s white goods business for $5.4 billion.
The deals are just drops in a gushing torrent of Chinese overseas spending. Foreign direct investment from China reached $111 billion in 2015, by one estimate—10 times more than a decade earlier.
For many Chinese companies, such acquisitions seem to make sense. Encouraged by the government and flush with cash, they have the financial muscle to buy on the world market what they currently lack: technology, market share, brands and management skills. Why do things the hard way—investing in research and development, nurturing brands and building sales networks—when you can just write a cheque? History, though, tells us it’s not that easy.
In the 1980s, Japanese giants, also awash in cheap money, snapped up foreign companies and trophy assets—most famously New York’s Rockefeller Center—but in many cases the deals were overly expensive, poorly conceived and horribly mismanaged. “The strategic rationale,” in the words of one consulting firm, “was fuzzy at best, amounting to little more than ‘because it’s cool, and because we can’.”
In the 1990s, Korean companies that tried to acquire their way into world markets learned that the old adage—you get what you pay for—is all too true. Samsung’s misguided stab into the global PC market—its purchase of troubled AST Research—ended in massive losses. LG fared only a bit better with its acquisition of the flailing US electronics firm Zenith, which still survives but never became a platform for international expansion.
The Haier-GE deal has some uncomfortable similarities. After nearly two decades of effort, Haier is still struggling to make progress in the US market. Buying GE instantly transforms it into a major player. But the price is steep: Haier is paying about $2 billion more than rival Electrolux had previously pledged, in a deal that broke apart due to regulatory concerns. With only $400 million in earnings (before interest, taxes, depreciation and amortization) on $5.9 billion in revenue in 2014, the GE business is definitely not high margin. And by maintaining the GE operation as an independent business with its own management, Haier may lose some of the potential synergies and savings of the merger as well.
Remember, too, that such assets go up for sale for a reason. The old-fashioned appliance business doesn’t fit into GE’s strategy for the future. In that sense, the Haier deal recalls Lenovo’s purchase of IBM’s PC unit in 2005. After some initial problems managing the combined business, Lenovo eventually made it work—becoming the world’s no. 1 PC maker—but in an industry in decline. PC shipments shrank by 8% in 2015.
Wanda’s investment in Legendary, meanwhile, recalls Sony’s purchase of Columbia Pictures in 1989. Sony thought it needed a movie studio to beef up its entertainment offerings, but its executives, more knowledgeable about making TVs than what’s shown on them, grossly overpaid, then botched Columbia’s management, and eventually suffered billions in losses. It’s reasonable to wonder if Wanda chairman Wang Jianlin—who built his fortune developing apartment towers and shopping malls, not movies—is allowing big ego and big money to get in the way of good business.
Previous generations of Asian companies came to learn from their mistakes. Samsung and LG eventually fostered the highly respected brands and global clout they wanted—but only after creating stellar products of their own. Chinese companies will eventually get things right, too. But they may lose a few billions along the way. Bloomberg
Michael Schuman is an author and journalist based in Beijing.