Mirror opposites, China and India M&A may converge

Mirror opposites, China and India M&A may converge

Mumbai: If overseas M&A from Asia’s two rising giants is defined by China flexing its might to snap up natural resources while India’s dynamic entrepreneurs buy control of operating firms, the distinction is likely to blur.

As Chinese firms in search of technology and brands gain confidence, they will make more deals like privately-run Geely’s recent $1.8 billion pact to buy Volvo from Ford Motor, the second-largest offshore purchase from China for control of a firm outside resources or power.

That could put more Chinese companies on a collision course for deals with Corporate India, known for its takeovers of brands and businesses such as Jaguar Land Rover, bought by Tata Motors in 2008.

For its part, India is becoming a more assertive player in the resources sector now dominated by China, as private firms led by Reliance Industries look to buy and state operators become savvier deal-makers.

“I think you’re going to see a convergence over time," said Frank Hancock, managing director for advisory at Barclays in India, who helped Bharti Airtel in its recent $9 billion acquisition of Zain’s African operations.

“You’ll see more private, cross-border out of China, and more public, cross-border out of India," he said.

While still emerging, such a trend could push up valuations for deals where Indian and Chinese firms find themselves battling for assets.

Markus Rosgen, Asia equity strategist at Citigroup in Hong Kong, said Asian acquirers are motivated by a desire to reverse declining margins and gain pricing power as commodity costs rise, which will spur accelerating overseas dealmaking from the region.

“In order to get pricing power, the one thing you need is brand recognition. That’s why Tata went and bought Jaguar and Land Rover, that’s why Geely’s going out to buy Volvo, and one of the things that obviously Asia is beginning to realise is what a brand gives you is a kind of quality control," he said.

State vs Promoter

M&A reflects differences between corporate China and India.

The top overseas deals from China, where the biggest firms are state-controlled, are mostly for natural resources as Beijing seeks energy security and inputs to fuel its economic machine. China has also bought billions of dollars worth of minority stakes in some financial firms such as Morgan Stanley.

In India, four of the top five overseas deals have seen private firms buying control and becoming true multinationals.

Where China’s big deals are hatched to serve Beijing’s strategic needs, India’s corporate culture is dominated by “promoters," or controlling shareholders, who can move quickly.

“It seems to create a very entrepreneurial dynamic in Indian corporate behaviour, because one person takes a decision, rather than a board of professionals. He can react incredibly quickly to auction situations," Hancock said.

Bharti’s Africa deal is quintessentially Indian.

The mobile carrier founded by Sunil Mittal, battling more than a dozen rivals eating into margins at home, has bet it can apply its low-cost/high-usage “minutes factory" model to Africa.

Its African adventure also exposes China Inc’s limitations.

State-run China Mobile, the world’s biggest mobile operator, was conspicuous in its absence from serious contention for Zain Africa or South Africa’s MTN, Bharti’s original target, despite market speculation and a $39 billion cash pile.

Scarred by a painful M&A history — in 2006 it backed out of a deal for Millicom at the last minute — China Mobile instead paid $5.8 billion for 20% of a Chinese bank.

Antony Dapiran, a partner in the Beijing office of law firm Freshfields Bruckhaus Deringer, said China has been cautious in letting companies expand abroad, in part for fear of overpaying.

“There are also concerns that Chinese companies don’t necessarily have yet the international experience and the management technology to manage a foreign business if it did actually acquire control over it," Dapiran said.

Culture matters

English-speaking Indians in large numbers have studied and worked abroad, giving Indian firms a leg up overseas; China was until recently much more inward-looking. That cultural gap is closing and will give Chinese firms more confidence to go abroad.

“Now you’re getting on to the second generation of Chinese business leaders who’ve been studying in America, or Canada, Australia, UK," Citi’s Rosgen said.

Private Chinese firms include global leaders in sectors such as the Internet and green technology. Chinese makers of cars and consumer goods are looking for brands and markets overseas.

In a sign of deals to come, Lenovo, which made one of China’s boldest moves abroad with its deal for IBM’s PC unit in 2005, was in the hunt for US smartphone maker Palm Inc but lost out last week to Hewlett-Packard.

India, for its part, will remain the underdog against China in the hunt for natural resources, but its plodding state energy and mining firms are trying to raise their game. Coal India, Oil and Natural Gas Corp and Indian Oil Corp will soon be granted more autonomy as they look overseas for deals.

Indian state resources firms may lack China’s financial heft and decisiveness, but they also carry less political baggage.

Still, ONGC was reminded of China’s might when it was among those losing to Sinopec’s $4.65 billion bid for ConocoPhillips’ stake in a Canadian oil project.

“Before we could even take the talks to a conclusion, they just came in and did the deal," said a banker for a competing buyer. “The Chinese just pre-empted the whole process."