Protectionist Cocktail: FDI + ODI + M&A. Mix with Global Recession. Add Dash of Espionage.

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The risk of protectionism is rising due to the economic crisis, and international M&A is in the frame.

China rejected Coke’s bid for “Chinese” (it is Hong Kong-listed) juice maker Huiyuan under the anti-monopoly law, after an extensive review, and on fears that it would give Coke too much control of the market. But others suspect it also has to do with protecting Chinese brands and the value they represent now and for the future.

Jack Perkowski (who knows a thing or two about M&A) at Managing the Dragon gave some background:

    “Beijing-based China Huiyuan Juice makes the country’s leading 100 percent juice and nectar brands. Founded in 1992, China Huiyuan is a privately-owned foreign company which listed its shares in Hong Kong in 2007. Two foreign companies, Groupe Danone of France and Warburg Pincus, the American private equity firm, hold minority stakes in the company. The acquisition of China Huiyuan by Coca-Cola would have been the largest foreign takeover of a China-based business.

    …For my part, I have to admit that I was somewhat surprised by China’s decision. When Coke first made its bid in September, I thought of writing an article for MTD on the deal. My angle would have been that it would test just how far China was willing to go to block foreign takeovers of the country’s leading companies. Over the last few years, there has been a noticeable shift in Beijing’s attitude toward foreign investment. In what was seen as a watershed deal, U.S. private-equity firm Carlyle Group ended its years-long effort last July to buy a stake in Xugong Group, one of China’s biggest manufacturers of construction machinery due to persistent regulatory resistance.”

    “Foreign private equity investments in China is not going to die, but it will need to modify. Wise foreign private equity firms are going to need to focus on the types of deals that have a real potential to work in China.”

The sorts of things that will pass muster are listed. CLB’s Steve Dickinson is quoted in the South China Morning Post with a neat summary:

    “China, fundamentally, 100 per cent discourages foreigners from entering the market and there are only three conditions China will permit,” he said. “Either the company is too small for the government to care about, or it is troubled and the foreign purchaser has agreed to improve the business, or the foreign company takes a minority stake and there is a transfer of technology or expertise or access to foreign markets.

    “If you don’t fit into one of these three categories you can’t do mergers or acquisitions in China and that’s the end of it.”

There is no doubt that the FDI environment has changed, and that policy must be watched carefully. But opportunities remain – for those willing to build from scratch or buy sensitively.

The Chinese ODI story is also in full swing, and has been brought into focus by the Coke rejection. It does not help the Chinese cause that three big Chinese companies – Chinalco (under review), Minmetals (blocked, but being re-worked), and Hunan Valin Iron and Steel (approved but with a cap) – have been chasing Australian assets at the same time, or that there are some overt political connections (“China names aluminum executive to Cabinet post”).

We did a review of other ODI news recently (“It’s a Deal For Chinese ODI” and more is coming all the time, so keep watching.

And while we are on the subject of ODI / security / protectionism…we Tweeted about the recent China spy net news here:

As protectionist sentiment grows in the face of global recession, it is perhaps not surprising that stories like this start appearing. Of course China has denied the allegation – hardly surprising! But is does raise questions for Chinese multinationals in waiting, and for international M&A (Huawei already had its bid for 3Com blocked last year).

There will be implications – for tech firms, if not mining ones.

2 Responses to “Protectionist Cocktail: FDI + ODI + M&A. Mix with Global Recession. Add Dash of Espionage.”

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