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The Chinese Are Coming. Is Your Firm Ready?

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The Chinese Are Coming. Is Your Firm Ready?

by Cesar Bacani, 18 February 2011
topics:
Corporate Finance Finance and Banking
tags:
3Leaf alliances CFIUS Huawei Technologies joint ventures M&A PwC

After paying US$2 million last May for the intellectual property and other assets of U.S. start-up 3Leaf Systems, China’s Huawei Technologies was told four months later, in November, by the Pentagon to get the approval of the Committee on Foreign Investment in the United States (CFIUS). In a letter to CFIUS, several U.S. politicians then charged that “the 3Leaf acquisition appears certain to generate transfer to China by Huawei of advanced U.S. computing technology.” 3Leaf has developed know-how to link computer servers together and create a powerful super machine.

 
On February 18, Huawei decided to give up. "This was a difficult decision," it said in a brief statement. "However, we have decided to accept the recommendation of CFIUS to withdraw our application to acquire specific assets of 3Leaf. Huawei will remain committed to long-term investment in the United States. The significant impact and attention that this transaction has caused were not what we intended. Rather, our intention was to go through all the procedures to reveal the truth about Huawei."
 
Some may think that Chinese companies are hitting a brick wall in their drive to buy overseas assets and companies. That’s not really the case, says PricewaterhouseCoopers. In fact, PwC reports, outbound M&A by mainland China buyers expanded 30% to a record 188 transactions in 2010. They have an aggregate value of US$38 billion, so the CFIUS disapproval of the 3Leaf deal involved only a tiny fraction of the total. 
 
Chinese Targets
“The overall trend is very strong and that’s a trend that we expect to continue,” says David Brown, Partner and Greater China Private Equity Leader at PwC. “There’s no one destination that really stands out; it’s really quite spread throughout the globe.” The Chinese concluded 34 deals in the U.S. (up from 21 transactions in 2009), 55 deals in Asia, and 53 deals in Oceania, Africa and South America.
 
“In terms of industry sector, raw materials and resources is still by far the largest,” Brown reveals. “But we’re also seeing something that we predicted last year, which is the growth in technology deals. This is the phenomenon of Chinese companies really going out trying to acquire technology, trying to acquire know-how, to acquire intellectual property and bringing it back to China.”
 
 
Counting 3Leaf, there were 24 such deals in 2010, up from just 11 in 2009. So far, it was only the 3Leaf transaction that faced a challenge at CFIUS – foreign companies typically get the approval of the committee first before completing a U.S. purchase. Huawei, the world’s second largest telecom equipment maker after Ericsson, says it did not follow this procedure because it thought it was not obliged to do so, as it was buying only the company’s assets, not 3Leaf itself.
 
The 3Leaf case notwithstanding, PwC says there is no holding back for China’s overseas forays. “Outbound activity will continue to grow strongly, driven by demand for resources and the search for high technologies . . . and supported by China’s ‘going abroad’ strategy and the increasing sophistication of Chinese buyers overseas,” says Brown.
 
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If chinese company has to go
Submitted by Deepak Agrawal on 23 February 2011 - 4:57pm

If chinese company has to go for successful outbound M & A then every company should build an internal M & A department with people trained with speciallized skills to handle global M & A activity. These people should get trained how to provide support at pre & post level of acquisition. Once a company start doing acquistion then after 2-3 deals they learn the tricks of effective global acquisition.

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