America's Emerson Network Power has acquired 100% in Avansys, a telecom and data power conversions provider, and a 100% owned subsidiary of Shenzhen-based Huawei Technologies for $750 million in cash, in the largest M&A deal between a private Chinese company and a foreign investor to date.
The deal represents a milestone in the Chinese M&A market. Hitherto deals involving western investors have been few, with investment usually taking the form of a joint venture, wholly owned foreign venture, or equity stake via an international IPO.
For example, the only two major M&A deals this year have purely domestic - the acquisition of Shandong Huaneng Power by Huaneng Power International for $1.45 billion and the acquisition of Sinopec Star Petroleum by China Petroleum & Chemical Corp (Sinopec) for $1.2 billion. The first two companies are state-owned entities which have restructured and listed abroad, while Sinopec, also a restructured and listed SOE, bought unlisted Sinopec Star from its parent, Sinopec Group Company.
"The (Huawei) deal is unusual, because in the past, Multinational Corporations have been on the sell side, rather than on the buy side. Historically there have been few purely domestic companies foreign investors have wished to purchase," comments Howard Chao, partner at O'Melveny & Myers, a law firm active in mainland transactions.
M&A in China has been hedged with restrictions. Buying state-owned companies is difficult since a government-authorized appraiser needs to look at the assets, and the State Asset Appraisal Administration must confirm the assessment.
Buying private and state companies as legal entities can also expose the buyer to large hidden liabilities.
But buying just the assets can also be complex. A business tax of 5% may be payable by the seller on the sale of certain assets, such as real estate. Real estate is also subject to a tax of approximately 3%-5%, payable by the buyer. There are other possible taxes, depending on the type of asset, points out O'Melveny's Chao. These factors can make an equity deal more attractive.
The difficulty in buying Chinese owned companies, both public and private, has meant the trend in investing in China has been to set up wholly foreign-owned enterprises.
This has replaced joint ventures with Chinese partners, which have often been characterized by misunderstandings and conflicts.
Deals with privately held companies are subject to less government interference, as long as they are not in 'strategic areas', but until recently China's private sector has been too small to produce the scale of the deal between Emerson and Huawei.
The transaction shows the growing strength of the company's private sector, which authorities intend to be a crucial component of China's economic performance once the country joins the World Trade Organization next year.
China's private sector is estimated to produce around one third of the country's GDP, and as high as 50% if private enterprises in the countryside are included.
The deal also shows China could provide some momentum to a M&A market, which fell to only $56 billion for Asia outside Japan and Australia in the first half of this year, down 42% on the same period last year.
Huawei says it will be using the proceeds to invest in its core business of designing, producing and selling telecommunication and data equipment.
Sales figures for Avansys are expected to be $290 million for 2000/01, according to Charles Anderson, a spokesman for Emerson. Compound annual sales growth for Avansys has exceeded 30% in the last three years, he adds. Avansys Power is the subsidiary of Huawei, a privately held company controlled by Ren Zhengfei and one of China's richest businessmen.
Figures for last year's sales were not disclosed.
The transaction would give Emerson an immediate leadership position in supplying reliable power solutions in one of the world's largest and fastest growing markets, comments David N Farr, Emerson's CEO in a press release. Emerson Network Power Companies provides networked data, telecommunications and Internet related business with power and connectivity equipment and services.
Huawei was incorporated in 1988 and is headquartered in Shenzhen, China. The company specializes in research and development, production and marketing of telecommunications equipment. Sales in 2000 were around $2.6 billion.
Emerson's sales in Asia reached $1.3 billion in 2000, up from $400 million in 1990.
