M&A monopoly faces challenge
By Sun Min (China Daily)
Updated: 2004-04-23 08:36

Chinese securities houses are trying to break the monopoly held by overseas investment banks in cross-border merger and acquisition (M&A) services.

Instead of only conducting simple and preliminary consulting services for overseas deals, more of them are seeking the chance to play a leading advisory role and build up their own brand in the international investment banking business.

Xiangcai Securities has set a positive example recently by leading the advisory service for Xinjiang Chalkis Co Ltd, a Shenzhen-listed agriculture company and China's biggest tomato producer, in its latest overseas acquisition.

Two weeks ago, the listed company took over a 55 per cent stake in France's SAS Conserve de Provence, a major tomato producer in France that takes about half of the market share of tomato products in the country but has been haunted by over-loaded debt.

The price Xinjiang Chalkis paid for the majority shareholder position was only 7 million euros (US$5.9 million), compared to a doubling net asset of the French company. That is a good bargain for the Xinjiang company as it wins access to the overseas market, production base and sales network, experts said.

Helping the clients find the most suitable acquisition target with most satisfactory prices is what investment banks like Xiangcai are set to do, said Jin Yanshi, chief economist of Xiangcai Securities, a Hunan-based securities firm and a pioneer in introducing overseas capital and expertise in the industry.

The company has already set up a joint venture securities house and a fund management venture in China and recruited a team of overseas professionals to expand its overseas investment banking business.

"The success with the Xinjiang Chalkis deal opens a new business model for us," said Jin, a former Wall Street investment banker.

So far, investment banking only attributes a small ratio of overall revenue in domestic securities firms - and there was hardly any from overseas business.

However, as the M&A market grows rapidly in China with economic restructuring, the Chinese authorities have been encouraging more domestic companies to open businesses overseas and allow more foreign investors in.

It took only about one month for the authorities to give the go-ahead for Xinjiang Chalkis' overseas acquisition in March, said Jin.

That demonstrates the authorities' support for such moves, so more domestic companies are expected to go down a similar road, he said.

"That is exactly where our business opportunities arise," he said, adding that his team aims to serve first-class domestic companies and help them become internationally competitive.

Timing and familiarity with the international market are essential elements to ensure the success of such overseas M&A deals.

Take the tomato business, for example, statistics indicate that the global consumption of tomatoes has been increasing by 3 per cent annually over the past few years.

The demand is even higher in Europe, but due to climactic reasons, the tomato output in European countries and the United States has been declining.

The shortage of tomato supply in the international market gives Chinese enterprises a golden chance, said Jin.

With the combination of the European brand and Chinese supply and processing capacity, it has been estimated that the French venture would turn around next year and become a global leader in the industry in three to five years.

Other industries that nurture similar opportunities for Chinese enterprises include food, electronics, power and steel, said Jin.

M&A in sectors like automobiles, real estate and credit cards are also on the rise.

But to be truly competitive with large overseas investment banks, Chinese companies still have a lot to catch up, experts said.

For example, foreign companies still prefer to choose investment banks from their home-market to provide services when entering China and acquiring Chinese firms.

Even for large Chinese companies, they oftentimes become clients of foreign investment banks when seeking overseas expansion.

So far, domestic investment banks are still mostly involved in small and medium-sized projects in the local market, where they have more advantages, said an official with the investment banking department of the Industrial Securities Co.

It will take a long time to change the situation, he said.