China corporate governance report: overseas acquisitions

ICBC’s recent acquisition of a stake in South Africa’s Standard Bank is another landmark. ICBC declined to comment for this article, referring Euromoney to the company’s annual report and web site for governance queries; Standard Bank did not respond to queries. But the pattern of corporate announcements since the acquisition looks much the same as in other takeovers or stake sales, with some ICBC directors moving onto the Standard Bank board, for example. Other acquisitive Chinese companies have included China Oilfield Services and Huawei Technologies.

That said, there may be deals that don’t happen at all over governance standards. “I know of a couple of cases where attempts to make significant acquisitions have been derailed because of the opaqueness of Chinese ownership structures,” says Marshall Meyer, professor of management and sociology at Wharton Business School in the University of Pennsylvania.

Indeed, it’s the deals that don’t take place, or are still on ice because of the politics, that capture the attention. Jenny Shipley has an interesting perspective on this debate. She is an independent non-executive director of China Construction Bank, one of whose major shareholders is Bank of America; she is also the former prime minister and minister for state owned enterprises of New Zealand. She has seen the government and the corporate side. “Governments are entitled to lay down what is in the public interest,” she says. “I am a person who believes that investment in a country stabilises, it doesn’t destabilise. If you have shared interests it is less likely to act in a volatile way. Having said that, it’s still a political issue that selling assets to foreign interests is a hard matter to manage: it’s where politics and economics come head to head.”

She adds: “I respect the rights of governments who have elected to make their decisions. But we are moving into a period in the next two or three years where there will be far more cross flow of investment. The rigid barriers that may have existed in the past may, for pragmatic reasons, have to be put aside so capital flows to where it is required.”

Woetzel thinks foreign companies engaging with China need to think differently on a number of levels. “Corporations outside China should increasingly see the country’s open state-owned enterprises as partners in global markets rather than only as conduits into the Chinese market,” he says. “Such companies, which have global aspirations and easier access to capital than their private-sector counterparts do, will help to propel a larger, more sustained wave of Chinese cross-border acquisitions than we have seen thus far. They should be accepted as peers capable of adding value to joint ventures around the world and as credible buyers of assets.”

He sees some western companies that have already learned to see Chinese state-owned enterprises in this light: GM, with its partnership with Shanghai Automotive Industry Corporation; and Rhodia, the French specialty chemical maker, which sold its silicones unit to BlueStar, for example.

Broadly, Chinese companies suffer the same challenges as anyone else going into new markets: uncertainty and inexperience. As Cui puts it: “About 70% of acquisitions are unsuccessful and that’s the case whether you are a Chinese or a western company.”

“There are several challenges,” says David Li at UBS. “Number one is understanding the real meaning of international standards and practice. They may acquire an American company and follow what they have to do but not really know what it means. The second is cultural understanding.” And there are the technical, accounting and legal issues.

And recently, assessing a good target has become harder still. A recent ill-fated acquisition was Ping An’s taking of a stake in Fortis, which subsequently ran in to terrible trouble forcing a $2 billion write-down in the value of the investment in this year’s accounts. However this was not an acquisition of an overall company, just a stake; also Jin Shaoliang, head of the group board of directors at Ping An, argues it was “purely asset matching for our life policies.” Nevertheless he is sanguine about the experience. “What we have learned from this lesson is when talking about risk control and one company’s risk we must also evaluate one country or region’s risk. If we were to do further overseas investments in future we would pay more attention to this kind of risk.”