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(Clockwise from top-left) AMC Entertainment, A123 Systems, Complete Genomics and the personal-computer division of IBM are all among China’s growing portfolio of U.S. acquisitions.  

China's zealous but bumpy U.S. acquisition spree

by Isabel Zhong
Jun 14, 2013

When it successfully bought AMC Entertainment Inc. last September, Dalian Wanda Group Corp. Ltd. made history by completing the largest ever U.S. acquisition by a Chinese company.

Now, a meat processor from a remote town in China’s Henan Province is looking to take that title away from the real estate and entertainment conglomerate. Only eight months after Wanda closed its $2.6 billion acquisition of the second-largest cinema operator in the U.S., Shuanghui International Holdings Ltd. recently announced plans for a $4.7 billion deal to buy Virginia-based Smithfield Foods Inc.

“This is a historic opportunity for both companies and their stakeholders,” Shuanghui Chairman Wan Long said in a press release.

In fact, the Shuanghui and Wanda deals represent just the crest of a surging wave of interest for American acquisitions coming from China. Despite the fierce backlash that often confronts foreign buyers in the U.S., Chinese purchases of American companies have soared in recent years, reaching a record high in 2012 when 40 deals worth a total of $10.5 billion were completed.

“With more financial resources at their disposal, Chinese investors have become more interested in expanding and enhancing their ability to serve the home market,” said John Zhao, CEO of Chinese private equity firm Hony Capital Co. Ltd. “So there is a trend of more Chinese companies wanting to make acquisitions in the U.S.”

As China begins to transform its exports-driven, low-consumption economy into one that is fueled by domestic demand, there are growing economic incentives for the country to reallocate funds from its massive $3 trillion foreign currency reserve to more productive offshore assets.

China’s double-digit annual economic growth for most of the past decade has paved the way for a boom in the country’s demand for goods and services. Since 2007, household consumption per capita in China has, on average, grown by 8.6 percent each year whereas in the U.S. it actually shrunk by 0.2 percent.

“Underneath this umbrella, you will see companies want to come to the U.S. to invest because they want to secure necessary resources that are needed to satisfy the demand in China,” said Zhao.

Chinese imports of U.S pork have risen 10-fold over the past decade as a result of skyrocketing meat consumption among China’s burgeoning middle class. Acquiring Smithfield, which already provides around 10 percent of Shuanghui’s raw materials, would generate substantial vertical-integration benefits to the Chinese meat processor.

In turn, Shuanghui has offered to pay a 31 percent premium over Smithfield’s market value to secure ownership of the Virginia-based company’s expansive asset portfolio, which includes the world’s largest slaughterhouse and an expansive hog farming operation that produces more than 3 billion pounds of fresh pork each year.

Yang Zhijun, Shuanghui’s managing director, said in a conference call, “We see a lot of synergies between Shuanghui International and Smithfield Foods – no other combination offers such a great opportunity.”

In addition to vertical-integration synergies, the shortcut that acquisitions offer Chinese companies looking to expand is another major driver behind China’s zealous shopping spree for U.S. assets.

According to Mark Williams, a former managing partner at DLA Piper who specializes in cross-border mergers and acquisitions, many Chinese buyers look for “target companies in the U.S. that offer distribution channels, valuable brands and intellectual property and know-how.”

“A Chinese company may have the infrastructure, manufacturing infrastructure for example, but they lack the distribution channels to access the US market or global markets outside of China, and American companies can often give those distribution channels,” explained Williams. “American companies often have brand names that Chinese companies want to own - brands that are popular in the US or globally.”

When Lenovo Group Ltd. acquired the personal computer division of IBM Corp. in 2005, the deal transferred one of the most recognizable brands in the global PC market to the then little-known Chinese technology firm.

“The IBM brand brought kudos to Lenovo - it removed a barrier to Lenovo's products outside of China,” marketing consultant Chris Grannell wrote in a research report. “Lenovo now seems more reliable, more trustworthy.”

And that translated to enormous benefits for the Chinese technology firm’s top line. In 2006, the first year after its acquisition of IBM, Lenovo saw its annual revenue more than quadruple to $12.69 billion from $2.61 billion the previous year.

For Wanda Group, its acquisition of U.S. cinema operator AMC Entertainment last year gave the Chinese conglomerate ownership of not only a well-known brand but also more than 4,000 screens and access to millions of cinemagoers in the world’s largest movie market.

“It was simply worth it,” Wanda Chairman Wang Jianlin said in an interview with the Wall Street Journal. “If you buy a screen in China, it costs 3 million Yuan, but if you buy the same screen in the U.S., it's less."

While Wanda and Lenovo were able to successfully complete their acquisitions, a large number of other Chinese companies have ended up hitting a “brick wall of opposition” in their attempts to buy U.S. companies.

In fact, a 2010 study published in the Journal of Current Chinese Affairs highlighted that only “half of China’s overseas acquisition bids could be completed.” And among the leading reasons is “regulatory scrutiny,” an obstacle that often confronts foreign investors looking to gain control of U.S. companies.

“Political concerns and perceived national security threats can lead national review agencies to quash deals in the name of national security,” according to the report.

That was what happened when Chinese telecom-equipment maker Huawei Technologies Ltd. was forced to abandon its 2010 acquisition of server-technology firm 3Leaf Systems. The deal was struck down on national security grounds in a retroactive review by the Treasury’s Committee on Foreign Investment in the United States.

Moreover, Huawei found itself barricaded in a room of opposition when an October report by the House of Representatives called for a complete ban on acquisitions of U.S. assets by the Chinese telecom-equipment maker. In the report, the Shenzhen-based company, which was founded in 1988 by ex-military officer Ren Zhengfei, was accused of having close ties with the Chinese military and was branded a security threat.

“China has the means, opportunity, and motive to use telecommunications companies for malicious purposes," read the report. "Huawei has failed to assuage the committee's significant security concerns presented by their continued expansion into the US.”

For Chinese meat processor Shuanghui, a “brick wall of opposition” has also emerged in its path. Less than a week after the Chinese meat processor announced its bid for Smithfield Foods, members of Congress have already labeled the deal “a threat to U.S. food security and U.S. national security."

“To have a Chinese food company controlling a major U.S. meat supplier is a bit concerning,” Charles Grassley, the Republican senator from Iowa, said in a statement.

A leading concern voiced on Capitol Hill is the possibility of Chinese pork products, which have been embroiled in a string of food-safety scandals recently, appearing on U.S. tables. In fact, Shuanghui itself was forced to recall products sold under its Shineway brand two years ago amid fears that some batches had been contaminated with the banned feed additive clenbuterol.

However, a representative from Smithfield quickly dismissed that possibility and wrote in a statement, “The combined company will not import any product from China into the U.S. and as a result, the proposed combination does not have any implication for the U.S. food supply.”

The U.S. Pork Producers Council supported that notion and said it was “not at all” concerned about the Shuanghui-Smithfield deal leading to the appearance of Chinese pork in U.S. grocery stores.

“There’s no possibility of Chinese pork being exported to the U.S. because the country can’t even produce enough to feed itself – it just doesn’t have enough arable land,” said Dave Warner, the council’s director of corporate communications. “The deal will only increase U.S. exports to China and that will benefit our pork producers.”

Whether or not the famous Smithfield Country Ham will be joining ThinkPads and Chicago’s River East 21 cinema in China’s expanding portfolio of U.S. acquisitions will be determined during the next few months. The deal is being closely scrutinized for “national security risks” by a multitude of federal agencies.

In the meantime, Shuanghui’s compatriot Wanda Group has already kicked off round two of its shopping spree for U.S. companies – this time in the hotel industry. The Chinese conglomerate is looking to spend $10 billion in the next decade to buy North American assets.