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Mergers and acquisitions are an integral part of any market economy, enhancing an economy's efficiency by reallocating and recombining production resources for better use. As China pushes its market-oriented economic reform into the 1990s, there seem to be three reasons behind the emergence of its mergers and acquisitions market, reasons that are likely to continue driving the market's development.
The government is essentially being forced to restructure and revitalize the state-owned enterprises, especially the unprofitable ones. The plan involves three steps: severing the government from these enterprises by redefining the government's role as a shareholder with limited liabilities; revitalizing large and some medium-sized state-owned enterprises by further devolving decision rights to management and continuing economic reform toward a fair and competitive market; and selling and renting the small and some medium-sized state-owned enterprises to competent public or private entities. This policy has basically opened the door for mergers and acquisitions of small and medium-sized state-owned enterprises. For large state-owned enterprises, the possibility of letting some be partially or wholly privatized remains a sensitive issue but is being considered by the government.
A second force behind the growth of the mergers and acquisitions market is that it is called for by the growing needs of the enterprises themselves as they seek to implement their development strategies. Profitable enterprises, either collective or state-owned, may need to expand their capacities, upgrade their technologies, diversify or streamline their products, invest in a new industry or divest from an existing business, enter into a new geographic area, and the like; the mergers and acquisitions market provides them an efficient channel for achieving these goals. The many unprofitable enterprises also stand to benefit, potentially breathing in new life through being acquired by or merged with other enterprises. In other words, industrial growth in the last fifteen years has brought the Chinese economy to a point of readiness for an active mergers and acquisitions market that will facilitate its internal structural adjustments.
The third dynamic encouraging development of China's mergers and acquisitions market is that it helps enterprises attract more international capital. Foreign investments in China usually take one of three forms-establishing and operating a joint venture with a local partner, investing in listed stocks, or acquiring or merging with an existing enterprise. Joint ventures are the most common form of foreign investment since 1978; because they involve the detailed operation of a project, the foreign investor usually needs to possess expertise in the particular business. Investing in the stocks of Chinese firms is a purely financial market activity, and the opportunities are available to the general public; the investment targets are limited, however, to the companies listed in the domestic and foreign stock exchanges.
In comparison with these means of investment, investing in a Chinese firm through merger or acquisition offers several advantages: (1) The investor may choose to attend to the acquired firm's daily business, but he or she may not necessarily have to do so. Such a form of investment may, therefore, be suitable for industrial companies as well as general investors through holding companies. (2) Potential investment targets are much more numerous than those listed on the stock exchanges. (3) Cash flow may be generated in a shorter time than in the case of a joint venture since a plant does not have to be built from scratch. (4) The investor may have full control of the acquired company, which is not attainable in a joint venture because the law stipulates that the management of a joint venture must be equally shared by local and foreign investors irrespective of their capital shares. (5) Most importantly, a merger or acquisition deal may be attractive to an investor because it offers land use at little or no cost, ready-made distribution channels, skilled labor, technical and commercial information, and so forth----even when a target has been a money-losing enterprise.
Driven by these forces, many voluntary merger and acquisition activities sprouted in China in the late 1980s and early 1990s, with the active support of local governments. The long-anticipated official sanction of the central government was issued on November 14, 1993, when it passed the landmark document A Resolution on Several Issues in Establishing a Socialist Market Economic System, which formally acknowledged the value and legitimacy of private enterprises and endorsed more liberal reform measures for state and collective enterprises. |
