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Wanhua Industrial Group is a product, and a part, of China’s incredible growth story. Over the past three decades, the company, based in the coastal city of Yantai, some 800 kilometers (500 miles) north of Shanghai, has transformed itself from a small regional manufacturer into Asia’s biggest maker of polyurethane, a plastic used in everything from automobiles to carpets. Looking to sustain that growth, CEO Ding Jiansheng has set his sights on Europe, which represents about one third of the global market for isocyanates, the raw materials for making polyurethane.

In late 2009, Ding found a target in BorsodChem, a Hungarian maker of chemical foams and plastics with a strong European distribution network. BorsodChem had gotten into trouble following a €1.6 billion ($2.1 billion) leveraged buyout in 2006 by U.K. private equity firm Permira Advisers and Vienna Capital Partners. When the global financial crisis hit, sales plummeted, losses mounted, and the firm risked collapsing under the weight of its €1.47 billion in debt. BorsodChem snubbed the first overture from Ding and Wanhua Industrial, hoping instead to refinance its debt with 60-odd lenders, so the Chinese fashioned an alternative strategy. Wanhua Industrial quickly bought up €200 million of the company’s debt to get a seat at the restructuring table. It was the first time a Chinese company had used this tactic, a staple of hedge funds and private equity investors seeking to gain corporate control.

“This was a secret strategy,” says Joseph Tse, a Beijing-based partner at Allen & Overy, the law firm that advised the Chinese company. “It was not without its risks or challenges.” Wanhua Industrial, a state-owned enterprise, needed to win approval from government regulators to pursue its gambit; the strategy also could have left it holding loans in a failing business. But in a three-day session in Frankfurt and Budapest, the company opened negotiations that eventually allowed it to convert its debt into a 38 percent stake in BorsodChem; it also provided €140 million in financing in exchange for the right to buy full control. By February 2011 the company had completed a €1.24 billion takeover, becoming one of the world’s three biggest producers of isocyanates, alongside Germany’s BASF and Bayer. Ding, who took over as chairman of BorsodChem in January, said the merger would turn the two outfits “from two regional players into one global company.” He called the deal a “beacon” for other Chinese companies looking to invest in Europe.

China, the world’s biggest export economy, is going global. After years of sporadic and often unsuccessful forays into the takeover business, Chinese companies are emerging as big buyers of offshore concerns. Oil and gas companies and metals and mining conglomerates continue to be the biggest actors, seeking to secure natural resources to feed the country’s industrial machine. Increasingly, however, Chinese manufacturing, transport and even financial companies are looking for overseas deals to acquire technology, world-class brands and global distribution. And in their pursuit of such assets, Chinese companies are approaching the M&A game with a sophistication unimaginable only a few years ago.

China's Global Bankers

Foreign banks handled most of the overseas M&A deals by Chinese companies in 2011.
1 Bank of America Merrill Lynch $27,017 23
2 UBS 18,734 21
3 Citi 18,405 16
4 Goldman Sachs Group 16,721 20
5 J.P. Morgan 15,371 17
6 China International Capital Corp. 13,372 24
7 Credit Suisse 12,501 21
8 Morgan Stanley 10,299 9
9 Deutsche Bank 8,517 16
10 Caixa Geral de Depósitos 8,326 2
Source: Dealogic.

Chinese enterprises spent $61.2 billion in 2011 to buy offshore companies and assets, up 20 percent from a year earlier and a threefold increase from 2006, according to data provider Dealogic. The number of Chinese overseas acquisitions jumped 24 percent from 2010, to 403. The country ranks fifth by deal volume, behind the U.S., the U.K., Japan and France, according to Allen & Overy.

“This is the start of a greater and longer-term trend,” says Yan Lan, head of Greater China investment banking at Lazard’s Beijing office. “China has a need to grow abroad, its companies have the money, and its ability to conduct transactions has been accelerated by the global financial crisis.”

A glance at China’s overseas buyouts in just the past six months illustrates the breadth of the country’s ambitions. In January, Sany Heavy Industry Co., a Hunan-based construction machinery giant, teamed up with Citic Private Equity Funds Management Co. to acquire Putzmeister Holding, a German concrete-pump manufacturer, for €360 million. Also that month Shandong Heavy Industry Group Co. spent €178 million for a 75 percent stake in Ferretti Group, an Italian luxury-yacht maker. And in October 2011, China National Chemical Corp. completed the purchase of a 60 percent stake in Makhteshim Agan Industries, an Israeli agrochemicals producer, for $1.44 billion.

The upsurge in China’s global acquisition activity is only just beginning. The country’s stock of foreign direct investment reached $298 billion in 2010, representing just 1.5 percent of global FDI stock, about the same as Sweden’s, according to the United Nations Conference on Trade and Development. By contrast, China accounted for 9.2 percent of world trade that year and 9.3 percent of global gross domestic product, according to Unctad and World Bank statistics.

The country’s direct overseas investment is set to surpass FDI coming into China before 2015, according to the Ministry of Commerce. That would represent a dramatic change for a country that has been the biggest magnet of foreign direct investment for most of the past two decades. China has attracted more than $1 trillion in FDI since 1978, when then-leader Deng Xiaoping broke with decades of communism and launched market-oriented reforms; the vast bulk of those funds has flowed into the country in the past 20 years. Now that tidal wave of money is set to reverse course, according to Rhodium Group, a New York–based economic and political consulting firm. China could directly invest between $1 trillion and $2 trillion offshore by 2020, the firm estimates.

CHINA'S HUNT FOR NATURAL RESOURCES — ESPECIALLY oil and gas — dominates the country’s offshore acquisition activity, and it’s not hard to see why. In 2010, China became the world’s biggest energy consumer, accounting for 20.3 percent of global use, surpassing the U.S.’s 19 percent, according to the “Statistical Review of World Energy,” published by British oil giant BP. A fast-growing middle class has turned China into the world’s largest automobile market, adding to demand from an energy-hungry industrial sector. The country now buys roughly half of its oil — more than 5.5 million barrels a day — on world markets. “China is very interested in establishing a supply of energy for growth. That means both resources and technology,” says William Owens, Hong Kong–based Asia chairman of private equity firm AEA Investors and a vice chairman of the U.S. Joint Chiefs of Staff in the 1990s. “China has a great interest in energy storage technology, clean coal technologies, shale gas and deep-ocean drilling.”

In last year’s biggest announced deal, China Petrochemical Corp., or Sinopec, paid $4.8 billion to acquire a 30 percent stake in Petrogal Brasil, the Brazilian subsidiary of Portuguese oil and gas company Galp Energia. It was the latest in a string of deals by the petrochemicals giant to secure access to crude supplies. In 2010, Sinopec bought 40 percent of the Brazilian unit of Spain’s Repsol YPF for $7.1 billion. One year before that Sinopec completed an $8.99 billion acquisition of Geneva-based oil exploration company Addax Petroleum Corp.

Chinese companies have spent $136.9 billion on overseas companies in the oil and gas and metals and mining sectors over the past six years — more than half of all foreign M&A activity during the period, according to Dealogic. Seven of the ten largest deals were in these sectors, led by the joint $14.3 billion purchase of a 12 percent stake in Anglo-Australian mining company Rio Tinto by Aluminum Corp. of China and Alcoa in 2008. Chinalco bought out Alcoa’s share the following year.

Resource deals are an obvious first step for China’s budding takeover artists. They meet a pressing economic need, and they pose fewer managerial obstacles than the average corporate acquisition.

“Generally, you’re buying assets, and assets are a lot easier to buy than a business,” explains Gordon Paterson, head of Deutsche Bank’s M&A business for Asia-Pacific. “With resources, you’re digging a hole in the ground, sticking in a pipe, getting it to port and shipping it out.”

The new surge of Chinese M&A activity is extending far beyond resource plays, though. Both state and private entities are looking overseas to acquire technology and powerful brands, and to extend their own supply and distribution networks. As Michael Weiss, head of China M&A at Morgan Stanley in Hong Kong, puts it, “The trend is slowly moving from what China needs to what China wants.”

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