Here come the have-nots

China National Offshore Oil Corp. failed to acquire California-based competitor Unocal Corp. in July, but emerging-markets companies aren’t done trying to take over developed-market stalwarts. State-owned China National was foiled largely by U.S. lawmakers’ fears about its gaining control of scarce energy reserves. But in less-sensitive industries, companies based in the developing world, amid improving local economies and falling capital costs, are gobbling up their counterparts in mature markets at an unprecedented pace.

In 2004 there were 126 such deals, worth a record $14.6 billion, according to research firm Dealogic. That was up more than fourfold from $3.4 billion in 2003. Activity this year is on pace to set another record, with 107 buyouts closed, totaling $11.4 billion, through July 27.

Among the more notable was Mexican cement company Cemex’s April acquisition of British rival RMC Group, for $5.8 billion. One month later Beijing’s Lenovo Group bought U.S. blue chip IBM Corp.'s personal computer division for $1.75 billion.

Improving capital markets are driving the trend. More than 40 percent of emerging-market countries now boast investment-grade credit ratings, up from less than 10 percent just seven years ago, according to Fitch Ratings. That means lower interest rates for corporate bonds, which are priced relative to sovereign debt. Low U.S. and European rates are driving yield-seeking investors offshore, further reducing corporate credit costs. Equity markets are just as hot. The Morgan Stanley Capital International emerging market index is up 13 percent this year to a record high, giving companies a more valuable acquisition currency.

Consider Cemex. A decade ago economic weakness in Mexico made it tough for companies there to raise capital. Not anymore. “We don’t feel at a disadvantage from a cost-of-capital perspective today versus the mid-1990s,” says CFO Rodrigo Trevino. In March, Cemex took out a $4.9 billion, four-year loan to finance the RMC deal, at a rate of LIBOR plus 80 basis points. Several weeks later it was able to refinance the debt at half that cost.

Russian steel company Severstal Group has raised $700 million in debt during the past year at a cost of just 8.2 percent, down from the 11 percent it paid a few years ago. Proceeds helped finance its $320.5 million buyout last year of Dearborn, Michiganbased rival Rouge Industries and its April purchase of a majority stake in Italian steelmaker Lucchini for $775 million. “The decrease in the cost of our debt was due generally to the upgrade in Russian sovereign debt,” says investor relations chief Dimitry Druzhinin. (Ratings agencies recently upped Russia’s debt to investment grade.)

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Growing competition for U.S. and European companies is driving up prices. China National’s interest in Unocal prompted winning bidder Chevron Corp. to pay 7 percent more ($17.6 billion). Appliance maker Maytag Corp.'s price rose 19 percent, to $1.35 billion, with Chinese competitor Haier in the mix. (Haier’s bid was trumped in July by Whirlpool Corp.)

What could derail the deal spree? As the U.S. did with China National, Western governments may resist ceding control of sensitive industries to foreigners. Rising interest rates could make bonds in developed markets more attractive than riskier emerging-markets paper, driving up capital costs for companies in developing countries and limiting their buying power.

“There could be a couple of years where companies in emerging markets are slowed down again,” says Marc Zenner, a Citigroup banker and author of a report on the cross-border boom. “But the long-term trend is irreversible.”