A Post Olympic Hangover?
A recent study by Ernst & Young looks at whether or not the good sentiment will continue in China after the Olympics in the face of weakness in the U.S. and Europe
April 17, 2008
In a recent study released by Ernst & Young, dealmakers polled expressed a belief that M&A in China will not suffer from a post-Olympic hangover, even as the global markets overall begin to experience weakness. Bob Partridge, the head of Ernst & Young’s transaction advisory services group, cites that the Olympics will certainly help the region, but China’s solid foundation has more to do with the “venture ecosystem” that has rapidly developed as the country shifted from a production- to an innovation-based economy.
“I think everyone recognizes there has been a big technology boost as a result of [the Olympics],” he says, but notes that most M&A pros see it as part of a larger continuum, helped along by policy changes and a growing effort to adapt to the global market. China’s admission to the World Trade Organization in 2001 underscores these efforts, which by most accounts are still ongoing.
“You are starting to see a different stage of concerns emerging, from talk of … becoming more environmentally conscious to quality control issues to intellectual property rights,” Partridge said.
He notes that China’s continued progress in these areas could keep investor optimism high. Even in the face of weakness in the U.S. and Europe, Partridge says PE and venture capital investments into China should “skyrocket,” as global PE firms have deployed more resources and raised more capital dedicated to the Far East and China, “despite what’s happening elsewhere.”
He notes that in 2007, the foreign direct investment into China was reportedly about $75 billion to $85 billion, versus the previous three years, when foreign direct investment reached roughly $60 billion. In 2008, quarter on quarter growth has grown by about 60% to 80% over last year.
Experts also predict a rise in outbound transactions. During this substantial period of growth, many Chinese companies have gained an additional perspective of how to run a global business.
For evidence of this trend, many deal pros point to Lenovo, the Chinese computer maker that acquired IBM’s PC business in 2005.
But Partridge notes that its likely Chinese companies will go after targets in emerging markets, as many businesses have developed skills attuned to harnessing rapid growth.
Moreover, political backlashes in developed regions, such as the resistance experienced in CNOOC’s bid for Unocal, may steer Chinese investors to areas more accepting of foreign capital. To wit, the Industrial and Commercial Bank of China recently acquired a 20% stake in South Africa’s Standard Bank.
“You will continue to see a lot more of this in the headlines,” Partridge said.
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