Third World’s Corporate Giants Embarking On Global Takeovers

Jan. 22, 2008 (Investor’s Business Daily delivered by Newstex) —

As the developing world churns out companies with global ambitions, India’s new multinationals have been on the fast track making acquisitions.

India’s firms have forged ahead with takeovers in the U.S., Canada and Europe, while Chinese and Russian firms still get the cold shoulder.

India’s new multinationals are mostly in private hands, with some run by families. Many Chinese and Russian multinationals are still state-controlled, or have opaque ties to government-run banks.

While attempted takeovers by Chinese or Russian firms continue to raise national security issues in the West, the welcome mat seems out for India-based companies.

In the auto industry, India’s Tata Motors ttm — which just unveiled a $2,500 car — is the favorite to buy Ford’s F high-end Jaguar and Land Rover brands. In earlier deals, parent Tata Group bought U.K.-based Tetley Tea, steel maker Corus and the Ritz-Carlton hotel chain.

Advantage: Private Sector

Tata isn’t the only India-based company to go global via takeovers. Suzlon Energy (OOTC:SZEYF) , which builds wind farms, acquired Germany’s Repower in June. Hindalco Industries (OOTC:HNDFF) snapped up Canada’s aluminum maker Novelis. And India’s drug firms have used deals to expand into Europe.

“Indian companies get cut some slack because generally they’re private, so there is not much anxiety involved in acquisitions,” said Ravi Ramamurti, professor at Northeastern University. “Many of the multinationals coming out of China or Russia still have close government ties, and state control is viewed with trepidation. It’s a red flag. That’s why China gets more flack.”

Chinese firms have been cautious about forays into the U.S. after state-controlled oil firm CNOOC’s ceo failed bid for Unocal in 2005 and appliance maker Haier’s aborted purchase of Maytag.

Last year Huawei teamed with Bain Capital Partners to bid $2.2 billion for 3Com (NASDAQ:COMS) coms. That deal faces hurdles in Congress because of questions over Hauwei’s ownership and ties to Chinese banks.

China Saves Wall Street?

Even so, some observers say the U.S. might be more open in the long run to Chinese acquisitions. That’s because Wall Street banks stung by the credit crunch have been seeking — and getting — cash infusions from China’s state-run investment fund.

Investment banks advise companies on mergers.

“The credit crunch is providing China with a golden economic and political opportunity to enter phase two of its ‘Buy Up America’ plan,” said Peter Navarro, professor at the University of California, Irvine. “Phase three is taking equity stakes in American companies and, in some cases, buying whole companies outright.”

Chinese companies have been busy making acquisitions outside the U.S., mostly in natural resource-rich regions such as Africa and Australia. Chinese firms have focused on securing iron ore and other raw materials.

China’s Lenovo (OOTC:LNVGY) did buy the PC operations of IBM (NYSE:IBM) IBM in 2005. But Lenovo has had a tough time managing the business, says Marshall Meyer, professor at the University of Pennsylvania’s Wharton School.

“I don’t think Chinese firms are all that confident coming into the U.S. to make large acquisitions given the Lenovo experience,” he said. “They need strategic partners.”

India is second to China in churning out new multinationals, according to a Boston Consulting study. Brazil comes in third, followed by Mexico and Russia.

Invest Close, Then Far

Some of Brazil’s new multinationals have used takeovers to expand in North and South America. Brazilian miner Companhia Vale do Rio Doce (NYSE:RIO) bought Canada’s Inco for $18.6 billion in 2006. Steel maker Gerdau acquired U.S.-based Chaparral Steel for $4.4 billion in 2007.

New multinationals tend to invest in neighboring developing countries — with markets similar to their home markets — before attempting big deals in rich nations.

Emerging multinational firms are more likely to make deals in older industries undergoing consolidation, Ramamurti says. He points to Mexico’s Cemex, which has become a power in the cement industry via acquisitions. Cemex bought U.K.-based RMC in 2005 and Australia’s Rinker in 2007.

Auto parts, chemicals, and beverages have also been sectors targeted by emerging multinationals, Ramamurti says.

Russia’s big energy giants, such as gas firm Gazprom, have eyed deals in Europe. Gazprom’s interest in U.K.-based gas supplier Centrica sparked an uproar in 2006. Germany also has been touchy about Russian firms buying energy assets, fearing the Kremlin will use energy as a political weapon.

In the U.S., the Foreign Investment and National Security Act of 2007 went into effect in late October. The new law overhauls rules governing CFIUS, a multi-agency panel that reviews foreign investments.

The new FINSA rules broaden reviews to include sensitive technologies with military applications and “critical infrastructure,” such as ports.

That follows Dubai-owned DP World’s bid to buy U.S. ports, which fell apart amid huge bipartisan opposition from Capitol Hill.

Despite national security concerns, the U.S. and other Western nations will have to come to grips with globalization, says Arjun Divecha, partner of emerging market fund Grantham, Mayo, Van Otterloo.

“Globalization works both ways,” he said. “If American companies are free to buy companies in India, then Indian companies are going to be free to buy American companies. And that’s going to be true for China. If it doesn’t work that way we’re going to have problems, because prosperity is being created by a two-way flow of stuff.”

Newstex ID: IBD-0001-22372689


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