Big Blue Is in Chinese Hands

By William Pesek Jr.
Dec. 9 (Bloomberg) -- Anyone who is shocked that a coveted
part of one-time Wall Street bellwether Big Blue is now in Chinese
hands had better get used to it, and fast.
``It's just started,'' says Donald Straszheim, president of
Santa Monica, California-based Straszheim Global Advisors, of what
could be the most significant business trend of the decade:
Chinese companies rapidly becoming more ``internationally
acquisitive.''
Yesterday, China's mergers and acquisitions boom moved into
high gear when Lenovo Group Ltd. agreed to pay $1.25 billion for
International Business Machines Corp.'s personal computer
business. It's the biggest acquisition of a U.S. company by a
Chinese competitor, and it lifts China's largest PC maker to third
in global rankings and gives it a marquee-caliber global brand.
As Chinese companies move from prey to predator, they are
also sitting on a powerful advantage: A possible currency
revaluation. If the yuan rises the 10 percent, 20 percent or even
40 percent analysts expect, overseas acquisitions of household-
name companies and properties become that much cheaper. In other
words, we haven't seen anything yet from China.

Two Phases

Even with an undervalued yuan, China is carrying out a two-
phase mergers and acquisitions strategy.
Phase one, Straszheim says, focuses on locking up foreign
sources of commodities -- mining companies, mostly --China needs
to feed its economic rise. Just about every company of this sort
in Canada, Australia, Southeast Asia, Africa and elsewhere is a
target.
The second phase, which is just getting under way, features
Chinese acquiring household-name companies to boost global sales
and distribution capabilities. Since brands take time to build,
it's logical for companies like Lenovo, household-appliance maker
Haier Group or phone-equipment maker Huawei Technologies to look
for quick entry points into the U.S.
``Many American companies or brands that are struggling
aren't being well managed or otherwise are out of favor may be
rejuvenated with a new Chinese partner,'' Straszheim says. ``Maybe
a China buyer will bail you out of that awful stock.''
Lenovo is emblematic of China's global ambitions, especially
as the 2008 Beijing Olympic Games approach. In March, it became
the first Chinese enterprise to join the International Olympic
Committee's global sponsorship program. Lenovo will provide
computer equipment and services to the Turin Olympic Winter Games
in 2006 and in Beijing in 2008.

Coming Out Party

Scooping up IBM will boost Lenovo's name recognition,
amplifying the benefits of its Olympics investments. Expect other
Chinese companies to follow Lenovo's lead in the next few years.
The lead-up to 2008 will be a multiyear coming out party for
corporate China. We can expect initial public offerings planned to
coincide with the Olympics, as well as mergers and acquisitions
activity.
All this may be a real eye-opener for U.S. executives
suddenly receiving overtures from Chinese competitors. China's per-
capita income is about a seventh of the average U.S. consumer. And
for all the excitement about its outlook, China has a dearth of
internationally known companies that operate on a global scale and
market their products abroad.
China is often seen as the world's factory floor; a place to
harness cheap labor to boost profits in the West, not a direct
competitor to corporate boardrooms. Yet as Lenovo shows, Chinese
companies are going global, something observers like Joseph
Quinlan, chief market strategist at Banc of America Capital
Management in New York, have been predicting this year.

Investments Abroad

So far, Quinlan says, the China story has been how much
foreign capital is flowing to Asia's No. 2 economy. Now, attention
is shifting to the mounting tide of foreign investment flowing out
of China as an increasing number of firms reach overseas.
It almost seems enough to have U.S. executives lobbying the
Bush administration to stop pressuring China to strengthen the
yuan. Currently, it's pegged at 8.3 to the dollar, a level the
U.S. claims gives China an unfair trade advantage.
Just wait until a stronger yuan makes Pebble Beach,
Rockefeller Center and Universal Studios -- the U.S. prizes
Japanese bought up in the 1980s -- cheaper. A stronger yuan also
makes the IBMs of the world cheaper for growth-hungry Chinese
companies. All this may confront a pro-business White House with a
be-careful-what-you-wish-for situation on China's currency.
China's economy may be growing 9 percent, yet it lacks the
ground-up entrepreneurship of competitors like India. China's is
largely a top-down economy; India has a creative spirit that
produced Infosys Technologies Ltd., Dr. Reddy's Laboratories Ltd.
and Wipro Ltd. Through acquisitions, China may hope to leapfrog
over years of domestic company building.

The Risks

There are risks aplenty for China. One is how Chinese
companies with little experience running operations overseas will
successfully integrate a well-established U.S. company. Or will
finicky consumers around the globe buy products from a lesser-
known company? Will they pay up for personal computers made by
little-known Lenovo?
Still, Lenovo's IBM purchase is symbolic of a shift in
technology manufacturing and, more generally, growth to Asia. This
region isn't only home to the world's two biggest consumer-
electronics makers and top three digital camera makers, but also
many of its fastest-growing economies.
Get ready America -- corporate China is coming faster than
you may have dared to believe.

--Editors: Ahearn