SUCCESS MADE IN CHINA

In November came news that private equity firms TPG, General Atlantic and Newbridge Capital had sold around four percent of their total ten percent stake in Chinese computer manufacturer Lenovo in a private placement. The sale was lucrative. Having invested a combined $350 million for the ten percent stake when Lenovo acquired IBM's personal computer business just over two years ago, the sale of shares representing four percent of the company has returned $374 million. The remaining six percent is valued at about $580 million.

To turn the clock back to the time when the deal was struck means revisiting a low-point in relations between the Chinese and American business worlds. The Chinese stood accused of IP theft and sharp currency management practices, as a result of which Chinese imports into the States were being threatened with a 27.5 percent levy. Aside from Lenovo/IBM, two other potential acquisitions of US companies by Chinese buyers were also in the pipeline: CNOOC/Unocal and Haier/Maytag. With the vibes emanating from Capitol Hill turning increasingly hostile, oil giant CNOOC and white goods maker Haier quit their respective auctions.

While those of a protectionist persuasion celebrated, free market proponents pointed to a missed opportunity. The arguments in favour of Chinese corporate/US buyout group tie-ups appeared fairly compelling, after all. From the point of view of low-cost Chinese manufacturers facing tough competition in their home markets, it made sense to consider international expansion. And who better to guide them into new markets than savvy, cash-rich LBO groups with their long experience of growing companies around the world? It was potentially a match made in heaven.

In the event, only one such arrangement made it to the altar – and that was Lenovo. Weijian Shan, co-managing partner of Newbridge, hailed Lenovo's acquisition of the IBM unit in a press release in the following way: “Through this acquisition, Lenovo is leading an important trend of Chinese companies moving onto the global stage.”

Shan was right to a degree. There's no doubt that a trend of Chinese outbound M&A activity did exist, and has continued to gather pace. A study by PwC showed such activity increasing 61 percent to $14.1 billion in the first 11 months of 2006. The report did point out, though, that the trend was driven largely by energy and resources deals. It also noted that Chinese outbound investment is “tempered by increasing realisation of the risks that Chinese companies take on” in the process.

Perhaps consideration of the possibilities represented by USSino cross-border co-operation might be reinvigorated by Lenovo's success. At the very least, the involvement of the US private equity consortium draws attention to the fact that the ‘unknown foreigner’ is not the only party that stands to benefit from deals like this. It's informative in this respect to note that CNOOC had secured backing from a number of private equity groups including AIG following a failed IPO in 1999, while Haier's bid for Maytag was backed by Bain Capital and Blackstone Group.

Blackstone Group. In the July/August 2005 issue of Private Equity International, this column commented: “For every Chinese acquisition of a US company that becomes a roaring success, it might just be that US-based investors will have most to celebrate.” With Lenovo's recent share placement having gone swimmingly on the back of surging earnings growth, jubilation spread well beyond the company's headquarters in Beijing. Several American GPs and their fund investors were also basking in the warm glow of a Chinese success story.

CORRECTION
In the November 2007 issue of Private Equity International, Asia Monitor referred to Bear Stearns having recently announced a further 300 job losses, bringing the total to 4,600 since the credit crunch struck. We would like to clarify that the latter figure referred to the total job losses announced by a number of banks and not Bear Stearns alone. For the year to the end of October 2007, Bear Stearns had announced about 800 job losses, according to a company spokesperson. We are happy to set the record straight.