As Europe enters a recession induced by the spread of the novel coronavirus, officials are bracing for another possible wave of takeovers and acquisitions by Chinese companies, much like they saw after the 2008 financial crisis.
Asset prices have crumbled around the world, and European institutions have started warning their members that they need to bolster corporate defenses to prevent a Beijing-led buying spree. Earlier this month, NATO deputy secretary-general Mircea Geoana told defense ministers that some countries are vulnerable to losing their “crown jewels” because of the pandemic. And EU competition chief Margrethe Vestager told The Financial Times (paywall) that European governments should buy stakes in key companies to prevent Chinese takeovers.
Europeans are not alone: India’s commerce ministry has said that any foreign direct investment from countries with which it shares a land border—including China—will be subject to government approval, and Australia also tightened their restrictions on foreign takeovers and acquisitions to “protect Australia’s national interest.”
But the world looks very different now than it did in 2018, or even the end of 2019. So such fears might be misplaced.
Flashback to 2008
Europe’s anxiety is rooted in the events that followed the Eurozone debt crisis. Chinese buyers took controlling stakes in strategic infrastructure and mining companies in European countries that were particularly hard-hit by the 2008 financial crash, including Portugal, Spain, and Greece.
“There were a lot of assets being bought on the cheap because of discussions with the euro zone, and the trend there at the time, in Germany in particular, that some of those countries needed to get their fiscal health back into order,” said Agatha Kratz, associate director at the US-based research firm Rhodium Group. “And so a lot of them sold strategic assets and some of them happened to get bought by Chinese players.”
For example, in 2016, China’s state-owned Cosco Shipping Ports took a controlling stake in Piraeus, Greece’s largest port. Since then, Cosco has taken control of three ports in Belgium and Spain, and large stakes in 10 other ports across Europe. And the Nikkei Asian Review (paywall) reports that Cosco has set aside $500 million for mergers and acquisitions this year.
So Europeans have reason to be worried. But the investment environment in Europe has changed since the 2008 financial crisis. The European Union recently branded China a “systemic rival,” for example, and many EU countries have implemented investment screening mechanisms, mostly as a response to Chinese foreign direct investment. Geopolitical tensions with Beijing over the coronavirus crisis, meanwhile, have only made the situation worse.
So, do Chinese companies have the appetite, and the cash, for major mergers and acquisitions in Europe, when the message emanating from institutions and many governments is that they are not welcome? Not really, according to Peter Lu, a partner at the law firm Baker & Mackenzie who specializes in mergers and acquisitions and leads the firm’s China Practice in the UK.
“The statement that Chinese buyers are going to come to Europe big time during the pandemic…is overrated,” he told Quartz. “I don’t think it’s a real concern.”
A different environment
Lu doesn’t foresee a Chinese shopping spree in Europe for three reasons, some of which are echoed in a recent report written by Rhodium Group partners Thilo Hanemann and Daniel Rosen. Chinese investments in Europe peaked in 2016, after which authorities tightened controls on what they deemed “irrational” capital flows by overly-leveraged domestic companies. Chinese investment decreased significantly after that, under pressure from new controls by Chinese regulators. Lu said some Chinese companies are still recovering from the “painful experience” of having to sell their assets in China in order to pay down their loans, and aren’t eager to take on more debt domestically in order to buy cheap assets in Europe.
A third reason, Lu said, is cultural: “Chinese companies are not aggressive in terms of corporate takeovers.” Because of the current political climate in Europe, “virtually any high-profile acquisitions will likely be viewed as predatory,” write Rosen and Hanemann, “risking public backlash and drawing in political intervention.”
Rhodium Group’s Kratz adds a fourth reason, which she says she noticed in her own European clients: They “just have no headspace whatsoever to speak about anything [other] than crisis management. And I would imagine in China this is exactly the same, where the situation is so bleak internally that a lot of those companies are just facing human resources, logistical, supplier, client disruptions, that at least the resources dedicated to outward investment are going to be extremely limited.”
Another, not-inconsiderable roadblock is Covid-19 itself. The Chinese economy has been slowing down since 2016, and as the world enters what economists believe is another recession, it has taken a major hit (paywall). Also, because everyone is stuck in their homes, major, expensive deals have ground to a halt. It’s hard to do due diligence on a deal to acquire, say, a car manufacturer, without being able to visit factories and meet the leadership.
Still, write Rosen and Hanemann, “some Chinese firms are positioned to take advantage of the sharp drop in global company valuations.” Lu said investments will be more strategic than in the past, and reflect Chinese companies’ desire to be competitive in their home market. That means an increased focus on what he calls “soft infrastructure,” companies that deal in 5G, artificial intelligence, and Big Data.
“Are we going to see a Chinese shopping spree because assets are very cheap going forward? I don’t think so,” Lu said. “But, do we see Chinese buyers continue to buy the assets which fit the company’s strategic goal in the long-term, especially when that company or asset can help them win the competition in the home market in China? Yes, absolutely.”