Wednesday, July 27, 2005

Calling Bull On Growth Through Acquisition

It looks like not only the CNOOC attempt to purchase Unocal is dead, but so is Haier's bid for Maytag. The reason given is that Whirlpool outbid Haier, but lost in all this is the motivation for China, Inc. -- "Wal-Mart with an army" as Steve Lohr recently put it in the New York Times -- to try in the first place. Sure, they're awash in dollars, and what are they going to do besides buy the most expensive baubles they can get? But besides that, Steve Rosenbush in the BusinessWeek article above suggests it's something else:
The primary driver of China's M&A scene is social and political in nature. Beijing is worried about the prospects for political unrest. John Rutledge, a former economic adviser to President Bush, says disturbances and even riots in China are more common than many people in the West understand. While the Chinese leadership may not have to run for reelection, "it knows it can't hold onto power without raising the standard of living," says Rutledge, who now runs Rutledge Capital.


Through M&A, China can not only create economic growth but also help boost employment growth and raise wages. One part of that strategy involves Chinese companies buying troubled U.S. ones such as Maytag. With wages in China so much lower than those in the U.S., such deals also allow Chinese management to return broken-down U.S. companies to profitability, according to Liu.

Whoa, whoa, whoa! Mergers and acquisitions create economic growth? When did this start? Those who lived through the 80's might recall the less-than-successful history of Groupe Bull, which attempted to take the various parts of other unsuccessful companies and cast them into one giant, mega-... thing. The end result was a bunch of different fiefdoms that never really coalesced into a single company, and within a decade, the whole mess had to be undone. Mergers and acquisitions have to be useful at the end of the day, but the mere agglomeration of parts into a consolidated whole doesn't make for growth by itself. If that's really China's strategy, maybe the rest of the world has less to fear than I thought.