M&A: Will China be the next buyer?

Julie Kunstler/Ovum
23 Dec 2010

There has been significant press coverage of the competing bids for Draka Holding NV, a publicly traded company headquartered in Amsterdam that supplies optical fiber and cables for the communications industry. Until now, Draka’s suitors were European players. Recently, Xinmao, a Chinese company located in Tianjin, a port city southeast of Beijing, submitted a bid. Xinmao has a wide range of businesses, including construction, engineering services, and information technology.

Acquisitions are common within the optical components and networking industry but Xinmao’s bid is unusual. First, it represents a Chinese company attempting to acquire a large European player. Second, this bid, at €1bn, represents a major deal for a company that does not have a history of acquisitions in Europe.

We believe that Chinese vendors will become active in M&A of optical component and networking deals in Europe and the US. The acquisition process will require new skills on the part of the target companies as they learn to evaluate offers from Chinese bidders. In addition, the Chinese companies may need to bid higher prices to compete with the familiar names.

Acquisitions by Chinese vendors require new skills by the targeted

There have been quite a few acquisitions over the last 18 months and many have been cross-border. Cisco acquired Germany-based Core Optics; Broadcom acquired Israel-based Dune Networks; Finisar acquired China-based Broadway Networks; and Atheros announced its acquisition of China-based Opulan. We use the word “based” to refer to R&D centers, since it is common practice for many start-ups to have US-based headquarters.

In these deals, the acquisition process is well tuned. The buyer makes an offer and the board of directors and CEO analyze the offer or hopefully multiple offers in a competitive situation. When the buyer is a US or European publicly traded company, it is quite simple to analyze the bidder’s ability to pay the offer price if the offer is all-cash or to analyze the buyer’s stock performance in a stock deal. While we don’t want to belittle the importance of valuation, it is sometimes an easier negotiating point than other transaction issues, such as escrow, indemnification, and contracts for key employees.

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