Risks and Opportunities in China

Managing the sale of a U.S. based company with worldwide operations – that included a fast growing facility in China – enabled me to learn firsthand what challenges and opportunities U.S. businesses encounter in the Far East. Middle market companies with operations in China are well positioned to receive a premium price from strategic and financial acquirers due to the vast opportunity this country represents. Most middle market companies in this segment are limited not by the prospects, but the access to capital to meet the growing demands of an ever-expanding marketplace. For American corporations, China represents an explosive growth opportunity that can have a highly accretive effect on the value of a business.

The case for expanding into China is well documented. The marketplace continues to undergo significant growth, creating opportunities for companies and investors who are able to manage the risks associated with a large and evolving economy. This exceptional market continues to sustain swift development with GDP increasing 11.5% in the first half of 2007, according to the IMF, and remaining above 9% per year for the foreseeable future.

GDB - china

Source: IMF World Economic Outlook

The opportunities presented by China are no longer exclusive to large corporations and private equity groups. Now companies of all sizes are entering this market. In the past, companies approached China primarily to access the cheap labor and export markets. Today, middle market companies enter China because large companies with operations there are demanding they be served locally and the opportunity to sell into this market continues to grow; creating the foundation for smaller companies to build Chinese operations. Companies also realize China offers an abundance of engineering talent and productivity advantages, in addition to the aforementioned low cost labor.

The value provided by successfully developing operations is demonstrated by the sheer number of companies and private equity groups seeking to acquire businesses with operations in China. Over the last 12 months, according to Capital IQ, approximately 120 U.S. companies fitting that description were acquired. Companies such as Wal-Mart, Best Buy, WPP Group, Illinois Tool Works, Coca-Cola and YRC Worldwide have stated strategies to expand operations in China through acquisitions. In addition, private equity firms such as The Carlyle Group, Platinum Equity, Hamilton Robinson, Sun Capital Partners, Jordan Industries, Leonard Green & Partners and Kohlberg & Company have all invested in companies with operations in China. These groups want to purchase quality assets that have built strong operations, with the necessary controls, and are willing to pay a premium for companies that fit these criteria.

Companies that overcome the issues that are inherent in a developing economy will see substantial benefits, including increased profitability, deeper penetration and broadening of customer relationships, and vastly improved valuations from potential buyers. The lesson learned from my previous experience proves that the results will be rewarding. The company’s position in China encouraged an aggressive bidding war by potential buyers with a resulting premium being paid.

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Michael Rosendahl

Investment Banking
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