IPO or acquisitions, what’s the best way for Chinese giants to go global?
Even though Chinese companies are still many to list overseas, their primary goal when doing so may not be to expand their international presence. To go global they should rather think acquisitions and invest in cross-border activities.
Once more, in 2015, the funds rose from Chinese IPOs in the mainland and Hong Kong (USD 29 billion) exceeded the funds raised in the US. But with USD 14 billion more for China, it is the first time in four years that the gap is widening as much. And 2016 could be an even better year for China’s stock markets. In the mainland alone, IPOs on the bourses of Shanghai and Shenzhen could generate up to USD 46.13 billion, putting China on the race for the top three largest IPO markets this year, reports PwC.
But even though Chinese bourses are gaining in popularity thanks to stock listing reforms, a significant number of local groups is still seeking to list overseas, especially in the United-States. Until now, the difficulties to list in China were the main reasons to do so. But a secondary goal can be to facilitate the acquisition of international brands and gain foreign recognition.Ultimately, it largely depends on the company’s internationalisation strategy.
An additional step to go global
Thus two of the most successful IPOs in Hong Kong in 2015 are part of an overseas expansion strategy. Huatai Securities Co., China’s largest brokering firm by trading volume raised USD4.5 billion in June, becoming the largest listing of the year in Asia and the second worldwide.Despite below performance on the first days, this second listing after the Shanghai IPO six years ago must help the company to deepen its impact on Asia-Pacific markets. However, Huatai Securities was already expanding overseas before its listing in Honk Kong: earlier in 2015, the broker bought the U.S. consultancy firm AssetMark for USD 780 million, which is the largest acquisition in the field of financial-services in three years.
Filling IPO also boosted Huatai’s rival GF Securities international strategy. Just two month after raising USD3.6 billion in Hong Kong, the group, which already counts offices in Canada, the U.K. and the U.S. announced the use of its London-based unit to expand in the global commodities markets.
Little direct causality between international presence and IPO
However, most IPOs by Chinese firms do not specifically serve expansion goals. Even though it listed in the United-States in 2015, Baozun, a company helping producers to establish market presence in China is solely focusing on the domestic market: it partners with local brands and local logistics services providers to serve Chinese consumers. And the company’s post IPO lows has nothing to do with not expanding in the country where it just listed.
A more famous example of this little causality link between overseas listing and international expansion has been given by Alibaba in 2014. Its momentous IPO in the U.S. fuelledrumours about a potential move on the American e-commerce market. But here again,and maybe because of slowing results on the stock market in the two months after the record IPO, Jack Ma preferred to secure its leading position on the domestic market.
Furthermore, a presence on the American stock market does not ensure success on the goods market: after convincing investors, the group needs to seduce consumers. To do so, experts advise for instance building an international team – which is taking shape with the nomination of Goldman Sachs Vice Chairman Michael Evans as President.
How to go global?
More specifically, Alibaba’s internationalisation strategy goes through cross-border activities. Even before its IPO, the group’s Vice Chairman Joe Tsai detailed to Forbes the company’s bet on overseas Chinese in North America, Europe and Australia to boost Alibaba’s international presence. Alibaba alsodeveloped specified marketplaces for Western merchants to access the Chinese market, among which Tmall Global. On the flipside is AliExpress, a marketplace making Chinese goods available to the rest of the world, in which Alibaba kept investing heavily in 2015. Alibaba makes the vast majority of its money from consumers in China. In its most recent quarter, revenue from the China commerce retail business was USD 2.1 billion, comprising 75 per cent of total quarterly revenue. Alibaba warned that its revenue and income might be “materially and adversely affected” by the current economic slowdown in China.
Besides this focus on cross-border e-commerce, the Chinese giant is also pursuing its shopping overseas to build a global presence: from a USD 250 million investment in Lyft in 2011 to other share acquisitions in U.S. e-commerce companies like ShopRunner and a partnership with the American second retailer Costco, Alibaba’s strategy to go global is definitely based on acquisition. “Alibaba just sealed its biggest overseas acquisition so fare with Lazada to develop its operation and revenue in Southeast Asia, a market without strong and dominant leader”, said Thibaud Andre, consultant at Shanghai and Beijing-based market research agency Daxue Consulting. “Jack Ma made no secret of his appetite for overseas investment to reduce his reliance on Alibaba’s domestic market. With this $1 billion investment, Alibaba ensures its business to smoothly enter a market which, while it is expected to rise, will require too much effort and costs in logistics and setup to start from the ground.”
And this is not surprising: most Chinese giants who succeed overseas owe their current position to thoughtful global brand acquisitions. Chinese companies, and especially the B.A.T have been all over acquisition in the expansion strategy lately, both in domestic and international markets”, added Thibaud Andre. “Their performances and earnings, especially for Alibaba but also second range IT players like LeEco for instance, will give some pretty significant signals on the relevancy of such moves.” And show if Chinese companies can follow the lead of Lenovo, as it is probably thanks to the buy back of the PC division of IBM in 2004 and the later acquisition of Google’s Motorola smartphone activities that the Chinese company outpaced HPP as the world’s first PC producer.
This article has been authored by Federico Sferrazza and Juliette Boulay, Daxueconsulting.
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