DEALTALK-Chinese buyers gun-shy on overseas M&A

(For more Reuters columns on deals, click [DEALTALK])

By Brian Kelleher, Asia financial services correspondent

HONG KONG May 30 (Reuters) - A group of Chinese insurance executives recently travelled to the United States to check out a large potential acquisition, only to drop out when the bidding got serious.

"They got cold feet," said one person familiar with the matter, expressing frustration over what he said was an all-too-familiar scenario when mainland companies look to make acquistions overseas.

Bankers said executives at acquisition-minded state-run Chinese companies often walk away when it's time to put money on the table for publicly listed firms because bidding attracts media attention and potential criticism, with success uncertain.

"It's difficult because they also have to go through regulatory hurdles to proceed," said the banker, referring to the long list of ministry approvals needed for big Chinese firms to complete transactions.

The wariness of Chinese buyers has some investment bankers choosing to spend more time working with Indian companies like Tata Steel (TISC.BO) and Hindalco Industries Ltd. (HALC.BO), which have pulled off major global deals.

Bankers' China hopes were raised two years ago after Lenovo Group's (0992.HK) landmark $1.25 billion acquisition of IBM's (IBM.N) personal computer arm, and outbound M&A volumes have indeed risen since then.

Chinese companies spent $20.1 billion on offshore acquisitions last year, up from $9.6 billion in 2005, according to market data firm Dealogic, although none of this year's top 10 outbound deals is for control of a public firm and most were purchases of energy assets to fuel its booming economy.

China's overall M&A market has been relatively quiet in 2007, with HSBC (HSBA.L) (0005.HK) and Commerzbank (CBKG.DE) topping the advisory rankings, followed by a group of local firms.

It's a different story in India, which is on pace to exceed last year's total M&A activity in the first half and where global advisory specialists UBS (UBSN.VX), Goldman Sachs (GS.N) and Morgan Stanley (MS.N) top this year's rankings.

"As a general rule, they are hindered," the investment banker said, noting that Chinese state-owned enterprises rarely pull the trigger on buys, in part because of bureaucratic structures.

That has bankers turning to Mumbai and New Dehli, as outbound Indian M&A volumes are $14.1 billion this year, compared with $6.2 billion for China.

Indian outbound volumes were $21.7 billion last year, and recent deals included Tata Steel's $12.2 billion takeover of Anglo-Dutch group Corus and top aluminium producer Hindalco taking over Canada's Novelis Inc. for $6 billion.

HIGH PROFILE FAILURES

Some argue that China's caution is warranted.

"Let's say a Chinese bank were to make a play for a European bank. What can they bring to the table but money?" said Khiem Do, the head of Asian multi-asset investment at Baring Asset Management in Hong Kong. "Investors will have some reservations about them being able to add much value."

Do and others support China's slow but steady foray into the world of international M&A, where companies from Japan, Australia and Europe have had high-profile failures.

Two of China's biggest state-backed companies have failed in high-profile bids for listed companies, which market watchers said may only reinforce a conservative corporate culture that does not reward executives who take outsized risks.

State oil company CNOOC Ltd.'s (0883.HK)(CEO.N) $18.5 billion bid for U.S. producer Unocal Corp. in 2005 became a political football which resulted in U.S. rival Chevron (CVX.N) eventually win the company.

Last year, the parent of China Mobile (0941.HK), the world's largest cellular company by users, broke off months of takeover talks with emerging markets telecoms operator Millicom MICC.O (MICsdb.ST) for a potential $5 billion deal, sending shares in the Swedish company plunging by 27 percent in one day.

Bankers, however, were heartened by Beijing's surprise move last week to take a $3 billion stake in the initial public offering of high-flying U.S. private equity firm Blackstone Group LP [BG.UL], a deal that came together in just a few weeks and was initiated by China.

"From what I understand it should be, or will be, part of a trend," Blackstone co-founder Stephen Schwarzman said of China's investment.