By Liu Ji (China Daily)
Updated: 2007-07-19 10:04

[The author Liu Ji is honorary president of China Europe International Business School in Shanghai.]

The continuous economic boom that has taken place in China over the last 28 years makes it a powerhouse of global prosperity. And now the country has become involved in the newest development of economic globalization.

The wave of mergers and acquisitions (M&As) among international businesses that has swept across the globe will ensure the rise of global corporations in the 21st century.

This explosion in M&As began in 2004 and peaked in 2006, when deals worth $3.5 trillion were inked. The deal-making has continued apace this year - M&A agreements involving $2 trillion were reached in the first four months of this year, up 60 percent from the same period last year.

The M&A deals range from the finance, electricity generation, property and media sectors to consumer goods. They have taken place in the US, Europe and many developing countries.

After being part of an M&A deal, many businesses see a marked improvement in their ability to lower costs, reallocate resources and explore markets. Global M&A deals, which have forged numerous global corporations, generally lift productivity to a higher level.

Against such a backdrop, China is seeing its own boom in M&A activity. In 2001, the total volume of M&A deals was $11.9 billion. That figure jumped to $58.8 billion in 2004 and climbed to more than $90 billion by last year.

According to statistics from Dealogic, a supplier of M&A activity information, the average M&A deal in China involved $43 million in 2006. An average M&A deal in the US involved $200 million, $140 million in Europe and $122 million for the world.

These disparities indicate that China is primed for a surge in M&As, especially given the country's current rate of economic growth and degree of integration with the global economy.

During this surge, China will experience several different types of M&A deals.

Many link-ups will take place between Chinese enterprises. By consolidating with other domestic enterprises, Chinese businesses will get bigger and be better prepared to compete with multinational players.

These deals could happen between State-owned enterprises, between private businesses or between companies of mixed ownership, regardless of their sizes. All these deals should have a common goal of improving the enterprises' strength in the global market.

Chinese businesses could also buy out overseas companies, in developed and developing countries. Through these deals, Chinese businesses could gain access to well-known brands, advanced technology, networks for distribution and services, talent and other resources. Overseas M&A deals will serve as a stepping stone allowing Chinese companies to move toward becoming multinational and even global operations.

It is also likely that Chinese businesses will be acquired by multinational companies from other countries. This is an unavoidable part of China's modernization and will benefit the country in various ways.

The most visible rewards of such deals include the introduction of advanced technology and management practices, the transfer of research and development capabilities, the localization of employees and tax income and even the establishment of regional headquarters in China.

Chinese businesses should try to secure these benefits in their M&A agreements with foreign companies.

As the economic boom and social progress carry on in China, M&A deals involving Chinese businesses will speed economic globalization and spur the country's development.

Therefore, it is imperative that Chinese businesses be aware of this unprecedented opportunity and be ready to embrace it.

Businesses should be doing somehomework to prepare. They should be studying the legal and commercial rules of global M&A practices, learning from the experiences of European or US companies that have been involved in M&A deals and weighing the gains and losses of Chinese businesses that have been part of such deals.

More importantly, the government should pay due attention to M&As. They are a key national economic security issue.

It is now a delicate moment for China's economic security.

If Chinese businesses do not take an active part in the global market for M&As, China might get marginalized and lose a chance to develop itself as a global business player. This would definitely endanger the country's economic security.

Meanwhile, if China indulges itself in the M&A wave without taking the steps necessary to protect itself, Chinese companies could fall victim to hostile mergers.

As a fledgling market economy, China does not have a mature enough legal system to ward off hostile mergers. About 20 percent of the M&A deals that have taken place since 2004 have been hostile, and most of them have taken place in emerging markets and developing countries.

Therefore, the authorities should prepare for the potential risks that lurk behind the exceptional opportunities of M&As.

Legislation governing M&A deals should be a priority. Chinese businesses should have recourse to substantial assistance so they can develop into multinational or global companies.

There should be laws against hostile takeovers, with internationally accepted punishments for violators. We also need an antimonopoly act as soon as possible to prevent overseas companies from gaining monopoly positions in domestic industries or regions.