Zhang Wenkui

An unprecedented wave of merger and aquisition (M&A) and restructuring is now sweeping the world. In 1998, value of M&A in the world was US$2,500 billion, 54 percent more than in 1997. In 1999, the figure rose to US$3,400 billion. This wave of M&A and grouping is characterized by horizontal takeover, and covers almost all industries of importance. Essentially, this wave of M&A has a strong tint of transnational industrial restructuring. Industrial restructuring has also won ever closer attention in China. As China’s accession to WTO is approaching, and the excessive capacity and competition in lots of industries are aggravating, industrial restructuring will inevitably become one of our important choices. At the time of transition toward a market economic system against the general background of intensification of economic globalization, however, it is of great importance to accurately understand the meaning of restructuring, correctly keep to the target of restructuring, and smoothly promote the realization of restructuring.

I

In well-developed economies, restructuring refers not only to changes of the business scopes and relevant assets of enterprises, and the control of assets, such as M&A spin-off and divestiture but also to equity reorganization and the resulted changes to corporate governance, such as tender-offer, share repurchase, going private, MBO, and ESOP, and recapitalization of enterprises that have plunged into debt crises, such as readjustment of categories of relevant debts and the transformation of some non-guaranteed debts into stocks. Since restructuring of business scopes and relevant assets and recapitalization are usually linked to the reorganization of equity rights, the reorganization is usually mixed up with restructuring and recapitalization.

There is no, however, any well standardized definition of industrial restructuring. It has been customarily thought that once restructuring, reorganization, or recapitalization occurs to a certain industry in a massive way (especially when restructuring has been resulted from M&A), this would be a kind of industrial reorganization. Industrial restructuring usually results in big changes in the market structure, and subsequently the market behaviors and market performance of the industry concerned, such as increases in the extent of centralization, specialization or alliance on a greater scale, lowering of average costs, differentiation of products, and strengthening of efforts in R&D. Some negative phenomena such as monopoly and price rise may also crop up.

Why should enterprises be restructured? And why restructuring takes places in certain industries on a large scale, in particular? Of cause, recapitalization is ignited by debt crises, without any argument, while the factors leading to the restructuring and equity reorganization are more complicated. When some factors act upon certain industries in a concentrated way, especially when big changes take place in external environments and internal conditions and break the organizational balance of these industries, industrial restructuring would occur.

First of all, to achieve business synergy is regarded as the most important factor leading to restructuring. Business synergy includes acquirement of a scale economy and a scope economy, enlargement of the extent of specialization, or conglomeration of sectors of the upper and lower streams.

Second, financial synergy is another important driving force behind restructuring. Financial synergy includes enhancement of enterprise capacity of utilization of financial leverage, and internalization of banking activities such as centralized use and settlement of funds and external investment.

Third, underestimation of the market value of an enterprise easily leads to M&A and repurchase. Sometimes, reorganization of equity rights is resorted to as a policy on share dividends. By using financial leverage to readjust its financial composition and quantities of equities, an enterprise can increase its dividends or revalue its stocks.

Fourth, existence of inefficient managers can also lead to M&A and restructuring. Due to inefficiency of certain managers, markets of company control would develop, thus leading to take-overs. Such take-overs are favorable to the prevention of the soft constraints resulting from the dispersion of stocks of listed enterprises.

In the fifth place, overheated pursuit by enterprises for market shares or even monopoly, or enthusiasm on the part of enterprise managers in the expansion of their fields of business or establishment of their spheres of influence may trigger off restructuring. This kind of restructuring can not help improve the efficiency of enterprises or sharpen their competitive edges. On the contrary, it will harm the development of enterprises and industries.

II

The international wave of M&A that started in 1998 has a noticeable tint of transnational industrial restructuring and has been thought to be driven by strategic forces. The driving force behind this wave is widely different from that behind the M&A wave in the 1980s. It has its origin in this rapidly changing world and will surely change this world.

First, influence of international economic integration. International economic integration has extended markets beyond national and regional boundaries into international markets, intensified competition, and forced enterprises to reconsider their scales and market shares from a bigger market perspective. Since their original scales have now become too small, they have no other choice but to expand the scales of their businesses by way of restructuring. International economic integration has also raised the call of a “reshuffle of cards” so far as international specialization is concerned. Enterprises will have to determine their core businesses once again, re-orient their marketing targets, and re-deploy their assets on this basis. International economic integration has also advanced integration of capital markets, and provided more convenient capital tools for M&A and restructuring. The inauguration of the Eurodollar and the gradual integration of European stock markets, in particular, have enabled the enterprises in Europe to make Eurodollar offers during the M&A campaign in 1999, and facilitated the announcement of plans on big M&A moves such as the case of Vodaphone and Mannesman.

The growing leniency on the part of the governments of various countries toward the standards on the implementation of anti-monopoly laws has added momentum to the M&A wave. This, too, has something to do with the internationalization of the scopes of markets. Welton, a US economist, studied the extent of centralization of all the 450 industries of the United States in as early as the 1980s. He discovered that the H4 index of these industries was about 40 percent on the average. Of these industries, 75 had internationalized market scopes. Although the domestic H4 index of these 75 industries stood as big as 50 percent, this index would come down to 25 percent if their factor of internationalization was readjusted. This shows that the influence of internationalization of markets upon industrial organization is great and provides a solid theoretical ground for their government to readjust its anti-monopoly policies. Exxon, Mobil, Boeing, and MacDouglas, for instance, are all super-sized companies in their respective fields. If viewed from the angle of competition at the US domestic market, their application for merger would definitely win no support. At a time when the scope of the market has already been internationalized, however, the US government approved these merger plans without any delay.

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