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Going East: Why East-West High-Tech Mergers & Acquisitions Will Increase

A new round of industry consolidation lies ahead for the high-tech sector.

Continuing a trend that picked up earlier this year with several mega-deals, the high-tech market will likely see increased mergers and acquisition activities in 2011 as companies leverage swollen balance sheets to snap up smaller rivals in similar market segments or expand into adjacent industry sectors to beef up product lines.

Many of the M&A actions that we will likely see in 2011 will involve trans-continental transactions as the industry’s top players expand or strengthen their operational presence across the globe. Some deals will occur between European and North American players but the more dramatic and strategic activities are likely to take place in Asia and involve western companies merging with or acquiring smaller but fast-growing competitors globally.

Until now, most Western companies involve in the high-tech supply chain have been content to simply outsource production to Asia or relocate facilities to the region. That’s about to change. In addition to fostering the same start-up culture that created Silicon Valley, countries like China, India, Korea, the Philippines and the Asian Tigers are also emerging as major consumers of electronic equipment.

China is already the biggest market for wireless phones worldwide and demand for LCD-TV’s in the country is forecast by researcher iSuppli Corp. to jump 34 percent in 2010 compared with 1 percent and 8.9 percent in North America and Western Europe, respectively.

As Asia evolves in the high-tech market from serving as a manufacturing and component supply center into a major consumer market the biggest North American and west European companies will similarly evolve in their response by seeking to establish a stronger and more permanent presence in the region. Invariably, this will result in transactions aimed at melding local firms into their bigger and better know Western rivals through mergers and acquisitions.

This is already happening in certain market segments but it will accelerate in coming years led by the same group of companies that in Europe and North America transformed the local landscape through acquisitions. Companies like HP, Cisco, Oracle and even IBM will lead the trend. They may be more active initially in India but eventually as they become more confident about the prospects for growth in Asia, attention will turn to the fractured Chinese market.

The Chinese government may not be totally supportive of the flood of Western companies by local rivals but it will not be able to stem the tide. By opening up the country to foreign capital and investments decades earlier, China itself set up a possibly irreversible integration of its economy with the West. The first phase is over. The next phase is about to begin.

In a future article, I will examine the implications of this development for the electronic supply chain and review the financial resources Western companies can harness as they continue the local and international consolidation of various high-tech sectors in 2011.

Hewlett Packard Cisco Systems Oracle IBM iSuppli

14 comments on “Going East: Why East-West High-Tech Mergers & Acquisitions Will Increase

  1. Barbara Jorgensen
    October 4, 2010

    In China, certainly, foreign companies receive a warmer welcome if you are an operating entity in the country, rather than just a factory location. A decade ago, the process to set up a business and/or acquire in China was extremely time-consuming and tedious. Has the red tape been reduced, or is it the appeal of capital infusion that's changing things?

  2. bolaji ojo
    October 4, 2010

    Western high-tech companies have been in China now for well over 20 years and it's time they moved on to the next stage of their relationship with the country. China's can still be a difficult business terrain and I don't expect the challenges to disappear anytime soon but foreign companies are learning to cope with the challenges, often by tapping local talents for support. If global economic integration continues as expected, the idea of companies merely setting up subsidiaries in China will fade away. To be fully integrated, companies must be both willing to establish Greenfield operations or buy local rivals. Chinese companies will similarly go West as Western companies go East. That process will benefit all parties and we may as well start removing the roadblocks to this.

    Interestingly, Avnet Inc., one of the world's biggest electronic components and IT equipment distributors, announced today it had acquired some assets from Eurotone Electric Ltd., a Chinese distributor that is more focused on engineering design support. Avnet said it made the acquisition to broaden its offerings in “critical components in solar and wind power applications,” areas seeing strong growth in Asia. That's the future of expansion in Asia for Western companies.

  3. Barbara Jorgensen
    October 4, 2010

    Smart move–the Chinese government is investing a lot in solar and wind power to both reverse pollution in the country and establish jobs and technology leadership in renewable energy.

    Avnet first dipped its toe into China 15 or so years ago by forming an arm's length partnership with a Chinese trading company. At the time, that was the most viable option in terms of China's in-country operating requirements and risk management on Avnet's behalf. An outright acquisition certainly marks progress.

  4. Steve Saunders
    October 4, 2010

    Hi Bolaji,

    I must have slept through the begining of the year – which are the major deals to which you are referring.

    Also, when you talk about  the potential for some big deals coming down the pike, can you please speculate as to which deals you think are most likely?

    Thanks

     

  5. bolaji ojo
    October 4, 2010

    Steve,

    Thanks for the questions. Most of the major acquisitions that have taken place over the last year in the high-tech sector have been largely within the United States and in Europe but there are signs some of the industry's biggest players are seeking new ways to tap into opportunities opening up in China, Japan, Korea and in Eastern Europe. Among OEMs, Hewlett-Packard and companies like Dell have been most active as they fight for dominance in emerging cloud computing areas with the goal of becoming one-stop shop for companies seeking hardware, software and consulting services.

    HP for instance fought a public battle over 3Par with Dell and won with a bid of $2.4 billion, much higher than the starting bid price of $1.6 billion. That's just one of the more high-profile acquisitions announced by HP over the last year. Earlier this year, it closed the acquisition of Palm Inc., for which it paid $1.2 billion. Also this year, HP bought ArcSight ($1.5 billion), Stratavia and Fortify Software (terms not discolsed.).

    Other companies have been similarly active. Dell lost the bid for 3Par but it won KACE, a systems management appliance company, Late in 2009, Dell bought Perot Systems for $3.9 billion.

    These are some of the biggest acquisitions on this side of the pond. Companies in Asia have been very busy too and some have made forays into the U.S. and Europe. In the non-high tech area, China's Sinopec bought 9 percent in ConocoPhilips for $4.7 billion. In the high-tech area, Alibaba.com, a China-based electronic commerce giant acquired Auctiva, based in California. Western companies have also been active in other segments of the economy. Massachussetts-based Charles River this year paid $1.6 billion for China's Wu Xi PharmaTech. The trend is in this direction despite obstacles governments and politicians will throw in the way.

    On the issue of potential cross-continental acquisitions that I think should take place, I have always thought China needs to make a big splash in the telecommunication equipment market. The acquisition of Alcatel-Lucent, for instance, by a major Chinese player in the sector is a possibility, if national governments in the U.S. and France would step aside and remove boundaries imposed over the transfer of dual-use (consumer and military) technologies to China. There are other struggling Western companies that could benefit from a strategic merger or other partnerships (such as buying minority or controling stakes) with south East Asia rivals. An example is Motorola, which wants to spin off its mobile handset business. It would seem to make sense for Motorola wireless division to seek a partnership with a major Chinese or Taiwanese handset vendor. The payoff would be huge for both parties; Motorola would get increased access, local/home grown design expertise and, of course, “adoption”   in China's huge market while the Asian rivals would get validated as a genuine and potentially major player in the west. Taiwan based HTC (formerly High Tech Computer Corp.) is a potential candidate for acquisition or merger with the like of Motorola.

    Will any of these happen? There are numerous obstacles on the way, including political and cultural. Western governments, for instance, are loath to open access to critical technology to China. But problems like this can be resolved. IBM succeeded in selling its PC business to the Lenovo Group after satisfying regulatory and other government concerns. My argument is that businesses and economic regions go through growth and development phases. It's now the next phase for the high-tech sector and this will involve cross-continental deals that many once thought were highly unlikely or simply impossible to orchestrate. They will eventually happen as the consolidation in the West wraps up and the East begin to see it needs more than “home grown demand” to make a big splash in the global market.

  6. Hawk
    October 4, 2010

    Western companies may want to go East and Eastern businesses may also want to go West but will the politicians get out of the way? That's the main problem I see with the theory that acquisitions will increase over the next few years between Western and Eastern companies. There are no doubts it is desirable and, under any other circumstances, it should be happening already. However, China is determined to grow as quickly and rabidly as it can at the expense of the West.

    That's why China will continue to welcome foreign investments but not allow its currency to float freely–otherwise it will have to face the spectre of potential unrest in its countryside if the cost of manufacturing in the country rise and foreign manufacturers stop outsourcing as heavily to the region. China also seems to think it can have its cake and eat it, that is, welcome foreign investment but make it difficult for foreigners to buy local companies or invest in certain market segments.

    China is not the only problem, though. Western governments, too, are very wary of China and can't seem to get over their concerns over the transfer of sensitive technologies and industry segments to Asia. So, some companies will not be, for now, available to Chinese buyers. In turn, Western companies will also not be allowed to invest in certain Chinese business areas. There you have it: stalemate. Any solutions?

  7. tioluwa
    October 5, 2010

    I'm curious,

    Can a company maintain its identity after a merger or does it just get swallowed up.

    Yes business is business but culture is also involved.

    In an east-west merger, how do the companies still manage to remain themselves wihtou loosing their identity to one another.

    I know an Acqusition is a complete swallow up, but what are the implications of a Merger on two companies with two different aproach to business, customer relations, and from different cultures.

     

     

  8. Anna Young
    October 5, 2010

    A company can still maintain it's identity after a merger. However, for this to be effective,there will be undoubtedly a refection on varied diversity of the parties involved. This in my view can only be addressed in the spirit of agreeing to disagree, instead of imposition of unformity. Bearing in mind that each Nation has it's strength and week points. They ought to share  and learn from various skills involved, rather than impose it's value,system and developmental way of life. It may not always turn out this way, this I believe ought to be the model, if merger is the order of the day rather than complete take over. 

  9. Anna Young
    October 5, 2010

    Barbara, can you simply forsee a change in Red tape in China? I think not.

    However, I deem this as “changing times”. The era of Globalisation. The option is to open and relax their rules to encourage more investor in order to aid further growth.

  10. Barbara Jorgensen
    October 5, 2010

    Hi Anna–thanks for your feedback and excellent point.

    From what I hear, there hasn't been any dramatic progress in cutting through the red tape in China. The policies still favor local companies, local content and local development. But as long as China remains a potential market for foreign goods, Western companies will do whatever is necessary to play in that market.

  11. bolaji ojo
    October 5, 2010

    It will take some time for China to be fully integrated into the global economy and along the way the country will need to make many more concessions to enable foreign companies fully participate in local business transactions. Already, due to economic weakness in the West and high unemployment, governments across the globe are clamoring for China to let its currency float, meaning they want the Yuan or Renminbi to appreciate against other major currencies.

    The belief is that a stronger Yuan will make Chinese exports more expensive in the West and help level the playing field. China has objected to the push for a free-floating Yuan for years but there are signs it is more willing to somewhat relax its hold on the currency. China has also over the years, under pressure from foreign companies, improved its intellectual property protection efforts and is helping to counter the incident of counterfeiting, which has in the past hurt and continues to hurt high-tech companies.

    I see the same happening on the issue of M&A activities. China may not readily yield to the need for companies to engage in mutually beneficial trans-continental transactions but it must eventually if it wants to continue to be a thriving member of the world economy. That's the hope, at least. The reality may turn out different if China feels further liberalization could negatively impact its political stability.

  12. SP
    October 6, 2010

    Agreed. Almost all the companies listed in your article have presence in India. But I guess what you meant was manufacturing. Yes with growing economies of China and India its inevitable but to merge and acuquire.

  13. papri1
    October 12, 2010

    East-West High Tech Mergers and Acquisitions will increase as the price is high for procurement of instruments and also manpower is challenging. Eastward countries are still manufacturing at low cost and hence comparing the cultural traditions the manpower is quite low which is affordable. Although in sofistication purpose I do suspect they are farmore improved and user friendly. Depending on the innovation capability and the novelety the probability for acquisition and discovering with patented ideas are on a rise for their demand. 

  14. maou_villaflores
    October 31, 2010

    The bottom line on this issue is that East offers a very low labor cost but very competitive talent. 

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