The China Price

Why Chinese investors are overpaying for struggling American companies.

China will pay for the Maytag men’s company

“The China Price” is a phrase owners, workers, and shareholders at American manufacturers have learned to dread. Business Week calls it “the three scariest words in U.S. industry.” The China Price is the absurdly low rate at which a good or service can be provided by the Middle Kingdom. A company—say, Wal-Mart—can approach a longtime supplier with the China Price and demand that it meet it. Or else.

But now a different kind of China Price is emerging, one that’s more beneficial to the owners of American companies and stocks. The New China Price is what Chinese companies, flush with dollars thanks to their massive exports, are willing to pay to acquire struggling or second-tier American companies. 

The New China Price is on vivid display today over at Maytag. Once the great symbol of American reliability in appliances, Maytag has exhibited all the signs of a company adrift in recent years. It’s been losing market share and going through CEOs the way Elizabeth Taylor ran through husbands. In May, the private equity firm Ripplewood Holdings agreed to buy Maytag for $14 per share in cash. But Monday evening, Maytag said that Chinese appliance maker Haier,which already has a plant in South Carolina, had teamed up with Blackstone Group and Bain Capital to make a preliminary offer of $16 a share.

Ripplewood—like other private equity firms that have snapped up faded industrial companies—is a classic financial buyer. It strives to gain assets on the cheap, slash costs, get the balance sheet in shape, and move on. It almost doesn’t matter what industry the company operates in, so long as the numbers come out right. Financial buyers are willing to pay some premium to gain control of a company, but not a huge one.

Haier, by contrast, is a strategic buyer. Strategic buyers look beyond cash flow and hard assets. Rather, they consider how all the target’s assets—everything from its cash on hand to its brand name—can further its core strategy. Maytag’s intangible assets—its brand, its management, its century of washing-machine-making experience, and distribution relationships—are what Haier finds most appealing. Potential American strategic buyers, such as, say, Whirlpool, might view Maytag’s assets as irredeemably damaged and wasting. But for a Chinese firm like Haier, even Maytag’s tarnished good name is a vast improvement over what it has. It can take decades and tons of money to build name recognition among U.S. consumers. Now Haier can buy it in a matter of weeks. Sure, Haier will have to pay a premium (and perhaps a big break-up fee). But so what? 

The Maytag bid resembles the recent sale of IBM’s PC unit. Competition had run the unit into the ground. Who would want to buy what was becoming a marginal player in the PC industry? Not Dell or Hewlett-Packard. They had already crushed IBM’s PC business, and they had nothing to gain by acquiring the IBM brand name. But Chinese computer maker Lenovo, an ambitious company with no name recognition in the United States, certainly did. It leapt at the opportunity to acquire the IBM PC mark, as well as its American management team, for $1.75 billion.

The advent of Chinese firms as players on the international mergers-and-acquisitions scene won’t necessarily lead to a golden age of bidding wars. You wouldn’t expect a China Price for Neiman Marcus, for example. But for beaten-down companies that make auto parts or ball bearings, why not? And in areas in which China has great needs—like natural resources—even comparatively healthy companies can expect higher bids from Beijing.

Look what’s happening to Unocal. In April, the second-tier oil company agreed to be purchased by ChevronTexaco in a deal that combined cash and stock. But now, as the Financial Times reports, China National Offshore Oil Corp. seems likely to make a higher bid.

So far, the New China Price hasn’t ruffled many feathers. Stockholders are generally pleased with the higher bids. And for stakeholders in manufacturing firms like Maytag or IBM’s PC unit, a sort of resignation has set in. Things are bad already—how much worse could they be under Chinese ownership? What’s more, a great deal of what the Chinese companies are seeking to acquire is uniquely American and can’t be replaced easily by overseas labor—the management, the brand, the legacy.

But don’t expect the good feelings to last. Remember what happened when Japanese companies began buying American ones in the ‘80s. Soon there will be opposition to the China purchases from the nascent mercantilist movement in this country. Last Friday, Republican congressmen Duncan Hunter and Richard Pombo called on President Bush to review the possible sale of Unocal to CNOOC.