China and India's Competition for Resources Causing Rise in Cross-Border Acquisitions

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Corporate Finance Focus

Mergers and acquisitions in emerging markets are heating up, and China and India are at the center of a bidding war for global resources, especially energy and metals, that is boosting cross-border deals. M&A transactions involving companies based in emerging markets more than doubled in the first quarter of 2010 compared to the same period a year earlier, according to Thomson Reuters.

Africa has been one of the major battlefields in the quest for resources, and it remains so, but the competition for hydrocarbons is global. It spread deeper into North America in April when Sinopec, the international arm of China Petroieum & Chemical, snared a $4,65 billion stake in the Syncrude Canada oil-sands project from Houston-based ConocoPhilh'ps. Meanwhile, India-based Reliance Industries agreed to pay $1.7 billion for a 40% stake in a joint venture with Pittsburgh-based Atlas Energy that will extract natural gas from one of the larger shale formations in the northeastern United States, known as the Marcellus Shale.

Two of the three largest M&A transactions in the Americas in March involved state-owned oil companies from China and India buying into energy properties in South America. The Indian government approved an investment of $2.2 billion over che next five years by three state-run oil companies in Venezuela's Carabobo oil-field acreage. Meanwhile, CNOOC, China's national offshore oil company, agreed to pay $3.1 billion to buy a 50% stake in Argentinabased oil-producer Bridas, in CNOOC's biggest overseas acquisition to date.

China is extending its influence in Latin America with huge "soft loans" provided by the state-owned China Development Bank. It promised $20 billion in loans to Venezuela in April. President Hugo Chávez said Venezuela will use the funds to build new power plants, highways and other infrastructure and will repay the loans by supplying China with oil. Petrobras, Brazil's state -controlled oil company, received a similar $10 billion loan last year from China Development Bank and is seeking another $W billion to be repaid in oil.

National Security Issues

In August 2005 CNOOC withdrew an Sl 8.5 billion orfer for Unocal, one of the largest independent US oil and gas producers, after US lawmakers complained that the deal could threaten national security. Last year CNOOC acquired stakes in the Gulf of Mexico from Norway's Statoil. making its first entry into the oil reserves in the gulf.

"The US government is tracking China's activities closely and will jump in when they are considered a threat," says John Bender, managing director of Bender Consulting, a San Francisco-based global consulting firm that focuses on the energy and technology industries. "China continues to emerge as a world powerhouse," he says. "Expect to see upward of $50 billion in M&A activity out of China for 2010."

China is the world's second-biggest energy consumer after the US, and it recently surpassed the US as the world's biggest automobile market. India already has an energy and power shortage. Its energy consumption has been growing and is being met by increasing reliance on oil. India lacks the resources to meet its current needs and is expected to import 90% of its oil by 2030.

Head-to-Head Battle

"India is severely energy constrained, and it is getting more aggressive in overseas acquisitions," Bender says. "It is in headto-head competition with China and the international independent oil companies."

The share of emerging and developing countries in world gross domestic product is expected to overtake the developed countries by 2014, according to the International Monetary Fund. Asian M&A deals outpaced Europeantargeted activity in the first quarter of 2010 for only the second time on record, Bender says. "There are more than 800 companies in China that have expressed global aspirations in the last three years," he says. …