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 / Autumn 2008 / Issue 52(originally published by Booz & Company)


The Rise of the New Blue Chips

Competitive companies from emerging economies are vying on the same level in mergers with the most powerful corporations in the West.

Call them the New Blues — emerging blue-chip com­panies from developing markets such as Brazil, Russia, India, and China that can compete on the same level in mergers and ac­quisitions with the largest and most powerful corporations in the West. These freshly minted contenders, along with a spate of government-run investment funds in developing nations, are driving an unprece­dented worldwide deal-making spree in­volving the buying and selling of topnotch R&D, marketing, and brands.

The New Blues are succeeding thanks to thriving home economies and burgeoning global consumer markets; indeed, their achievements are helping to create and reinforce these conditions, and are inspiring greater ambition and more lofty aspirations among the people and the governments in these emerging nations. Many New Blues started as low-cost contract manufacturers or outsourcers, but are no longer content with that role; they want to create more profitable products for their domestic markets and for de­veloped countries as well.

Witness China: In September 2007, thanks to a massive run-up in its stock exchange, China was home to three of the world’s largest companies by market capitalization. One of them, the Industrial and Commercial Bank of China Ltd. (ICBC), overtook Citigroup Inc. as the number one financial-services company, measured by market cap. Quite an accomplishment, considering that less than a decade ago China had no capital markets.

With all of the new money flooding China, the nation’s businesses have earmarked a growing portion for mergers and acquisitions, many of them outside the country. In 2007, for the first time, Chinese companies spent more money on cross-border deals (about US$24.2 billion in announced transactions) than foreign firms spent acquiring companies in China (about $22 billion).

Many Chinese companies stop short of outright acquisitions. For example, in late 2007, ICBC bought a 20 percent stake in South Africa’s Standard Bank Group Ltd. for $5.6 billion. But outright purchases of foreign-owned companies are occurring with more regularity. In January 2008, WuXi PharmaTech (Cayman) Inc., a Chinese provider of pharmaceutical R&D outsourc-ing services, ac­quired U.S.-based AppTec Laboratory (now called WuXi AppTec Inc.), giving WuXi new capabilities and expertise, as well as a significant operational footprint and an expanded customer base in North America.

China is anything but an aberration among emerging economies. In 1990, only 19 companies from developing countries were listed in the Global Fortune 500, a list that naturally includes many of the most active acquirers in the world; in 2007, the figure had risen to 74. And between 1993 and 2005, the total number of multinational companies whose parents were based in Brazil, China, Hong Kong, India, or the Republic of Korea grew almost fivefold, from fewer than 2,700 to more than 14,800, according to the 2006 World Investment Report by the United Nations Conference on Trade and Development.

The New Blues are remaking their industries through domestic and regional acquisitions and by setting their sights on developed markets. The Saudi Basic Industries Corporation (SABIC), for instance, paid $11.6 billion for GE Plastics in 2007, and in early 2008, Tata Motors Ltd. purchased the storied Jaguar and Land Rover brands from Ford Motor Company for $2.3 billion. Tata said that Ford will continue to supply engines, transmissions, and other components for the next five to nine years, turning one of the Detroit Three into an outsourcer for an Indian automaker.

And consider personal computers, an industry long controlled by U.S. firms. Three Asian companies are now among the top five manufacturers of PCs. In 2004, China’s Lenovo Group Ltd. ponied up $1.75 billion for IBM’s PC division, which made Lenovo the fourth-largest PC maker in the world. Lenovo dominates the Chinese market, where PC sales are rising four times as fast as in the U.S. Three years later, Taiwanese PC maker Acer Inc. leapfrogged Lenovo into third place worldwide by ac­quiring Gateway for $710 million. That deal gave Acer a stronger presence in the U.S., and now the company is targeting Europe through a 2008 $49 million buyout of Netherlands-based Packard Bell. The Toshiba Corporation, the third Asian company in the top five, has been a prominent worldwide PC maker for many years.

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