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Published: August 26, 2008

 
 

The Rise of the New Blue Chips

With each deal, the New Blues alter the economic calculus in their home nations, creating a positive feedback loop as they aggressively seek out cross-border transactions. The success of local companies strengthens regional economies, creates more high-quality jobs, and enables more people to take advantage of improvements in living standards. In turn, these new consumers juice local demand for goods from the growing domestic companies. Finally, successful global deals, by easing access to capital and forcing government authorities to adopt legal systems and financial reporting requirements that conform to international standards, create an environment in which other companies from emerging nations can more easily follow suit.

The rise of the New Blues as M&A competitors is particularly intriguing, because their fortunes, although still fundamentally linked to the West, no longer rise and fall in lockstep with Western companies. Thus, New Blues can be on the prowl for acquisitions even when Western companies cannot.

Consider how buyers in Asia and the Middle East reacted to the subprime mortgage debacle that began to swamp financial institutions in the U.S. and Europe in 2007. As Western institutions, which held billions of dollars of collateralized debt obligations on their books, rushed to raise capital, in­vestors in Asia and the Middle East sensed a bargain and stepped in. The China Investment Corporation invested $5 billion in Morgan Stanley; the Abu Dhabi Investment Authority shoveled $7.5 billion into Citigroup; China’s Citic Securities Company agreed to prop up Bear Stearns with $1 billion (before the U.S. firm’s sudden demise); and the Government of Singapore Investment Corporation announced a $9.75 billion investment in UBS. All this made 2007 a watershed year, according to the Wall Street Journal. It was the first time deal makers in developing nations acquired about as many assets in the West as deal makers in the West acquired in developing markets.

As these transactions suggest, strategic buyers are not the only competitors from developing na­tions flexing their M&A muscle; the New York Times has reported that increasingly aggressive government investment funds, or the so-called sovereign buyers, currently control about $2 trillion worldwide and are expected to have more than $12 trillion at their disposal in 2015. The lion’s share of this money is in the Middle East, where record oil prices have filled the coffers of sovereign buyers with about $1.5 trillion in assets; their thirst for deals corresponds directly to the world’s thirst for their oil. By the third quarter of 2007, the sovereign funds of Kuwait, Saudi Arabia, Dubai, Abu Dhabi, and Qatar had spent $64 billion globally, compared to $30.8 billion in all of 2006 and $4.5 billion in 2004, according to the Wall Street Journal.

Sovereign buyers have been losing interest in staid bonds and even private equity funds. Rather, they are purchasing companies directly. Since 2005, government-owned Dubai Ports World of the United Arab Emirates has bought Peninsular & Oriental Steam Navigation Company of London; a Dubai state-owned fund has acquired the Tussauds Group; and Kingdom Holding Company of Saudi Arabia (and Bill Gates) have secured the Four Seasons Hotels chain. And then there was the deal in 2007 that could be described as the first global M&A struggle, pitting British bank Barclays against a consortium of the Royal Bank of Scotland, Benelux’s Fortis, and Spain’s Banco Santander for Dutch financial-services giant ABN Amro. Although the Barclays bid was ultimately unsuccessful after months of behind-the-scenes ma­neuvers and public posturing, it was notable for the involvement of several sovereign funds. Among them: the China Development Bank, which said it would invest at least €2.2 billion (US$3.4 billion) and as much as €9.8 billion ($15.2 ­billion) and Singapore’s Temasek Holdings, which pledged as much as €3.6 billion ($5.6 billion).

 
 
 
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