With Shanghai Having a Market Cap Four Times The Size of Bombay – Why Is It Indian Companies Are Taking The Lead In Global M&A?
An examination of the roles and responsibilities of the stock exchanges of Shanghai and Mumbai leads to some interesting potential implications for the development of companies listed on the respective bourses – and some pointers as to why it is currently Indian – and not Chinese – companies that are currently expanding globally.
Firstly, lets look at some comparisons and history.
The Bombay Stock Exchange (BSE) – is known as the oldest exchange in Asia. It traces its history to the 1850s, when stockbrokers would gather under banyan trees in front of Mumbai’s Town Hall. The location of these meetings changed many times, as the number of brokers constantly increased. The group eventually moved to Dalal Street in 1874 and in 1875 became an official organization known as ‘The Native Share & Stock Brokers Association’. In 1956, the BSE became the first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act.
The Bombay Stock Exchange developed the BSE Sensex in 1986, giving the BSE a means to measure overall performance of the exchange. In 2000 the BSE used this index to open its derivatives market, trading Sensex futures contracts. The development of Sensex options along with equity derivatives followed in 2001 and 2002, expanding the BSE’s trading platform.
Historically an open-cry floor trading exchange, the Bombay Stock Exchange switched to an electronic trading system in 1995. It took the exchange only fifty days to make this transition.
The Exchange is known for tough listing regulations and a strict adherence to transparency, giving it an well deserved reputation internationally. This is demonstrated in it’s recent history and stability – over the past 15 years there have been only 22 changes of it’s top 100 listed companies. In total, the BSC has a market capitalization of USD900 million spread around 3,500 listed companies.
The Shanghai Stock Exchange (SSE) was founded on Nov. 26th,1990 and in operation on Dec.19th the same year. It is a non-profit-making membership institution directly governed by the China Securities Regulatory Commission(CSRC). The SSE bases its development on the principle of “legislation, supervision, self-regulation and standardization” to create a transparent, open, safe and efficient marketplace. The SSE endeavors to realize a variety of functions: providing marketplace and facilities for the securities trading; formulating business rules; accepting and arranging listings; organizing and monitoring securities trading; regulating members and listed companies; managing and disseminating market information.
After several years’ operation, the SSE has become the most preeminent stock market in Mainland China in terms of number of listed companies, number of shares listed, total market value, tradable market value, securities turnover in value, stock turnover in value and the T-bond turnover in value. The total market capitalization of SSE is USD350 billion with about 845 listed companies.
In essence then, the Shanghai Stock Exchange appears to be roughly four times larger than it’s Indian counterpart in market cap, with it’s listed companies raising also about four times as much money. So why then are Indian companies apparently so much further ahead in global positioning and acquisitions than their Chinese counterparts ?
Chinese & Indian Global M&A Activity
Lets look at some recent deals. It should also be remembered that in terms of global trade figures – it is the world that has come to China, not the other way around, and this is an anomaly, not a norm. Most businesses operate on a basis that sees more active cross-border activity, and this has generally not been the case for most Chinese businessmen. Indeed, the only acquisitions of note by Chinese businesses overseas – with the only sole exception really being Lenovo’s take over of IBM’s PC business – has all been State sponsored strategic purchases made generally in the energy industry. While Lenovos take over of IBM’s PC business is laudable and they appear to be doing a great job of it – it remains practically the only success story in Chinese outbound investment and was a relatively minor USD1 billion deal. Compare that with Tata Steels acquisition of Corus at USD13.6 billion, or Mittal Steels take over of Arcelor for USD31billion. Yes – it could be argued that as Mittal are registered in Europe and not India it was a Euro deal – however in soul at least it is very much an Indian acquisition. There are many other examples as we list below.
One of the first overseas acquisitions in 2007 which received little or no notice was Mahindra & Mahindra Ltd’s takeover of 90 per cent stake in Schoneweiss & Co. GmbH, a family-owned German forgings company with over 140 years of experience in the sector.
Tata Steel’s $13.6 billion takeover earlier of Corus, the Anglo-Dutch steel company and Europe’s second-largest steel producer and the eighth largest in the world (October, 2006). The Corus acquisition is India’s largest-ever global acquisition, and makes Tata Steel the world’s fifth largest steel producer with a capacity of about 26 million tonnes and combined sales of $24.4 billion.
India’s largest wind energy firm Suzlon Energy acquired Belgium’s Hansen Transmission International for $324 million (March, 2006).
Indian Pharma giant Ranbaxy also made a large foreign acquisition of $372 million, with buyout of a 96.8 percent stake in Romania’s Terapia (February, 2006). Ranbaxy, one of India’s top pharmaceutical companies, has spent $500 million acquiring 14 companies abroad since 2004.
One of the largest ever acquisition by an India company abroad in the paper and pulp industry was made by Ballarpur Industries, which along with JP Morgan, acquired a 97.8 percent stake in Malaysia’s Sabah Forest Industries for $261 million.
Tata Group joined the ranks of Indian seekers on foreign grounds with a $677 million acquisition of U.S.-based Glaceau, the maker of health drink vitamin water, which was pegged as the largest ever overseas buyout by a private Indian company in 2006. The deal surpasses the acquisition of German generic drug maker Betapharm by Indian pharma giant Dr Reddy’s in February, 2006 from U.S,-based private equity firm 3i for $572 million. Tata’s acquisition of Glaceau only lags behind state-owned Oil & Natural Gas Corp Videsh’s 15 percent acquisition of Petrobras’ BC-10 block in Brazil for $1.4 billion.
In 2002, Tata Tea bought a controlling stake in U.K. firm Tetley for $407 million.
In 2004, Tata Steel acquired Singaporean firm Natsteel for $486 million. In 2005.
In 2005, Videsh Sanchar Nigam Limited acquired U.S. firm Teleglobe, a provider of voice, data and mobile signalling services, for $239 million.
Wipro acquired eight companies from December, 2005 – October, 2006, for amounts ranging from $20 million to $56 million.
So far this year (2007), 34 foreign acquisitions totaling $10.4 billion have been reported by Indian companies as completed or pending, according to Dealogic, a British research firm. That is almost half of the $23.1 billion total for all of last year. Once the Corus deal goes through, Tata will have well over half its revenue coming from outside India. It has spent more than $15 billion on 27 foreign acquisitions and minority stakes since 2000. In the auto industry, Tata Motors and Mahindra & Mahindra have adopted a mergers & acquisition strategy to become multinationals.
Different Stock Exchanges, Different Dreams
So why have Indian listed companies – with less than four times the assets – outstripped Chinese listed companies in M&A activities ? The much lauded “The Chinese are coming !” in terms of international anticipation of Chinese outbound investment turning up to buy international businesses has not occurred.
I can identify two major components that prevent Chinese companies “Going Global” – and these are linked to the roles and management of the respective stock exchanges, being the theme of this article. Others include communication abilities, a lack of quality management in Chinese firms, domestic competition brought on by WTO membership and many other factors. However it is the fundamental understanding of the role and function of a stock exchange that I refer to.
Handling on occasion the due diligence of Chinese companies that are a target for acquisition by international investors, it strikes me that close to 100% of the time, the Chinese mentality is very short term – “lets make as much personal money out of the deal as we can” rather than “lets build a business together than has a long and bright future”. The lack of transparency in accounts, and the sheer wanton abandonment of any pretence at investing properly in a business are shockingly apparent. Investment in a Chinese business is often seen by the Chinese as a vehicle to divert money into their own pockets, not into the business. This is compounded by the Stock Exchange’s own lack of due diligence or the ability of the appointed regulatory body – the Chinese Securities Commission – to have any ability to punish errant companies. The State, and not the CSC decides whether or not to press charges for false accounting or making inaccurate financial statements – and with much of the listed stock in Shanghai still being partially State Owned – that leads to a breakdown in transparency and credibility. Shanghai’s Stock Exchange needs, desperately, to have a truly independent regulatory regime, and while it does not, funds raised on the bourse continue to disappear into other peoples pockets and not into the intended investment vehicle.
Compare this to India, where a strict regulatory body oversees matters and errant firms and individuals can be – and are – jailed if false statements have been made to deceive investors. The consequent standards of management in Indian companies is thus far greater – and by jove does it show when it comes to global expansions and acquisitions.
The question for China then really is – do your companies really want to expand their reach overseas ? Because if so – an independent judiciary and associated regulatory bodies are going to need to be in place well before any serious Chinese outbound investment is going to occur. And it starts with the State and then the Stock Exchanges.
Bombay Stock Exchange