China goes shopping

I suppose it could be worse – it could be called PsynGent@ or something. But apart from a company with a stupid name, what does state-owned ChemChina get for the US$43 billion it plans to pay for Swiss seeds and pesticides maker Syngenta?

The South China Morning Post files the story under ‘agriculture’ and sees the deal as an acquisition of cutting-edge crop technology and a boost to food security. Reuters says China wants to increase productivity on its degraded farmland. Syngenta has a big presence in the US, so authorities there will examine the takeover for possible repercussions to their own national security, and probably find nothing to worry about.

Why does the Chinese government (of which ChemChina is essentially an arm) feel a need to spend US$43 billion on a foreign company whose products may help improve its agricultural sector? The country could shop around and buy the best and latest in high-yield GM seeds, pesticides, fertilizers and other farm technology not only from Syngenta but from Monsanto and all the other players out there, at a fraction of the cost.

Maybe, like Victor Kiam, they were ‘so impressed’ and see long-term returns. As a Chinese state-owned company enjoying favourable financing and protection from competition, ChemChina is probably sitting on huge piles of cash, and – like everyone else in the Mainland – would rather move it offshore. It is official policy to diversify; thanks to another recent acquisition by ChemChina, the Chinese public are now the proud owners of Italian tyre manufacturer Pirelli.

But this is not about a sovereign wealth fund adding to its portfolio. This is about control – or more to the point, a psychological need for a sense of control. China has also bought Smithfield, the world’s biggest pork producer, and owns/leases farmland from New Zealand to Africa, and holds other supplies of resources overseas like mines. Other countries dependent on imports of vital commodities, like Japan, just buy what they need at market prices. This isn’t so much about national security as Chinese Communist Party insecurity. China’s leaders are paranoid and convinced the world is out to get them. Ownership of sources of raw materials makes them feel less vulnerable. Interestingly, rather than making China less reliant on evil barbarians, it probably exposes the country to new risks like sequestration, or devaluation of fixed assets, or a case of buyer’s remorse on being lumbered with a bad deal.

That bring us to the amount China is paying for this stuff. Chinese officials might rationalize these acquisitions in mercantilist terms: why pay foreigners dividends when you can keep all the profits yourself? But if the foreign shareholders are all too delighted to sell, it suggests that China might not be getting the fantastic and clever deal it imagines.

The Reuters report quotes a fund manager as saying that ‘Syngenta has never been valued so highly. Over the last few years the company has failed to demonstrate it can generate reasonable earnings on its own’, and pretty much adding that he can’t wait to grab the cash.

Syngenta’s boss is interviewed on CNBC. Too suavely European to drool openly all over the newscaster’s desk, he purrs about ‘a very nice premium for shareholders… a multiple of earnings…’ Mmmmm. Could there be a nicer bunch of people to do business with than the Xi regime?