Do you remember the outrage when the Japanese bought some of America’s landmark properties during the 1980s? Japanese buyers snapped up U.S. icons like Pebble Beach, Columbia Pictures and Rockefeller Center.
Heck, even movies were made about this phenomenon. Remember Michael Keaton in the 1986 movie “Gung Ho”?
The Japanese buying spree was a function of the country’s great prosperity. Throughout the 1970s, Japan consistently had the second-largest GDP and one of the highest per-capita incomes in the world.
Times have changed and Japan is struggling with two decades of economic doldrums. But another Asian giant is on the acquisitions warpath, with two notable Western takeovers in just the past week …
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China Now Bringing Home
The Bacon … to Club Med
Do you remember the 2005 hostile takeover attempt by China’s government-owned China National Offshore Oil Company (CNOOC) of California-based Unocal? CNOOC eventually abandoned its $18.5 billion bid for Unocal (which Chevron later acquired), but that was just the tip of the iceberg.
For example, Lenovo (LNVGY) bought IBM’s personal-computer division for $1.75 billion and the Chinese government invested $3 billion in the Blackstone Group (BX).
And just last week, Chinese companies announced plans to buy two Western companies — Smithfield Foods (SFD), one of the largest pork producers in the world, and Club Méditerranée (CLMDF), the French resort company.
Fosun International (FOSUF), Club Med’s largest single shareholder, teamed with Paris-based AXA Private Equity to offer to buy Club Med. Meanwhile Shuanghui International offered $4.8 billion for Smithfield Foods.
If the Smithfield deal goes through as planned, it will be the largest-ever Chinese takeover of a U.S. company.
SFD shares jumped 28.4% on the takeover announcement. Could we see the same type of pop with another company? We should have plenty of opportunity to find out, because …
The Chinese Are Picking Up
Where the Japanese Left Off
The Chinese aren’t just buying businesses — they are buying skyscrapers, shopping malls, farms, forests, ski resorts, vineyards, refineries and mineral deposits.
And they are just getting warmed up!
In 2012, Chinese companies spent $65 billion on foreign acquisitions including:
- Chinese energy giant CNOOC bought Canada’s Nexen for $15.1 billion
- Sinopec, China’s biggest oil refiner, bought stake in Chesapeake Energy’s Oklahoma and Kansas oil/natural gas fields for $1 billion.
- Wanda Group paid $2.6 billion AMC movie theaters.
And China is expected to spend even more on foreign M&As in 2013.
However, the current Chinese buying binge is very different from the Japanese spree.
3 Reasons China’s Buying Spree Tops Japan’s
I see at least three important differences this time around …
First, the Japanese companies doing all the buying were privately owned; many of the Chinese buying is being done by the state.
Although this week’s deals were done by corporations, the fact is that government-owned oil and mining companies still account for China’s biggest deals abroad,
Second, Japan is a democracy; China is not.
Third, and most importantly, Japan was not buying strategic resources like oil and natural gas.
In Smithfield’s case, Shuanghui’s chairman Wan Long told the press that they were attracted to “its strong management team, leading brands and vertically integrated model.”
Some have raised concerns about a Chinese company buying a major U.S. food producer, while others wonder how many more companies China is planning to snap up. That begs the question …
Should You Worry About
China’s New Buying Binge?
That depends largely where you fall on the free trade vs. national security debate, but it absolutely has huge implications for investors who are smart enough to put that knowledge into action.
How can you make money?
Well, you could dig out your Ouija board and try to come up with a takeover list, but I think that’s an impossible game to play.
On the other hand, I am confident that the Chinese will continue buying access to the raw materials they need to fuel and support their rapidly expanding economy. I’m talking about:
- Energy, such as oil, natural gas and coal
- Metals, like aluminum, copper and steel
- Foods, including pork, poultry and agricultural products
- Construction materials, such as cement, timber and heavy machinery
So, it won’t take much homework to come up with a list of companies that are probably sitting on resources that the Chinese want. What you need to do is get “long” whatever the Chinese are buying.
If you’re more of a mutual fund or ETF investor, you could look at the iShares S&P North American Natural Resources Index Fund (IGE), the Energy Select Sector SPDR Fund (XLE) or the U.S. Global Investors Global Resources Fund (PSPFX).
Whatever you do, make sure you pay attention to what the Chinese want because if you get in front of their long-term, multi-decade natural-resource buying binge, you could make a mountain of money.
Smithfield is just another in a long line of U.S.-based companies that stand to benefit from big business from China and other Asian consumers.
While I’m not looking at SFD as a buy right this moment, I can promise you that I’ll be watching to see how much its business stands to grow thanks to its exposure to a whole new region of potential consumers with a growing appetite for protein-based products.
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