Geely’s Proposed Acquisition of Volvo as Harbinger of New Wave of Chinese M&A

On March 28, 2010, Zhejiang Geely Holding Group Company Limited entered into a stock purchase agreement with Ford Motor Company to acquire 100% of the outstanding shares of Volvo Car Corporation for $1.8 billion, with approximately $1.6 billion of that amount to be paid in cash. The sale is expected to close in the third quarter of 2010 subject to regulatory approval. The deal has not been without naysayers, particularly with respect to the fate of Volvo in the hands of a newcomer to the automotive sector best known for low-end vehicles.

Founded in 1986 as a refrigerator manufacturer, Geely has been in the automotive manufacturing business for little more than a decade. However, rapidly increasing demand for automobiles in the domestic Chinese market over the past few years, fueled by a growing Chinese middle class, have contributed to Geely’s strong cash position. Coupled with value pricing of American automotive companies battered by the economic downturn, Geely’s acquisition of a more-established foreign automotive brand seemed inevitable. As quoted in the People’s Daily Online , Geely Chairman Li Shufu noted that Geely’s acquisition of Volvo would allow China-made cars to be sold throughout the world and enhance the image of a Chinese independent brand globally.

Geely’s acquisition of Volvo may be a harbinger of a growing wave of Chinese acquisitions. The same market factors that have led to this transaction--the acquisition of a prominent automotive brand with more than eighty years of manufacturing pedigree by a relatively unknown Chinese company with a short history of building refrigerators and, recently, economy cars--is playing out across industry sectors. According to data obtained by BusinessWeek from the China Commerce Ministry, overseas direct investment by Chinese companies has grown exponentially in the last few years from around $6 billion in 2006 to nearly $60 billion in 2009. BusinessWeek notes that the rapid growth in Chinese overseas mergers and acquisitions should benefit the global economy by freeing up some of the capital that Chinese companies have acquired, but may also cause discomfort among and trigger pushback from management and investors at target companies. As was the case with the Geely-Volvo transaction and the proposed acquisitions of Maytag and Hummer by Haier Group and Sichuan Tengzhong Heavy Industrial Machines, respectively, many of the new wave of Chinese-led mergers and acquisitions appear to have the unique combination of having a high profile target and substantial deal value, and being the acquirer’s first major foray onto the international business stage.