Sany Makes Clumsy Zoomlion Approach

By newsdoug on June 28, 2013

A small brouhaha has broken out in the Chinese media these last few days over what looks like perhaps the clumsy beginning of a takeover attempt involving Zoomlion (HKEx: 1157; Shenzhen: 000157) and Sany Heavy (Shanghai: 600031), China’s 2 top construction equipment makers. I’m not quite convinced that this was a real takeover attempt, as the numbers involved are quite small. But whatever happened, the instance was a reminder that Chinese firms are still quite clumsy at unsolicited M&A, especially the hostile type.

This brewing story began when Chinese reported that units of Sany had quietly purchased shares in Zoomlion on the open market. (Chinese article) As very simple background, these 2 companies are both based in central China and have an intense and often bitter rivalry to become the nation’s first global heavy equipment giant. Both companies currently have annual sales of more than $7 billion, putting them on the list of the world’s top 10 heavy equipment makers. But both are still well behind global leader Caterpillar (NYSE: CAT), which boasts about $40 billion in annual sales.

Following the media reports, Hong Kong-listed Zoomlion has issued a statement confirming that indeed some of its shares have been purchased by 2 units of Sany. (company announcement) One of the Sany units owns about 3.9 million Zoomlion shares, while the other owns another 2.7 million, according to the announcement. That would total around 6.6 million shares, which would have a total value of about $5.7 million, according to Zoomlion’s latest share price. Obviously that amount is tiny compared with Zoomlion’s total market value, which stands in the billions of dollars.

It was clear from Zoomlion’s statement that it had no previous knowledge of the Sany purchases, and only learned of them after checking records from its latest annual general meeting. This raises the interesting question of: what exactly was Sany trying to do by making these purchases?

Frankly speaking, I don’t see any real logical explanation here. It would be highly unusual for one company to buy its rival’s shares for purely investment reasons, since such a purchase would look highly suspicious. On the other hand, the size of the investment isn’t very large; and it’s also highly unusual for companies to try and do M&A through this kind of open market purchasing, especially when the target is your bitter rival.

Investors seemed to think that perhaps Sany was making a bid for Zoomlion, with Zoomlion’s Hong Kong-listed shares up more than 6 percent after the announcement came out. I personally can’t believe that Sany would buy the Zoomlion shares for a pure investment, which leaves the M&A theory as the only possible answer.

If this really was the early stages of a takeover attempt, it certainly wouldn’t be the first such case of such a clumsy M&A try by a Chinese firm. Within the Internet space, online game expert Shanda made a similar stealth attempt to acquire leading web portal Sina (Nasdaq: SINA) by buying 20 percent of Sina shares on the open market back in 2005. Sina had no interest in a deal and rebuffed the bid, prompting Shanda to ultimately sell its stake.

More recently, oil major Sinopec (HKEx: 386; Shanghai: 600028; NYSE: SNP) made an equally clumsy and unsolicited bid for Hong Kong-listed China Gas (HKEx: 384) late last year. That bid also ultimately fell apart after China Gas rebuffed the offer. This latest potential takeover attempt by Sany — if that’s what it really was — looks equally clumsy and unsophisticated and is unlikely to go anywhere, especially now that Zoomlion is aware of the situation. Accordingly, I’d look for Sany to quietly sell its small holdings of Zoomlion stock in the next few months, and for the companies to continue their bitter rivalry.

Bottom line: Sany’s quiet purchase of Zoomlion shares may have been a clumsy start to a stealth takeover attempt, reflecting Chinese firms’ lack of experience at unsolicited M&A.