The BRIC Acquisitions

In Money Week this week, I've been speculating that the next boom will be a wave of takeover bids from the BRIC economies. Here's a taster....

The phrase ‘What good for GM is good for the US’ clearly doesn’t have the same kind of resonance it had when it was first coined half a century ago. As the American auto giant became the largest ever industrial bankruptcy in US corporate history, the stock and currency markets took the news comfortably in their stride. In truth, GM along with the rest of the American automobile industry, has been in decline for so long, its demise no longer has the capacity to shock anyone very much.
That doesn’t mean, however, that the story isn’t interesting to investors.
Its significance is not that GM is collapsing. It is who is rescuing its European arm, and what that tells us about how the global economy is changing.
The car-makers two European brands, Vauxhall in this country, and Opel in the rest of Europe, are being bought by a Russian-backed consortium. Within a few years, they will spearheading an emerging Russian auto industry.
One of the big themes emerging from the credit crunch is the transfer of global wealth, power and influence from west to east, and from the old economies to the new. What the stock market calls the BRICs – Brazil, Russia, India and China – are rising fast, not just as manufacturers of cheap goods, but as developed, powerful economies which, in many ways, will be better equipped to compete in the twenty-first century than their older, more traditional rivals.
Over the next decade, they are likely to embark on a huge acquisition spree in both the US and Western Europe, buying up brands, technologies and expertise. And, of course, there will be huge opportunities for investors and the City in that. Work out what kind of assets the BRICs will need, and there will be money to made.
The takeover of GM’s European assets is just one example of the trend. The deal was fronted-up by the Canadian auto-parts company Magna, but in reality it looks like a Russian takeover. True, the Canadian company will own 20% of GM’s Opel unit. But another 35% will be owned by the Russian bank Sherbank, whilst GM will hang on to another 35%. Crucially, the industrial partner for the new entity will be the Russia’s GAZ, best-known as a truck-maker, but which also owns the Volga car brand.
It isn’t hard to see how this is going to play out. GM is going to have enough problems without worrying about a European division in which it is a minority shareholder. The Canadians don’t have the expertise to become players in such a fiercely competitive global industry. With Russia set to become the largest car market in Europe – it is, remember, Europe’s biggest country, and doesn’t have many cars right now – GAZ will become increasingly the dominant partner. A decade from now expect to see plenty of Russia-built Opel’s on the roads (the Vauxhall brand may well be quietly forgotten – Chelsea is the only part of London that interests the Russians).
That is just one deal among many. We have already seen Tata of India take control of Jaguar and Land Rover. The Chinese computer company Lenovo bought IBM’s personal computer business. Those are only the tip of a very large iceberg.
The credit crunch is accelerating the shift of power from east to west. The over-indebted countries of Europe and North America are losing ground to the emerging powerhouses of Brazil, Russia, India and China. Where once a financial crisis would have hit the emerging markets hardest, in this one they sailed through largely unscathed. The Brazilian market is up by 40% this year. India is still growing at nearly 6% a year, and China at more than 6%. Russia has taken a hit to growth largely because of the fall in the oil price but is recovering fast – its stock market is among the world’s best-performing this year. Not only have the emerging giants been hit less severely by the global recession, they look like bouncing back faster as well.
The BRIC economies no longer just sell cheap manufactured goods and raw materials to the rest of the world. They are increasingly creating the biggest, most dynamic companies in the world. Of Fortune’s ranking of the top 500 global companies, 62 are now from emerging markets, up from 32 in 2003. That number is only going to grow.
For investors there is an opportunity there – and one that goes beyond just buying some emerging markets tracker funds for your portfolio.
The new BRIC giants will have to raid plenty of Western assets to fulfil their ambitions on the global stage. Volga is going to need a company like Opel to turn itself into a serious player in the global auto industry. Likewise, Lenovo needed the IBM brand name to turn itself from an assembler into a global business.
The BRIC companies will need brand names, and they will need technology. And they will need them in a hurry. They need the know-how to create large-scale manufacturing operations. And they will need the tradition and name-recognition that comes with a brand that has been built up over a century.
Where should investors be looking? Companies such as British Aerospace have the technology that the BRIC companies may well want. So do the pharmaceutical giants such as GlaxoSmithKline or AstraZeneca. Consumer goods companies such as Unilever are packed full of brand names. Mobile phone companies such as Vodafone have both the brands and the technology.
It is fanciful to speculate about particular deals. Many companies will have no interest in selling themselves. Even so, the next boom, when it comes, will be all about brokering the takeover of European and American assets by the rising powers of the global economy.
True, it might be selling of the family silver. But if it’s going to sold anyway, no reason not to try and make some money out of it – and plenty of people, not least in the City, certainly will.