Wharton Pushes for More China M&A

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 |  Includes: GS, IBM, JPM, LNVGY, MS
by: David Wolf

Contemplating the irrational messiness of China's corporate landscape, investment bankers around the world must salivate in anticipation of the fees and bonuses that will be theirs when they finally convince China's ambitious business leaders that mergers and acquisitions are a viable growth strategy.

Success for Whom?

The pressure to sell M&A to China's corporate leadership must be particularly acute in the wake of the financial crisis, since the flow of such deals in the U.S. and Europe have dried to a trickle. What other reason for this recent pronouncement coming out of Wall Street's alma mater, Wharton:

Lenovo is probably the prime example — having bought IBM’s (NYSE:IBM) PC business — where [a company] did successfully use the acquisition strategy. And the main reason is that, beyond quick access to markets like the United States and Europe and so forth, they need high-end technologies and also established brands. Those are the elements that the Chinese firms have been missing. And so it fits very well to combine the strong and cost-efficient back end of Chinese firms with the branding, market access and technology that Western developed firms can offer them.

I find it puzzling that a professor at one of the world's most prestigious business schools is still able to characterize Lenovo's (OTCPK:LNVGY) acquisition of the IBM PC division as a "success." The only unqualified success to date is the one for which the investment bankers received a fee. A more holistic analysis of the acquisition - such as the performance of the combined company in the wake of the merger, falling market share, and a failure to capitalize on the assets acquired - might yield a much different assessment.

Let us grant the possibility that at some point in the future, the move will have been a good one, and possibly even justifiable from a financial or brand value standpoint. The evidence to date does not support the idea that the money Lenovo spent buying IBM's PC division would not have been better spent pursuing a more targeted, more organic, and more manageable international growth strategy.

What the evidence does appear to support - to date - is that Lenovo pursued the acquisition at the urging of a young and ambitious senior executive who managed to dazzle Lenovo's leadership with the sheer audacity of the buyout, in the wake of an utter failure to build consensus on a realistic strategy for international expansion.

Lenovo's own preliminary verdict on that acquisition came when Liu Chuanzhi returned last year and refocused the company's international growth strategy on emerging markets like Russia and India, rather than the developed countries where IBM had been stronger.

Leaning Tower of Ivory

Wharton, for its part, would have served itself better with a less sanguine assessment of Lenovo's purchase of IBM. As an institution whose primary product - and major source of alumni largess - is investment bankers, Wharton faculty must appreciate the implicit conflict of interest in publicly praising the work of its benefactors.

Knowledge at Wharton may not be a peer-reviewed publication, but the public holds members of the academy to the same high standard regardless of medium. We expect academics to be, by virtue of their "sinecured" isolation from the rough-and-tumble of commerce, an intellectual priesthood focused on finding and telling The Truth. We do not expect them to be tenured fanboys for Wall Street's Big Swinging Dicks and Chicks. If the last two years have proven anything, it is that Wall Street could use more informed criticism from trusted and respected observers.

If China and her companies are proceeding cautiously in considering the value of mergers and acquisitions as a growth strategy, the record suggests that they should be encouraged to be careful. The last thing China needs is to spend her national treasure in a global corporate shopping spree. And given the size of the bonus checks in New York this year, I would suggest it is the last thing Wall Street needs as well.