China Construction Machinery Business Online
China Business News: What is the purpose of Zoomlion acquires Terex?
Post Date: 2016-03-09
Recently, the US construction machinery giant Terex Corporation (TEX.NYSE, hereinafter referred to as Terex) announced that Zoomlion (000157.SZ), one of the largest construction machinery enterprises in China, had delivered an acquisition offer to it. Allegedly, Zoomlion will spend a total of US$3.3 billion (about 21.7 billion Yuan) to acquire Terex at a price of US$30 per share. After the news came out, Zoomlion also confirmed the ongoing acquisition. What’s the reason for Zoomlion’s massive acquisition of Terex, a world-famous machinery enterprise headquartered in Connecticut of America despite such a depression in the construction machinery industry? The author holds that this perhaps is related to Zoomlion’s medium-and long-term strategy, current capital reserve and financing conditions, etc. 
 
Let’s review this acquisition first. On January 28, Zoomlion confirmed that it had discussed with Terex about a potential transaction and submitted to its Board a non-binding offer. It can’t be ignored that since 2012 the domestic demand for construction machinery has decreased by over 30 percent on year-on-year basis for four consecutive years, and the corporate profitability declined generally with deteriorating business indicators. Since the whole industry suffers from financial strain and poor performance, Zoomlion’s acquisition will inevitably arouse greater, wider attentions.   
 
One reason for Zoomlion’s acquisition is that it has a strong complementarity with Terex although they have some overlapping business operations. 
At present, Terex is mainly good at manufacturing of hoisting and material handling equipment and leads the world in a number of businesses. Its products include aerial work platform, construction machinery, etc. However, Zoomlion focuses on construction machinery and its strength in environment and agriculture is also being enhanced. Therefore, this massive acquisition will greatly help Zoomlion march into the fields of aerial work platform, industrial cranes and port machinery and material handling machinery. 
 
According to a report by Soochow Securities, the Terex Report 2014 shows that of the US$7.3 billion (about 44.7 billion Yuan) revenue of this American enterprise, US$2.37 billion was contributed by the aerial work platform business, accounting for about one third. This business can meet most of the requirements of high-altitude operations and customized needs and realize self-propelled, intelligent control, safe man riding and super large coverage. On the other hand, 72 percent of Terex’s businesses were in Western Europe and North America and 85 percent of Zoomlion’s businesses in China, so the two can form a cooperative relationship in terms of production capacity, supply chain and channel, etc. 
 
Second, in the process of entering a new field, Zoomlion will sometimes choose an appropriate and mature acquisition target, which is undoubtedly a way of this company to make strategic investment. If you pay attention, you will find that Zoomlion has launched some major acquisitions in the similar way recently. For examples, it has taken over Chery Heavy Industry Co., Ltd.(also refers as Detank) in the field of agricultural machinery, and Ladurner, an Italian company in the field of environmental protection. Therefore, acquisition of Terex is an important step in the grand strategic layout of the company. However, whether the two sides can achieve better integration of their businesses and maximum integration of their research, development, manufacturing and design platforms after the completion of the acquisition still remains to be seen. 
 
In addition, Zoomlion has prepared for capital and financing currently. The company's 2015 Third Quarter Financial Results shows that it has had a monetary fund of more than 15.5 billion Yuan, and its operating cash flow began to gradually take a turn for the better from the third quarter. The cash received from sales of goods and services increased to 15.3 billion Yuan from the 4.74 billion Yuan in the first quarter and 9.61 billion Yuan in the second one, a support for the future acquisition of the American company. Meanwhile, its asset-liability ratio is 58.9 percent, making it have certain space for financing. Moreover, the company boasts an applied credit limit and financing amount of 120 billion Yuan. As for this acquisition, Zoomlion said it had gained the confirmation of relevant state department on the report of overseas acquisition project information and the financing support confirmation of relevant financial institution. Of course, it can’t be denied that its revenue (4.38 billion Yuan) and gross profit (1.25 billion Yuan) in the third quarter last year decreased to some extent. If its future operating performance continues to decline, its acquisition may be adversely affected.
 
It is also said that Zoomlion’s “state-owned, military background” perhaps couldn’t pass through the relevant review of America. A senior executive of the company responded to the China Business News: “After years of reform on shareholding system, our equities have been relatively scattered, including only 16 percent of state-owned capital. For now, more and more acquisitions by Chinese enterprises have been approved by CFIUS, such as Lenovo's purchase of Google’s Motorola mobile phone business and China National Offshore Oil Corporation’s takeover of Nexen’s oil and gas business. Moreover, we are one of China's largest equipment manufacturers, and our businesses cover construction machinery, environment industry and agricultural machinery, etc., but none of them have been involved in military cooperation. Our nuclear power projects mainly provide lifting equipment for construction of venues, consistent with the services provided by Terex and other international manufacturers of construction machinery.” 
 
Obviously, with the implementation of the “Belt and Road” initiative and “Made in China 2025” strategy, more and more Chinese companies are going global. China South Locomotive and Rolling Stock Co., Ltd. acquired SMD, a famous oceaneering enterprise; Weichai Power bought Baudouin; and Sunward Intelligent Equipment Group purchased Canadian Avmax. One after another acquisition has emerged. “By 2025, China’s manufacturing industry is expected to enter the second-tier phalanx, making the country a strong manufacturer; by 2035, it will lead the second-tier phalanx, making the country a real manufacturing power; and by 2045, it is estimated to enter the first-tier phalanx, making the country a global leader in manufacturing,” said Su Bo, Deputy Minister of Industry and Information Technology. 
 
China’s manufacturing industry needs to improve its innovation ability and international development level. Meanwhile, the domestic enterprises are required to vigorously promote breakthroughs and development in key areas. In the process of changing from a big manufacturer to a real manufacturing power, we need to go through a very long time and make more adequate strategic deployment
 
(Source: China Business News)
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