Joe Sternberg of the Wall Street Journal asks some tough questions:
Everyone knows the greater-fool theory of investing—you buy any asset at any price, no matter whether the price has any rational relationship to the underlying value, in the hope you can sell it at an even higher price. The method is more than a little dangerous, and plenty of people have lost a lot of money when they discovered they were the fool at the end of the chain.
So what does that have to do with the Chinese?
Buying ailing companies isn’t inherently foolish. Mitt Romney and his colleagues at Bain made lots of money doing exactly that. A smart acquirer can change the underlying value proposition. Mr. Romney’s success lay in his ability to transform a struggling firm through an injection of better “management technology.”
But this requires skill in distinguishing failed business models from failed businesses—the difference between companies that fail because they’re poorly run, and those that fail because they’re selling a product no one wants. Not even Mr. Romney and other experienced private-equity investors in the West are infallible at this.
The contrast between that model and the China model are striking. The most common justification presented for so many Chinese acquisitions, including A123 and Nexen, is technology transfer. The idea is that Chinese companies, at their government’s urging, are buying Western companies mainly for their know-how.
Think about this for a minute. The successful market-economy acquirers focus on transferring skill into their purchases: Management acumen better unlocks the value of a viable but struggling company, or integrates a reasonably successful firm into a larger whole that can better exploit its resources. China is interested mainly in transferring mechanical and managerial know-how out of struggling companies, without any apparent thought for why the companies are struggling in the first place.