Flying High and Flying Blind: How One Chinese Buyout of a US Aviation Firm Soared While Another Crashed

January 12, 2017

This case tells the twinned stories of two attempted Chinese acquisitions of US commercial aviation firms, Cirrus and Hawker-Beechcraft. One transaction succeeded. The other failed spectacularly.

The two cases share some similarities: both involved strong Chinese government support and were pursued with the intent of aligning with, however vaguely, China’s broader industrial policy objectives. But the cases differed dramatically in their outcomes:

The first case, a Chinese takeover of Minnesota-based Cirrus Aircraft, proceeded smoothly and the firm has since become more profitable. The second case, the busted takeover attempt of Hawker Beechcraft, failed badly and that firm was eventually acquired by another American entity. But the twin stories, and their distinctive outcomes, are not simply a tale of different Chinese buyers. Timing was also an important factor fueling the distinctive outcomes of these twin transactions. The 2008 financial crisis that swept across the global economy had a devastating impact on the global aviation industry, including the US market, which accounts for more than half of global “general aviation” manufacturing, a market segment that includes light aircraft for personal and business use. As a result, certain aviation firms that weathered the financial crisis and emerged intact determined that this would be an ideal time to buy assets on the cheap.

This impulse to seek opportunity out of the crisis was precisely the economic rationale that underpinned the attempted Chinese acquisitions of Cirrus and Hawker. Both US aviation firms were hit hard by the 2008 crisis. From the perspective of the Chinese investors, therefore, not only could they opportunistically target cheaper assets possessed of advanced technology but each acquisition could also be justified on grounds of supporting the Chinese government’s national aviation industry strategy.

Moreover, the two US target firms were established players in their respective market segments and well-known brands. This made it easier to entice Chinese state support for the attempted buyouts because these investors could make a political argument that “China” writ large would be “acquiring a valuable brand.”

Unlike the other cases in this series of investment papers, each of which is dedicated to a deep dive on a single deal, this study compares and contrasts twin deals in a similar sector. And this twinning of cases is especially striking because it involves aviation, a relatively sensitive and technology-intensive industry. The divergent outcomes, curiously enough, tell us less about the Chinese acquirers per se than about how each of these players approached the transaction and behaved during its negotiations. Perhaps surprisingly, the successful transaction involved AVIC, a large Chinese state-owned enterprise (SOE) that also serves the Chinese military, while the failure involved a private Chinese firm.

The intervention of the Chinese state played a role in both of the cases’ outcomes. But although the attempted Hawker acquisition was much larger and more complicated than the Cirrus deal, it was neither the complexity nor the associated national security concerns that ultimately seem to have derailed it. Rather, the failure in the Hawker case can be explained by a combination of factors. These included a lack of understanding of the industry by the Chinese acquirer, amateurish negotiations, and a shoddy partnership between a Chinese state entity and a private player. Conversely, because the Cirrus deal was not AVIC’s first foray into global mergers and acquisitions (M&A), the more seasoned central SOE, despite its ties to the People’s Liberation Army (PLA), turned out to be more adept at navigating obstacles on its way to acquiring a technology-intensive US firm.