On January 17, 2007,
Baosteel Group completed the purchase of a controlling stake in Bayi Steel Group, with the signing of an agreement in Xinjiang. This merger is the important first step for
Baosteel in its merger and acquisition strategy within
China - Bayi Steel being the first targeted steelmaker to be merged successfully by
Baosteel.
In early 2006,
Baosteel signed strategy cooperation agreements with Ma Steel and Bayi Steel as the first move towards future mergers. Due to resistance both from Ma Steel and local government officials,
Baosteel's advances in relation to Ma Steel did not go very smoothly - in sharp contrast to its progress with Bayi Steel. After signing the cooperation agreements with Bayi Steel Group in May 2006,
Baosteel was able to move the merger process swiftly along and has now brought it to a successful conclusion.
The principal difference between the above two cases is that Ma Steel is in a good operative and financial situation, while the same was not true for Bayi Steel. Though lacking both advanced management ideas and high technological levels, Bayi Steel in recent years has had to carry a heavy burden of numerous retired workers. As the holding company of the listed Bayi Steel, Bayi Steel Group felt it couldn't endure such a situation any longer. Meanwhile, due to rich natural resources and many local large-scale
construction projects,
Baosteel is very anxious to enter the local market in the northwest of
China. In this context,
Baosteel and Bayi Steel were able to come together quickly, helped along by the backing and organization of the central and local governments.
According to the merger agreement,
Baosteel Group will invest RMB 3 billion ($385 million) and will provide its advanced management experience to help in the restructuring of Bayi Steel Group.
Currently, Bayi Steel Group has a share of nearly 70 percent of the local Xinjiang market. With this merger,
Baosteel will become the biggest steel operator in the region. Due to Xinjiang's special geographical advantages, it will now be easier for
Baosteel to enter the western Asia market than ever before. In addition, Xinjiang is famous for its plentiful natural resources. As a big local enterprise, Bayi Steel owns rich coal and
iron ore resources – all good news for
Baosteel in its efforts to guarantee strong raw materials and energy supplies. Although
Baosteel will inevitably face the burden of supporting Bayi Steel's retired workers and also of solving problems relating to the merger and restructuring processes, the practical difficulties will probably not be as serious as expected due to the assistance of the central and local governments.