China’s companies are expanding overseas. And they’re increasingly doing so through mergers and acquisitions.
But the nation’s companies have not had the best track record in M&A. State-owned enterprises, notably, have been big offshore buyers of resources assets, and they have often spent heavily and then struggled to make the deals work.
So how can Chinese companies improve their chances of success? FinanceAsia garnered the views of three serial overseas acquirers and advisers on how best to do that. In Part One, we looked at the importance of planning and of starting small.
3) Beware the watchdogs
Acquisition-minded Chinese companies also need to consider the impact of governments and regulators. The larger the deal, the more likely they will take an interest.
The US has a mixed reputation among Chinese buyers. US law firm O’Melveny conducted a survey of Chinese investors about overseas markets. While 38% of respondents perceived the US’s regulatory regime to be an attractive attribute, 48% said it was the greatest barrier to investment.
China’s outbound acquisitions into the US have long been controversial. Energy major Cnooc’s $18.5 billion bid for Unocal in 2005 was scuppered by US congressional opposition. These days the big bogeyman for Chinese acquirers is the Committee on Foreign Investment in the United States, or CFIUS, which is tasked with ensuring foreign investments don’t raise national security issues. It has tended to take a hard line on potential Chinese acquisitions.
The committee has stymied many deals. In January it blocked Chinese investor-led GO Scale Capital’s $2.8 billion bid for 80% of Philips’s LumiLEDs unit, a deal that seemed to offer little security risk to the US.
The difficulty of US approval has led Chinese companies to focus more on Europe, which has been fairly welcoming of companies seeking acquisitions. “Chinese companies like German and Swiss companies in particular, seeing them as having good corporate governance and having experienced managers,” Samson Lo, head of Asia M&A at UBS, said.
Chinese companies are also adapting to CFIUS demands. In January Haier and GE Appliances made a voluntary application to the committee.
“Haier seems to be saying ‘We have nothing to hide’,” said Tom Deegan, a partner in Sidley Austin’s corporate practice unit in Asia. “It speaks to their credibility and is an example of how to improve your chances of getting things done.”
He added that the best Chinese companies are becoming well-versed in local issues of the markets in which they’re trying to expand.
“One energy company has a library with leather-bound country files, and information about the petroleum law of each, plus risk issues and the government and political risk,” he told FinanceAsia.
4) Consider cultural sensitivities
Chinese and international firms also need to navigate cultural differences.
Language is the most obvious roadblock. Mandarin is not widely spoken in Europe or the US, and many SOE executives and private entrepreneurs speak limited English.
However, English is quickly gaining popularity in China and consultants say many Chinese companies have a sprinkling of German, French, Spanish or Italian speakers too. Fosun following its acquisitions, for example, now employs 100,000 people, about one fifth of whom are non-Chinese.
Yuan Yafei, chairman of Sanpower, said 70% of his company’s senior managers had an overseas background. He himself started learning English five years ago. “I began with learning one word by one in the English-language section of the local newspaper Nanjing Daily,” he said.
In addition to improved communications, Chinese companies need to address the chief fears of their targets.
The first is the need to demonstrate their seriousness. Firms are taking steps to address this.
“There will always be some concern among Western investors over the certainty of Chinese companies being able to close a deal, finance it, and get regulator approval,” said Lo. “But there are many examples of Chinese companies being open to providing assurances, such as deal protections.”
Bidders in several recent China outbound acquisitions are believed to have agreed to sizeable break fees, including ChemChina and Haier. Such fees help demonstrate financial commitment although they aren’t a guarantee of success.
Fairchild Semiconductor of the US was in merger talks with local peer ON Semiconductor last year, only for China Resources Holding and Hua Capital Management to make an unsolicited $2.46 billion bid in December. The Chinese consortium promised to cover Fairchild’s $79 million breakup fee for ending discussions with ON, but it rejected the offer on February 16 over fears of CFIUS rejection.
Another concern is the place of existing managers and workers, post-acquisition. In fact, experienced offshore acquirers say the cooperation of these people is essential.
“Sending a team of Chinese to manage the newly acquired company is destined to fail,” said the spokesman of Wanda.
BCG’s Willers notes that some companies even give the target management control of the post-M&A integration process.
ChemChina is a big proponent of keeping local staff intact. It acquired German plastics machinery maker KraussMaffei with investors Guoxin and AGIC Capital in January for $1 billion after promising to add rather than cut jobs. And in 2015 ChemChina placed the management of Italian tyremaker Pirelli in charge of post-merger integration, after acquiring it for $7.7 billion.
5) Clear post-M&A plans
The ultimate test of an M&A occurs after the deal is completed. Yuan said synergies, or finding and making cost savings and eliminating resource overlaps, are particularly important at this time.
“Many people might think the first thing to do after acquiring a company is integration,” he said. “But in the internet age, speed decides the fate of a company. Integration takes a large amount of time. The best way to complement different sides’ advantages is synergy.”
Guo Guangchang, chairman of Fosun International, agrees that the success of acquisitions depends heavily on post-deal planning.
“We firmly believe a good investment demonstrates its true value after the completion of the deal,” he said. “A successful investment needs more successful management afterwards [to achieve the investment value].”
Fosun does this by preparing a post-agreement plan when making a bid. “Based on Fosun’s experience and resources, we will design [a] detailed ‘100-day plan’ with companies in which we invest a bid to quickly establish the cooperation ties with each other,” Guo said.
It’s a point Aga Guzewska-Radzka, head of M&A for Asia at Accenture Strategy, underlines. “The 100-day plan is essential, and it needs to be ready to go from day one,” she told FinanceAsia. “Otherwise the target company risks being in limbo and its most talented staff and clients are in danger of being poached.”
