Initiated by iDeals and co-organized by several key players in the cross-border M&A industry such as KPMG, Eurasian, and GORG, the China-EU Cross Border M&A Best Practice Sharing dialogue was held recently in Shanghai, China. Ellen Zhang, KPMG’s M&A Director, shared her expert insights on the topic in a keynote speech before her interview with iDeals.
What are the strengths and weaknesses of Chinese companies in this profitable but risky industry?
Although acquiring abroad can potentially generate growth, the process is inherently risky. While more and more Chinese companies look to join the buying spree, Ellen Zhang draws attention to the two advantages and three disadvantages of Chinese buyers compared with overseas ones.
The first advantage is China’s fast-growing market. By entering an acquisition deal with a Chinese buyer, the acquired firm will be able to not only utilize the acquirer’s strengths but more importantly, make inroads into the huge Chinese market.
The second advantage is the Chinese companies’ capital strength. As such, most target companies find it profitable to do business with Chinese companies.
In the meantime, there are weaknesses because China has had a fairly late start as an economic power.
- Different from European countries which are largely similar in culture, Chinese entrepreneurs can be easily impeded by cultural differences in cross-border interactions such as language barriers.
- It’s challenging for domestic Chinese companies lacking international experience to navigate the unfamiliar cultural, geographical, and legal milieu in the overseas market, which can easily result in losing a deal.
- Influenced by China’s pervasive culture of doing business at banquet tables – as opposed to doing business through formal procedures – the average Chinese company is not well trained on the proper procedures involved in cross-board M&A. This process, however, is all about planning out the necessary steps.
Given these weaknesses, what should companies do differently to be successful?
Companies can address these weaknesses by hiring professional services. “There are agencies out there to help companies play to their strengths”, says Ellen Zhang, as she talks about KPMG’s support services along the entire process of a deal: strategic design, letter of intent, due diligence, evaluation, negotiation, and integration. “There have been few success stories to date. By success, I don’t simply mean closing a deal, but achieving the expected returns after closing. A majority of deals led by Chinese companies did not accomplish the original return projections after closing.” According to Ellen Zhang, getting the integration right post-deal is of vital importance. The following are some of her suggestions to make this happen.
Focus on due diligence
Data have shown that negotiation breakdowns and deal terminations triggered by the identification of material risks through due diligence are the two major reasons why Chinese companies fail to acquire targets abroad. By conducting due diligence on the financial, operational, tax, and legal aspects governing a deal, acquirers will be able to identify the risk factors facing them during and after mergers and acquisitions.
Avoid the uncertainty in transactions
Chinese companies must be careful to avoid the uncertainty in transactions as this is highly undesirable to target companies. For instance, a unique problem facing Chinese companies is the time-consuming and uncontrollable process of moving capital offshore. Without prior communications or capital arrangements to prevent delayed payment, this can be a great concern for the other party and can even cause the deal to run aground.
"It’s true that Chinese companies tend to be generous buyers, but cross border M&A is not a game for the highest bidder," says Ellen Zhang. In view of the common issues faced by Chinese companies in pursuing cross-border M&A, she offers the two suggestions below.
The first is to adhere to timetables. European countries consider timetables as commitments that must be honored. Hence, companies must be careful about meeting deadlines. When missing a deadline is unavoidable, rather than simply ignore it, companies should consider requesting extension through the help of an intermediary.
The second is to follow procedures strictly and heed the advice of intermediaries. Making informed decisions is the key to success.