Recently, iDeals hosted the M&A Community: China-EU Cross-border Best Practice Sharing event in Shanghai.
During an interview with iDeals, Cheng Na, Eurasian’s M&A director, sheds light on some of the most prominent issues involved in cross-border M&A. Eurasian, as a leading consulting firm in China-German M&A deals, is dedicated to helping Chinese and European companies, particularly German companies, to strike strategic M&A deals.
What’s the status quo of China-Europe M&A?
From 2008 to 2016, the volume of Chinese investment surged in Europe, peaking in 2016 with 309 deals closed. Besides, the number of German companies acquired by Chinese buyers increased from 8 in 2008 to 68 in 2016. In 2017, although policy constraints led to slower growth, the number of M&A deals closed was still bigger than that in 2015.
Chinese companies are buying at a global scale, but Germany is clearly one of the most preferred destinations for M&A deals. Cheng Na gave three reasons to explain why this has been the case.
Firstly, Germany has a strong market backed by a favorable macroeconomic environment.
For many years, the country has topped the Country-Risk Rating of Overseas Investment from China (Croic-Iwep) with an AAA rating in terms of economic fundamentals, solvency, political stability, social flexibility, and relations with China.
Secondly, from a development perspective, the German market is highly complementary with the Chinese market. Germany has the strong brand and technological expertise much needed in China as the world’s biggest manufacturer seeks to move up the value chain.
Therefore, their partnership can create a synergy.
Thirdly, Germany is a suitable investment destination for Chinese companies. For the majority of Chinese buyers investing overseas for the first time, it’s better to begin with small firms, which Germany has a big number of. These hidden champions, small but strong in their segment market, can make for a good choice for first-time acquirers.
What are the strengths and weaknesses of Chinese companies?
Despite the surge in the volume of overseas investment by Chinese companies, many of them do not fully understand the risks involved in this process. To help Chinese companies make informed decisions in cross-border M&A, Cheng Na shares her insights into the strengths and weaknesses of Chinese buyers as they seek to close deals in
On the one hand, the strengths are evident. China has a fast-growing market, wellcapitalized companies, and a good reputation of respecting the operational autonomy of the acquired firms.
On the other hand, there are some weaknesses. China is a non-EU country, which can give rise to huge misunderstandings between the both sides. For example, one of the biggest considerations for German companies in cross-border M&A is the safety of transactions. However, this is often deemed questionable in the eyes of the acquired party, as the latter may have concerns about the acquirer’s financial commitment being undermined by stricter policies and unfamiliar national circumstances in both countries.
These concerns are the exact reason why L/Gs and break-up fees come into existence in the first place. Even with these protective measures in place, German companies are more likely to feel insecure due to their unfamiliarity with Chinese acquirers than would the average American company, with whom Chinese companies have a relatively longer history of business acquisition.
“Traditionally, Chinese companies acquiring in Germany tend to focus on its manufacturing industry since it is more matured and has many well-recognized brands. In recent years, however, part of the attention has been shifted towards companies in the emergent industries such as big health, bio-pharmaceuticals, consumer goods, new energy, and environmental protection. This could be the future trend”, says Cheng Na.
How to increase success rates?
Among the numerous Chinese enterprises eagerly throwing themselves into cross-border
M&A deals, many have found their attempts to run aground. To help Chinese acquirers break from the “failure” spell, Cheng Na puts forward the following suggestions.
The first is to improve the safety of transactions. Although companies have little control on regulatory approvals, they can design the terms and conditions with a view to eliminate concerns, such as providing bank L/Gs or making advance payments.
The second is to join the game early on. For most Chinese companies, they begin preparations to bid only after the auction, causing them to lag seriously behind than other buyers. They can make a difference by being more proactive and reaching out to the target company with a buying intent before the auction process. In fact, making the first strike will greatly increase the chance of success.
The third is team effort. Companies need law firms and consulting firms to serve as their guide in the unfamiliar cross-border M&A. For one thing, the use of specialists can be interpreted by the other party as a goodwill gesture. For another, it can also bring higher efficiency as companies can benefit from their services as they make preparations predeal and deliver better execution post-deal.