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Thursday, February 12, 2015, 09:43

Risks rise for overseas M&As

By Li Xiang
Risks rise for overseas M&As

The reality has been much more complicated than what Chinese companies had anticipated for overseas investments. (Photo / IC)

While Chinese companies have been making headlines for their global hunt for investment projects and acquisitions, a slew of troubled overseas deals have exposed increasing risks and potential losses behind these high-profile cases, experts said.

On Wednesday, the Mexican authorities confirmed that they have received the official document filed by the Chinese side seeking compensation for losses in its bid for the scrapped $3.75 billion high-speed rail project, according to Mexican media reports.

The deal would have been the largest single overseas construction deal won by a Chinese-led consortium. The compensation that China has demanded will likely be valued at 100 million yuan ($16 million), Chinese media reports said.

Similarly, Greece has halted the sale of a majority stake in one of the country's largest ports Piraeus, which China Ocean Shipping (Group) Co bid for.

The scrapped deals show that the reality has been much more complicated than what Chinese companies had anticipated for overseas investments, experts said.

Cheng Jun, partner of the Beijing-based Zhong Lun Law Firm, said that a lack of understanding of the foreign legal and political environment is one of the main reasons for the failure of such deals.

"Some Chinese companies tend to believe the verbal promises made by officials from the host country during the negotiation process. This exposes them to the default risks from the other side," Cheng said.

Lack of in-depth due diligence and insufficient knowledge about counterparty transactions have also led to huge losses in some overseas Chinese merger and acquisition deals, he said.

Political risk is another major factor that led to the failure of some overseas investment deals.

Among the 120 failed outbound deals between 2005 and 2014, about 25 percent were due to political reasons, a recent report showed.

Though China became a net capital exporter last year with total outbound direct investment reaching a record $102.9 billion, a majority of the deals were loss-making, some experts said.

Xu Hongcai, an economist at the China Center for International Economic Exchanges, said: "Lack of talent familiar with international practices has also been a major shortcoming for Chinese companies in overseas markets."

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