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Tuesday, November 15, 2016, 21:57

Mainland companies urged to do homework before takeover deals

By Oswald Chan
Mainland companies urged to do homework before takeover deals
The central business district in Chengdu, capital of Sichuan Province. Chinese mainland companies have been urged to match their enthusiasm for overseas M&A (merger and acquisition) deals with deeper knowledge of their positions and profitable business models in the domestic market as well as those of companies targeted. (Shen Qilai / Bloomberg)

Conducting rational business and global geopolitics analysis is vital for Chinese enterprises to execute merger and acquisition (M&A) deals amid an uncertain business environment, according to venture capital firms.

In the year-to-date for 2016, Chinese companies have engaged in a record buying spree of $207 billion — more than double that of the same period in 2015 — according to Bloomberg.

China’s outbound direct investment (ODI) has surged in the past decade as the central government strives to rebalance the national economy — from being reliant on manufacturing, investment and infrastructure to one based on consumption, innovation and value-added services.

Research from global business advisory firm Baker & McKenzie showed the combined value of Chinese acquisitions and greenfield projects in Europe and North America totaled $40 billion last year. Before 2008, both regions on average attracted less than $1 billion ODI annually.

Prior to 2013, Chinese firms’ overseas deal-making was denominated by State-owned enterprises acquiring natural resources and energy. Now private entrepreneurs are snapping up marquee assets, including Italian football teams, American film studios and French fashion houses as government-backed buyers purchase chipmakers and crop technology.

“Mainland companies have the desire to tap into advanced technology and manufacturing capabilities, strengthen brands and know-how in services, and diversify into safe-haven assets to hedge against economic risks on the mainland,” Baker & McKenzie partners Maite Diez and Danian Zhang said in a research report on Chinese ODI.

“The country’s economic deceleration risks, a weakening renminbi and fear of capital controls have also fueled M&A activities since the middle of 2015.”

“Mainland companies can go out to acquire technology and business models for deployment in the domestic market, while foreign investors can leverage their production technologies, business models and operational experience to accelerate the pace of mainland transformation,” said Benny Liu, joint chairman at KPMG China.

Adam Xu, partner and digital practice leader at PricewaterhouseCoopers’ Strategy&, said: “In light of the innovation-driven development strategy at a national level, mainland companies have been increasing their research and development investment year by year, which indicates that they are shifting their advantage from competitive cost to innovation to build up technology capabilities to win in the global market.”

Various Chinese financial institutions, including sovereign funds, public and private companies, insurers, financial groups and private equity/venture capital funds, are investing in a bundle of overseas business assets.

Despite the investment frenzy, many are ultimately unsuccessful as Chinese companies cannot integrate their businesses with the acquired companies, mainly due to huge cultural differences in business practices.

“Most of the mainland investors themselves do not have a clear strategic blueprint on how the M&As can propel the new company to go forward. They just contribute the new capital, not realizing they can leverage their own connections, expertise and know-how to facilitate the acquired companies to excel,” venture capital firm Rouge Ventures’ Managing Director Desmond Marshall told China Daily.

He said Chinese companies must analyze current geopolitical situations thoughtfully to eliminate unforeseen risks in executing M&As.

“(Mainland) appetite for M&A is still there, if not even more, but the risks involved in closing these deals are also here,” Marshall said.

“Mainland acquirers should not only assess whether the acquired businesses can generate adequate cash flows (business readiness), they should also cultivate the business acumen to determine whether the acquired firms can have sufficient room for future business expansion (investor readiness).”

The M&A targets by Chinese companies are increasingly diversified, including in infrastructure and utilities, medical technologies, big data projects, agricultural farms and security technologies. Some of these acquisitions in overseas countries have aroused fears that national security may be encroached upon, with opposition elicited towards these M&As.

Home appliances company Midea Group Co’s 4-billion-euro ($4.3 billion) acquisition of an 86-percent stake in German advanced robot manufacturer KuKa AG in July, as well as Grand Chip Investment’s 670 million euro buyout of German semiconductor equipment supplier Aixtron SE in May, forced the German government to seek tighter control over foreign investment in German companies.

Property billionaire and Wanda Group Chairman Wang Jianlin’s acquisitions in the US entertainment industry have triggered calls from US lawmakers to scrutinize Chinese influence in Hollywood.

Despite some cases of opposition as countries remain skeptical toward Chinese takeovers, not all incidents are negative.

State-owned China National Chemical Corporation’s $43-billion takeover of Swiss peer company Syngenta AG was met without hostility in Switzerland although it gave a State-controlled Chinese company a central role in the global food industry. This was partly due to ChemChina’s promise to keep existing jobs, retain the Swiss headquarters and work toward a future re-listing of the company after the deal.

M&A activities by Chinese companies will continue to grow as China is regarded as one of the top three global exporters of foreign investment, with an increase of 15 percent since 2005.

There is also ample room for growth, as ODI only accounted for 7 percent of China’s gross domestic product, compared to 38 percent in the US and 20 percent in Japan, according to Baker & McKenzie’s Diez and Zhang.
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