The smooth integration of Chinese enterprises with global acquisitions is high on the agenda of business leaders.
An investment banker friend turned to me recently during a discussion on the international investment strategy of Chinese companies and said, “The problem is not a lack of money. China has the cash to buy pretty much whatever business is of interest. The issue is what happens after you buy that business? Can you make money or will you just be faced with a lot of local problems you cannot solve?”
Clearly, this is essentially the question that everyone in the world of merger & acquisitions (M&A) asks themselves on a daily basis. Whether you are Chinese or Japanese, Korean or American, leaving your country to purchase a business is one of the most difficult tasks. Yet, when an opportunity arises that is too good to pass up, savvy business executives book the air tickets and fly into the wild blue yonder in search of the Holy Grail.
Why do they do this? Why not stay at home and develop their business in a market they know? Well, at one point, even in the largest economies, the opportunity at home is no longer attractive, or the market is too competitive, or the cost of new acquisitions too expensive. Such was the case in the late 1980s and early 1990s with the then cash-rich Japanese. And, that was also the case of petro-dollar rich OPEC nations, which came to market in two waves – 1974 to 1981 and 2005 to 2014.
For Chinese business, the challenge of globalization is somewhat different and more diverse. While in the case of the Japanese and Arabs the stomping grounds of Europe and America were the first port of call, Chinese executives and entrepreneurs are not scared to move farther afield. With the advent of the Silk Road initiative, Chinese enterprises have been given carte blanche by their government to travel the Road & Belt in search of business.
Today, you will find Chinese enterprises in such far-flung destinations as Tajikstan and Pakistan, Sri Lanka and Cameroon. No place seems to be too far or too obscure for those in search of new resources to tap, infrastructure to build or tourist resorts to develop. Most recently, investors have chosen to scour the outer islands of the Philippines and the hinterlands of Siberia in search of locations to establish mega-resorts for a Chinese population eager to try new and exciting destinations.
Castles to Technology
The Chinese are still attracted by what they perceive to be the undervalued markets of Europe, where they pick up everything from French castles to German robotic enterprises and technology firms at bargain basement prices. They love the depressed markets of Eastern and Central Europe, where countries like Hungary, Romania and Poland are welcoming. They see value on the Adriatic Coast, picking up the best and brightest technologies, such as the recent backing of an electric-powered plane maker in Slovenia, winner of the NASA challenge on three occasions.
And, Chinese still love the allure of the big cities of the US, picking up flagship properties like the Waldorf Astoria Hotel in New York and Hollywood studios across the country in Los Angeles, a similar trend to what the Japanese did in their heyday. These entrepreneurs are just as excited to find a new medical technology that can be exported to China, or make the trip to Silicon Valley in search of a social media application that can be monetized on their Mainland platforms.
Armed with massive war chests from prominent IPOs or backed by the trillion dollar-plus foreign exchange reserves of the state, China is making its mark on the world of M&A. While not everyone appreciates this flow of capital, as many are not always pleased with the Chinese manner of doing business, more often than not countries and their enterprises take the investment with a firm smile knowing full well their choices are limited.
This brings us back to the original question of my Chinese investment banker friend – what do you do when you buy these assets or properties? The answer to that is rather simple. Chinese dealmakers must do what the locals do when buying a business. In the initial stages, prior to taking the big leap, make sure you hire a strong local accountant to check the books and a leading legal firm to conduct a Western style due diligence on your behalf. The due diligence, if done correctly, will check all the right boxes and could well save a fortune – so Chinese buyers should not scrimp and save at this end.
Equally important, enterprises must find a local partner they can trust. After all, that is exactly what foreign investors do when they come to China, search for a local person or group that knows the home market inside and out. So, Chinese M&A players should find a foreigner they can trust, and, if they do not have one already, there are many in Hong Kong or Shanghai or Beijing eager to assist. Or, simply pick one from the pile of money hungry consultants in the target market eager for a piece of the China Dream.
The key is to make sure that the all-important local partner stays loyal and takes your side of the table in making sure that all goes as planned. For this to work best a suitable incentive should be provided, perhaps a nice compensation package with some shares in the business. Still, that incentive should be closely tied to performance targets and the progress should be monitored to make sure these targets are reached. After all, the foreign friend will want to perform as well, knowing full well that with support and capital he or she can do things they never dreamt of before.
If all else fails, and you simply cannot find a foreign partner you can trust, be prepared to head overseas to run the business yourself, or send a family member to watch over the crown jewels. This is a route to success that takes longer and is harder, but it is something Chinese entrepreneurs in particular are eager to follow. While the generation leading the business in China may never speak a word of a foreign language, it is not unusual for a child trained in a respected foreign university to take the helm overseas.
Still, this route can be over-rated and is not a road that always leads to riches. Choosing a family member or a Chinese friend who speaks the local language is no assurance that the person selected has any idea what they are doing. While they may have an MBA in business or a PhD in finance, running a business in a foreign land for a parent or partner back in China is often the road to ruin – or at least the loss of friendship.
Clearly, the best result is to choose a business that works well with a staff that is competent and able, and let the team do what it is paid to do. That is something the major Chinese enterprises are indeed good at in some regard, and in some cases where the competition for a prized asset is tough the target business owner goes with the Chinese for this reason. Giants like Sinopec, Alibaba, ChemChina and a host of others have made multi-billion dollar purchases in key markets worldwide. More often than not they give the existing managers a chance to perform.
ChemChina is a particular case in point, with its purchase of Italy’s Pirelli and completion of China’s largest M&A ever with Switzerland’s Syngenta. In both cases, there were other suitors for these valuable assets. And, in both cases, incumbent management gave the nod to ChemChina. One reason for this is the liberal policy taken when it comes to corporate governance and allowing local managers the leeway to run their business.
This is not always the case with hands-on entrepreneurs or the infamous tu hao – nouveau riche with more money than brains. They often come into investment thinking they know best how to manage a business in a country they cannot even speak the language of. Having managed to somehow make their way through the China business world with some success they feel they can do the same anywhere. Often this proves not to be the case and the investment suffers.
Finally, whatever the route chosen in making a foreign acquisition, one point is clear: nothing is more important that experience, and the more you do something the better you get at it. If the M&A record books are an indication, China is getting more than it share of experience.