How China can succeed in the M&A world

The upcoming sale of bankrupt Korean automaker Ssangyong Motor to India's Mahindra & Mahindra, marks the end of an attempt by a Chinese company to grow overseas. When state-controlled Shanghai Automotive Industry (SAIC) won a heated takeover battle in 2004 for a nearly 50 percent stake in Ssangyong, it was the first acquisition by a mainland China company of a foreign car manufacturer, with potential for SAIC and Ssangyong to complement each other's businesses. After SAIC encountered a number of challenges, including an inability to get control of Ssangyong's operations and labor unions, it cut the stake to less than 4 percent.

Chinese companies such as SAIC are discovering that expanding into foreign markets is tricky. The odds certainly aren't in their favor. Worldwide, merger-and-acquisition efforts often fail to deliver their intended value. The stakes are even higher for companies-such as most Chinese buyers-that lack experience in M&A. A global survey by Bain & Co. of 750 companies shows that, a year after deals were announced, the shares of 55 percent of acquiring companies had failed to outperform the market.

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Chinese companies should be mindful of those odds as the country becomes a player in a game it's just beginning to learn. China's explosive economic growth has spurred a corresponding boom in mainland companies pursuing expansion opportunities overseas through M&A, joint ventures, partnerships, or organic growth. Even as the financial crisis roared in 2009, the value of deals involving Chinese companies making overseas acquisitions totaled $35.9 billion. (As recently as 2004, it was $3.5 billion.) Several multibillion-dollar deals are in the works or have been completed, including the $7.7 billion acquisition last year of Canada's Addax Petroleum by Sinopec International Petroleum Exploration and Production. In April, state-owned Sinopec announced it would buy 9 percent of a Canadian oil-sands project, Syncrude, from ConocoPhillips for $4.7 billion.

What does it take to get M&A right? We've found that winners start slow and small, then gain experience and confidence with domestic acquisitions before expanding globally. They often monitor the growth of acquisition targets for years before making an offer. They focus on how the deal could take full advantage of synergies for both parties. Winning acquirers understand that to excel, they have to attract and retain top talent.

Read the full article on BusinessWeek's website.