Etude

For Chinese companies: Learning the rules for outbound M&A

As more Chinese companies turn to outbound M&A to expand capabilities and fuel growth, they’re discovering that they need to master a new set of rules.

Par Philip Leung and Kiki Yang

First published on janvier 12, 2016
min


Armed with abundant capital, the government’s encouragement and a willingness to be global, Chinese companies are intensifying their efforts to acquire foreign companies and broadening their capabilities and portfolios to help them win at home and abroad. China has been a net capital exporter for three years in a row. Bain & Company’s analysis of M&A deal activity shows that the transaction value of outbound deals has been rising by 22% annually since 2009, reaching $79 billion in 2014. Today’s deals cover an expanding number of industries in all regions. Although private enterprises represent a growing share of outbound activity, the largest deals still involve state-owned enterprises. In the past, outbound deals were made primarily with the purpose of obtaining natural resources or raw materials. Today, they’re just as likely to be aimed at helping companies train and develop staff, or giving companies access to overseas revenues and profit pools they’ve not yet addressed. Many Chinese acquirers are new to this game. As they turn to outbound M&A, they need to learn some fundamental rules to avoid common missteps. When outbound deals fail to deliver, acquirers typically stumble over three hurdles. First, they may overlook the importance of scenario analysis and may be ill-prepared for unexpected macroeconomic risks such as currency fluctuations or commodity price cycles. Second, they may shortcut the due diligence process. The nagging reality is that Chinese buyers tend to undervalue the importance of diligence. We’ve seen companies devote only a single month to diligence, relying primarily on internal staff who are experienced only in the Chinese market. Finally, many Chinese companies struggle with two critical areas of merger integration: culture and governance. For example, it is not unusual for Chinese acquirers to instinctively leave intact a foreign company’s leadership team without exploring the options. That may have been the right move when acquiring a natural resource asset, but when the goal is generating synergies, it could backfire. Based on our work helping Chinese companies develop their approaches to M&A, we have identified five important rules for success. Make M&A an extension of your growth strategy worldwide. Clarify how each deal creates value. Perform rigorous due diligence. Know what you really need to integrate. Mobilize in a focused manner.

Armed with abundant capital, the government’s encouragement and a willingness to be global, Chinese companies are intensifying their efforts to acquire foreign companies and broadening their capabilities and portfolios to help them win at home and abroad.

China has been a net capital exporter for three years in a row. Bain & Company’s analysis of M&A deal activity shows that the transaction value of outbound deals has been rising by 22% annually since 2009, reaching $79 billion in 2014. Today’s deals cover an expanding number of industries in all regions. Although private enterprises represent a growing share of outbound activity, the largest deals still involve state-owned enterprises. In the past, outbound deals were made primarily with the purpose of obtaining natural resources or raw materials. Today, they’re just as likely to be aimed at helping companies train and develop staff, or giving companies access to overseas revenues and profit pools they’ve not yet addressed.

Many Chinese acquirers are new to this game. As they turn to outbound M&A, they need to learn some fundamental rules to avoid common missteps. When outbound deals fail to deliver, acquirers typically stumble over three hurdles. First, they may overlook the importance of scenario analysis and may be ill-prepared for unexpected macroeconomic risks such as currency fluctuations or commodity price cycles. Second, they may shortcut the due diligence process. The nagging reality is that Chinese buyers tend to undervalue the importance of diligence. We’ve seen companies devote only a single month to diligence, relying primarily on internal staff who are experienced only in the Chinese market. Finally, many Chinese companies struggle with two critical areas of merger integration: culture and governance. For example, it is not unusual for Chinese acquirers to instinctively leave intact a foreign company’s leadership team without exploring the options. That may have been the right move when acquiring a natural resource asset, but when the goal is generating synergies, it could backfire.

Based on our work helping Chinese companies develop their approaches to M&A, we have identified five important rules for success.