Shanghai Daily

M&As tempting but tricky for Chinese firms

Chinese companies looking to expand into foreign markets are discovering how tricky it can be. And they aren't alone.

Par Phil Leung and Larry Zhu

First published on juillet 29, 2010
min


China's explosive economic growth has spurred a corresponding boom in its companies pursuing expansion opportunities overseas through mergers and acquisitions (M&A), joint ventures, partnerships or organic growth. Even as the financial crisis hit in 2009, the value of deals involving Chinese companies making overseas acquisitions totaled US$35.9 billion. As recently as 2004 it was US$3.5 billion. Mining, telecom, utilities and financial services topped the list for outbound M&A deals in 2008 and 2009. Typically, the deals are small, with minority stakes totaling just US$50 million or less. But several multibillion-dollar deals are in the works or completed, including the US$7.7 billion acquisition last year of Canada-based Addax Petroleum by Sinopec International Petroleum Exploration and Production Corp (SIPC), a subsidiary of China Petrochemical Corp, and Zhejiang Geely Holding's US$1.8 billion purchase of Ford Motor's Volvo division. With growing demand for raw materials and energy, these sectors will continue to pursue M&A deal making. But Chinese companies are discovering that expanding into foreign markets is tricky. And they aren't alone. Worldwide, M&A efforts often fail to deliver the intended value—and the stakes are even higher for companies that lack experience in M&A. A Bain & Co global survey of 750 companies showed that 55 percent of the acquiring companies' stock failed to outperform the market one year after deals were announced. When Shanghai Automotive Industry Corp (SAIC) won a heated takeover battle in 2004 for a nearly 50 percent stake of Ssangyong, it was the first acquisition by a Chinese mainland company of a foreign car manufacturer, with the potential of SAIC and Ssangyong complementing each other's businesses. But SAIC encountered a number of challenges, including an inability to get control of Ssangyong's operations. However, some seasoned acquirers are getting it right. They start slow and small, gaining experience and confidence with domestic acquisitions before expanding globally. ChemChina (China National Chemical Corp) became the mainland's No. 1 chemical conglomerate by following that path. After more than 100 domestic acquisitions, ChemChina, on its own or through its Blue Star subsidiary, then targeted three major foreign firms—Adisseo and Rhodia in France and Qenos in Australia. The deals helped catapult ChemChina onto the global stage, giving it the technology, management skills, capital and market access required to become a multinational player. As the pace of global expansion by mainland firms accelerates, Chinese businesses need to learn quickly several important lessons to replicate the success of companies like ChemChina. For example, don't assume conventional M&As are your only options. While M&As are the major growth strategy, companies often learn the ropes by forming partnerships and joint ventures in foreign markets. Since 2008, Alibaba.com, the global leader in e-commerce for small business, has used a joint venture with Japan's telecommunications giant, Softbank, to open up new opportunities in the Japanese marketplace. It gave Alibaba.com access to Softbank's talent and sophisticated knowledge of the Japanese market. Now the two companies are in talks to form a partnership that would jointly promote e-commerce between China and Japan. The article is adapted from the authors' recent report for Bain & Co titled "Growing Beyond China." The authors are partners with Bain & Co's Shanghai office.

China's explosive economic growth has spurred a corresponding boom in its companies pursuing expansion opportunities overseas through mergers and acquisitions (M&A), joint ventures, partnerships or organic growth.

Even as the financial crisis hit in 2009, the value of deals involving Chinese companies making overseas acquisitions totaled US$35.9 billion. As recently as 2004 it was US$3.5 billion.

Mining, telecom, utilities and financial services topped the list for outbound M&A deals in 2008 and 2009. Typically, the deals are small, with minority stakes totaling just US$50 million or less.

But several multibillion-dollar deals are in the works or completed, including the US$7.7 billion acquisition last year of Canada-based Addax Petroleum by Sinopec International Petroleum Exploration and Production Corp (SIPC), a subsidiary of China Petrochemical Corp, and Zhejiang Geely Holding's US$1.8 billion purchase of Ford Motor's Volvo division.

With growing demand for raw materials and energy, these sectors will continue to pursue M&A deal making. But Chinese companies are discovering that expanding into foreign markets is tricky. And they aren't alone.

Worldwide, M&A efforts often fail to deliver the intended value—and the stakes are even higher for companies that lack experience in M&A. A Bain & Co global survey of 750 companies showed that 55 percent of the acquiring companies' stock failed to outperform the market one year after deals were announced.

When Shanghai Automotive Industry Corp (SAIC) won a heated takeover battle in 2004 for a nearly 50 percent stake of Ssangyong, it was the first acquisition by a Chinese mainland company of a foreign car manufacturer, with the potential of SAIC and Ssangyong complementing each other's businesses.

But SAIC encountered a number of challenges, including an inability to get control of Ssangyong's operations. However, some seasoned acquirers are getting it right. They start slow and small, gaining experience and confidence with domestic acquisitions before expanding globally.

ChemChina (China National Chemical Corp) became the mainland's No. 1 chemical conglomerate by following that path.

After more than 100 domestic acquisitions, ChemChina, on its own or through its Blue Star subsidiary, then targeted three major foreign firms—Adisseo and Rhodia in France and Qenos in Australia.

The deals helped catapult ChemChina onto the global stage, giving it the technology, management skills, capital and market access required to become a multinational player.

As the pace of global expansion by mainland firms accelerates, Chinese businesses need to learn quickly several important lessons to replicate the success of companies like ChemChina. For example, don't assume conventional M&As are your only options.

While M&As are the major growth strategy, companies often learn the ropes by forming partnerships and joint ventures in foreign markets.

Since 2008, Alibaba.com, the global leader in e-commerce for small business, has used a joint venture with Japan's telecommunications giant, Softbank, to open up new opportunities in the Japanese marketplace. It gave Alibaba.com access to Softbank's talent and sophisticated knowledge of the Japanese market.

Now the two companies are in talks to form a partnership that would jointly promote e-commerce between China and Japan.

The article is adapted from the authors' recent report for Bain & Co titled "Growing Beyond China." The authors are partners with Bain & Co's Shanghai office.