Chinese Companies, Eager to Buy Abroad, Sharpen Their M&A Skills

Chinese Companies, Eager to Buy Abroad, Sharpen Their M&A Skills

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.

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Chinese Companies, Eager to Buy Abroad, Sharpen Their M&A Skills

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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. 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 to obtain 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. Second, they may shortcut the due diligence process. Finally, many Chinese companies struggle with two critical areas of merger integration: culture and governance. For example, many Chinese acquirers 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. As some Chinese companies are discovering, inorganic growth often is the best answer for creating shareholder value. Our research determined that in China, as in the rest of the world, the bigger and more frequent the deals, the higher the returns to shareholders. It’s logical: Companies that make more acquisitions are more likely to identify the right targets, to develop the capabilities required to vet deals better and faster, and to form the organizational muscles to more effectively integrate acquisitions.

Clarify how each deal creates value. Every merger or acquisition needs a well-thought-out deal thesis—an objective explanation of how the deal enhances the company’s core strategy, adding value to the target and the acquirer. For example, the deal may create new opportunities for existing capabilities or give the acquirer access to new markets. A clear deal thesis identifies the 5 to 10 most important sources of value—and danger—and points you in the direction of the actions you must take to be successful.

Consider the solid deal thesis behind the acquisition of Nedschroef, a leading automotive fasteners supplier in Europe, by the Shanghai Prime Machinery Company (PMC). The deal thesis spelled out how the merger would enable PMC to enter a high-barrier market segment that would have been difficult for the company to access on its own. And Nedschroef would have access to the fast-growing Chinese market and lower-cost manufacturing.

Perform rigorous due diligence. It’s no secret that poor due diligence is the single-biggest cause of unsuccessful deals in China. Among the reasons are inexperience in diligence, overreliance on banks, a lack of understanding of local markets and cultural gaps between China and foreign markets. In contrast, PMC invested in a comprehensive diligence effort for its acquisition of Nedschroef, setting up dedicated team resources, hiring external advisers, pressure testing scenarios for both core and new markets, and identifying concrete synergies.

Know what you really need to integrate. Integration should start with the unique deal thesis, with integration task forces structured around the key sources of value. Teams need to understand the value for which they are accountable and should be challenged to produce their own bottom-up estimates of value, right from the start.

Companies must resolve the thorniest cultural, people and governance issues quickly and productively, relying on local integration teams. According to a global study conducted by Bain, acquirers that proactively tackled cultural issues saw their share prices rise 5.1%, on average, one year after the deal announcement, whereas companies that were not proactive lost share price. Attention to cultural and governance issues were a key ingredient in the success of Geely’s $1.5 billion acquisition of Volvo Car in 2010. In numerous ways, the integration was designed to respect Volvo’s unique culture. For example, the Swedish automaker’s former CEO was invited to join the merged company’s board. Geely allowed Volvo to operate with a high degree of autonomy and maintained close communications with the relevant labor unions in Sweden.

Mobilize in a focused manner. To keep integration on track, outbound deals require a proactive and disciplined approach. The most effective integrations employ a decision management office, and integration leaders focus the steering group and task forces on the critical decisions that deliver the most value. They lay out a decision roadmap and manage the organization to a “decision drumbeat” to ensure that each decision is made by the right people at the right time, and with the best available information.

If management allows itself and the organization to get distracted by the integration, the base business of both companies will suffer. The CEO should set the tone, allocate the majority of his or her time to the base business and maintain a focus on existing customers. Below the CEO, at least 90% of the staff should be focused on the base business; they should have clear targets and incentives to keep both businesses humming. Companies should take particular care to make customers’ needs a priority and to bundle customer and stakeholder communications, especially when system changes risk confusing customers.

As outbound M&A becomes a critical tool for Chinese companies, it’s important to take the time to evaluate how well it worked and what you would do differently the next time. Use your findings and discipline from the integration to make future M&A activities more successful. The biggest lesson to learn in the years ahead is that the more deals you do, the better you will get.

Philip Leung is a Shanghai-based partner who leads Bain & Company’s Asia-Pacific Mergers & Acquisitions and Corporate Finance practice.

Kiki Yang is a partner based in Hong Kong who leads the Mergers & Acquisition and Corporate Finance practice in Greater China.


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