Deals for getting big in China—fast

Deals for getting big in China—fast

From our experience with clients in a range of Chinese industries, we’ve determined approaches that boost the odds of successful inorganic growth success.

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Deals for getting big in China—fast

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Already the No. 1 market in a host of industries, including automobiles, home appliances and mobile phones, China is a leading profitable growth engine for multinational companies (MNCs). But it’s as challenging to global companies as it is important.

The competition has never been tougher as a new generation of domestic companies is quickly setting the standard for low-cost and good-enough products. Chinese players are showing how easy it is to outpace MNCs. In consumer goods, local player Hosa overcame Italy’s Arena to become the No. 1 seller of swimwear by targeting the mass market. In healthcare, domestic ultrasound manufacturer Mindray became the No. 1 player by using technology that was reliable but less advanced and offering 30% to 40% lower prices than similar models from MNCs.

To compete, the pace of M&As and joint ventures (JVs) by multinationals has dramatically intensified beyond restricted industries like banking or insurance where there is still no alternative for MNCs. In fact, only about 25% of Fortune 200 companies will rely solely on organic growth in China.

Increasingly, these deals are proving transformative. They provide companies with upstream activities, R&D, intellectual property (IP) contributions and core capabilities sharing. In addition to gaining regulatory access, inorganic growth enables MNCs to lower costs for both domestic production and exports, fill portfolio gaps and strengthen their go-to-market capabilities—areas where domestic players typically have the edge. Buying or partnering with a Chinese company can help level the playing field, enabling a multinational to build a leading market position.

From our experience with clients in a range of Chinese industries, we’ve determined approaches that boost the odds of successful inorganic growth success.

Why are we doing this deal?

In China as elsewhere, knowing exactly what you hope to gain is crucial to a deal’s success. Begin with a growth strategy that clarifies how M&A will enable growth, and then develop a prioritized target list—keeping in mind that in China deals may arise opportunistically. A deal thesis spells out usually five or six key arguments for why a transaction makes compelling business sense.

Few companies have been as systematic in using a deal thesis as China Resources Snow Breweries (CRB), the SABMiller and China Resources Enterprise joint venture. Since joining forces in 1994, the joint venture has completed dozens of regional brewery acquisitions in China. By coupling SABMiller’s brewing, low-cost expertise and integration experience with China Resources’ local market knowledge, the joint venture built Snow into the clear market leader and the world’s No.1 beer brand by volume.

How are we doing this deal?

Once a company understands why it’s doing a deal, the next big decision involves whether to embark on a joint venture or acquire majority ownership through an M&A. Bain & Company has developed a framework for helping companies decide which of the two options is most appropriate based on two factors: the potential value the deal can bring and the MNC’s need for control.

For example, determining the potential value means looking into the breadth of the capability required, depth of collaboration, scope of cooperation and length of the partnership. Assessing the need for control requires determining the value the new entity will create, the chances of success if the MNC advances on its own, the possibility of losing core assets such as IP and the willingness to take the full investment risk. The higher the value and need for control, the more likely that M&A is the best option. When the engagement value and need for control are relatively low, it’s wise to consider JVs.

Whichever path a company takes, its odds of winning improve greatly by taking a rigorous, replicable approach to succeed and mitigate risks.

When a joint venture is the answer

Many MNCs in unrestricted industries are stopped cold by the challenges of joint ventures in China. The list includes poor organizational control, technology infringement and the risk that the partner may become a competitor. JVs require careful screening of potential candidates, addressing the tricky issues early as part of contract negotiations and joint business planning, and agreement on key business drivers and ongoing management and monitoring.

In our experience, when done right, joint ventures succeed when partners clearly understand what each party brings to the table and work to accommodate their unique needs. Successful JVs create a differentiated setup for different strategic product types (commoditized vs. high-end). They also provide partner-desired assets and capabilities – for example, transferring technology for commoditized products to the JV can allow it to compete in the good-enough segment. They pressure-test assumptions and look for potential operational hurdles that could affect the JV’s success. They agree on the important details – everything from board memberships to pricing issues. And they build an implementation plan and lay out critical steps for the joint venture setup and full operation.

When M&A is the answer

Among the biggest obstacles to pursuing M&As in China: the dearth of good target companies and the difficulty of conducting solid due diligence. Also, valuations are high, and post-acquisition improvements are hard to achieve because of cultural differences and top management drains.

Again, companies that succeed begin with a clear strategy, investment thesis and process, designed to capture the key elements of the deal thesis while simultaneously managing the risks. They know what they’re looking for and how it will fit with their strategy. They know how they plan to integrate it, if at all. They carry out systematic screening. Only then are they positioned to make a disciplined investment decision.

Companies need to design an explicit, pragmatic integration blueprint and targets to unlock value.

In our experience, companies that get M&A right benefit from an institutional M&A capability. Often, they build a dedicated core M&A team that repeatedly executes deals. Institutionalizing its M&A capability has put the Dutch chemicals and life sciences group Royal DSM on a winning path in China. Before embarking on its acquisition strategy, China represented only 4% of the company’s total revenues. By 2010 China had grown to contribute 10% of its global total, according to data from Capital IQ. Now that it has perfected the M&A process, the opportunities ahead for Royal DSM are as vast as China itself.

Phil Leung, Weiwan Han and Raymond Tsang are partners in Bain & Company’s Shanghai office and members of the Mergers & Acquisitions practice.

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