Editor's Note: Since the onset of the global credit crisis last fall, the five biggest mergers and acquisitions involving Chinese banks lost nearly half or more of their value.
Part of the reason is that financial services companies around the globe are struggling in the global financial crisis. But the challenges of realizing value from major cross-border M&A deals are also very real.
Johnson Chng and Philip Leung have developed extensive knowledge about banks and cross-border M&A deals.
As economic turbulence continues to roil banks, insurers and asset managers across North America, Europe and Asia, Chinese banks face an extraordinary opportunity - and risky new challenges.
Troubled international financial services companies looking to raise capital are selling attractive assets at bargain prices. Increasingly, those potential buyers are Chinese banks that want to expand.
Chinese banks are well positioned to move on to the world stage. The balance sheets of China's biggest State-owned and joint stock banks remain healthy, with cash and reserves exceeding standards set by international and domestic regulators.
As relatively new cross-border acquirers, however, they are beginning to step into traps that await novice offshore acquirers.
Since the onset of the global credit crisis last fall, the five biggest mergers and acquisitions involving Chinese banks lost nearly half or more of their value, partly due to fallout from the global meltdown.
Unforeseen economic reversals and the need to win the approval of skeptical regulators raise further challenges.
Still, the forces propelling Chinese banks' offshore expansion are compelling.
The most urgent reason for banks to enlarge their transnational footprint is to serve the fast-expanding needs of their increasingly globalized corporate customers.
Outbound direct investment by Chinese multinationals increased thirtyfold to $67 billion in 2008, and will likely approach $100 billion by 2012.
Expanding trade exerts another strong pull to move offshore. Export-import transactions increased by 23 percent annually over the past five years to nearly $3 trillion through 2008.
Global Chinese manufacturers and exporters are looking for banks to serve basic needs like trade settlement, foreign exchange guarantees and cash management that they are ill-equipped to provide today.
Foreign-based banks are making deep inroads serving Chinese corporations, and domestic banks will need to acquire the higher-value capabilities to become globally competitive over the long term.
As trade continues to expand, demand for more sophisticated products and services - from financing far-flung supply chains, supplying working capital, and buying receivables - will increase on the domestic and international side.
Banks that focus on these three key issues face better odds of success in offshore M&A:
First, develop a compelling investment thesis. The starting point for any bank's outbound journey is to match their access to potential target markets with their strategic priorities for serving customers or building key capabilities.
Attractive markets are new regions where its key customer segments are expanding their presence either through direct investment or trade flows, enabling the bank to strengthen key capabilities or add new ones.
What form expansion into a target market should take - a single big acquisition, a series of smaller takeovers or gradually building a presence through organic growth - is a second critical aspect of the investment thesis.
The right approach results from the interplay between local market conditions and the bank's strategic objectives.
Bain's analysis of deals completed to date shows that the rationale behind most Chinese offshore acquisitions has been to increase the scope of their businesses by adding new product lines or picking up new capabilities.
Such deals will become increasingly important as corporate customers expect banks to offer a comprehensive portfolio of value-added services like supply-chain financing and receivable purchasing.
Third, over-invest in due diligence. Identifying potential acquisition targets and winnowing them down to one or two best choices requires painstaking discipline. A Bain & Co survey found that nearly 30 percent of all successful deals involved acquisitions of a target company whose revenues were half or more of the acquirer's. In failed deals, by contrast, only about 10 percent of the targets were bigger companies.
The real work begins once the search closes in on the most promising targets. Conducting rigorous due diligence that heads off problems before a purchase is completed requires extra attention in cross-border deals.
Start by identifying any regulatory or political issues that could be a potential roadblock. Companies can develop an inside point of view by tapping their existing networks or customers and sending in an advance team to conduct an end-to-end review of the enterprise.
Act early to extract full potential value. Achieving full value from newly acquired assets generally is the single most important factor influencing a deal's success.
The best time to think about what the merged companies will look like is before the merger is consummated. Chinese banks should learn from the experience of successful acquirers that focus on three critical integration issues.
Begin by identifying high-priority "Day One" initiatives, assigning teams to capture quick wins backed up with detailed implementation plans.
Then, move quickly to protect the franchise. Since human capital is the premier asset, it is important to quickly launch a retention program to hold on to top talent and customers and communicate with key stakeholders.
Even under the best of conditions, mergers and acquisitions are a high-risk growth strategy.
As China's banks move on to the global stage, they'll need to take special care to execute their international expansion skillfully.
Johnson Chng is a partner in the Beijing office of Bain & Co, where he leads the firm's financial services practice for Greater China. Philip Leung is a Bain partner based in Shanghai, where he leads the firm's M&A practice for Greater China.