China Daily

Driving mergers through successfully in the auto industry

Opportunities abound for Chinese auto companies. So do merger integration hazards.

글 Raymond Tsang and Philip Leung

First published on 12월 28, 2009
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The current crisis in the auto industry outside China has opened up opportunities for mergers and acquisitions (M&A) worldwide—and has brought the Chinese industry to an important crossroads. Sichuan Tengzhong's bid for General Motor's Hummer and the Geely Holding Group's negotiations for Ford Motor's Volvo division reflect the challenge many Chinese auto brands face: What type of a deal should I be looking for? A recession can be the perfect time to find a bargain investment. The right deal can vault a company to the next level in domestic or overseas markets. Bain analysis of more than 24,000 transactions between 1996 and 2006 shows that acquisitions completed during or just after the 2001–2002 recession generated almost triple the excess returns of acquisitions made during the preceding boom years. However, the wrong deal—or, worse, a hasty acquisition—can cripple a company and even put it out of business. Our experience shows that very few companies can painlessly carry off a merger or an acquisition. In fact, the Bain Deal Success Study, which looked at more than 750 acquisitions, found that only about 30 percent of the companies saw returns in excess of their investment; most ended up with a net erosion of value two years after the deal was announced. Nearly always, the single largest problem was post-merger integration. Very often, pre-merger, an acquiring company sees "synergies" and puts a high value on them to justify the deal. In reality, implementing the merger is hard and the market realities often turn out to be harsher than expected. So what's an ambitious Chinese auto company to do? As it turns out, if the company employs the lens of post-merger integration, it quickly becomes clear how it can make the right choice. By ensuring that the valuation of the acquisition target is fully justified on it's own merits—and that all potential benefits from "synergies" are treated as a bonus—a company can make a much more realistic assessment of whether a deal is worth pursuing or not. When we mapped China's leading auto players on a matrix of risk and strategic value, we found that there were three types of deals that most companies could pull off. The safest bets are those deals that consolidate Chinese local original equipment manufacturers (OEMs) or suppliers. As these transactions seek to build scale in the same or highly overlapping businesses, they have a much higher chance of succeeding—especially for first-time buyers. The Chinese government's blueprint to push consolidation in China's fragmented auto-market, for example, is a step in the right direction. For companies such as FAW, SAIC, and Dongfeng a low-risk, high-return approach to identifying M&A targets is to focus on national consolidation, while others such as Beijing Auto, Guangzhou Auto and China National Heavy Duty Truck pursue regional consolidation. A slightly more risky approach—but one that is tempting for Chinese companies with global ambitions—is to focus on buying assets from US or European suppliers to gain core technology. For many companies testing the M&A waters for the first time, these deals are easier because post-merger integration is focused on technology transfer—and there are none of the "soft" issues that trip up most companies, such as merging two different cultures or managing people-integration. For the more sophisticated Chinese companies—preferably with some M&A experience already—this recession might even offer the temptation to buy a US or European supplier with strong brand equity and technology. Once again, the more the deal focuses on adding value by the acquisition of "hard" assets such as technology, the easier it will be to digest. The more the deal focuses on brand-integration or people-integration, the higher the hurdle to extract a worthwhile return on investment. Lenovo learned this the hard way when it first took over IBM's PC division. The company had to work hard to retain customers and manage brand perception after the deal—but eventually, the efforts did pay off. Our matrix also reveals that there are two kinds of deals that most Chinese auto players should walk away from: "rescuing" dealers to access new markets or buying stakes in US or European OEMs in the hope of turning them around. Such deals come with a lot of integration baggage—and are best done by companies that have already mastered the art of acquisition and the gritty job of merging operations. Ironically, these are the deals that often lure management away from the straight and narrow path—and often become a matter of prestige. In our experience, these deals usually suffer from one of two issues. One: Not enough effort is put into carrying out a thorough due diligence on what the integration challenges will be before the offer is made. SAIC's bid to gain a controlling stake in SSangyong did not account for the complexity of potential technology transfer or the trouble unionized labor could create; it also underestimated the cultural difference between the two companies. Two: Sometimes companies focus too much on scale while pursuing an M&A target—and then face challenges when the total market size changes. When TCL set out to acquire France's Thomson, it had the right numbers for how the deal would increase capacity. However, the overall market demand for cathode ray tube televisions fell as flat-screen televisions became more popular. For Chinese auto companies this is particularly important to consider if they suspect that the current global auto market is showing signs of overcapacity and glut. Our research on companies that pursue acquisitions shows that the penalties are greatest for those who chase mega-deals with no experience in M&A—or for those, at the other end of the spectrum, who simply sit on the sidelines. On the other hand, companies that fare best start with smaller deals, learn from the experience and then move on to larger acquisitions. It is important for China's auto companies to grasp the opportunity of the current recession to develop their M&A capabilities. Companies such as Wanxiang show that a steady M&A diet—that over time increases the size and scope of the acquisition—can fuel a fast-growth trajectory. As Chinese auto companies stand at the crossroads, they need only remind themselves that mergers and acquisitions are a competency that a company develops over time. Once they master the art of the deal, from identifying the right target to implementing a smooth integration, it can be a great source of competitive advantage. When it comes to M&A in a downturn, driving too fast can be dangerous, but idling on the side can eliminate you from the race. Raymond Tsang is a partner in Bain's Shanghai office and leads the Industrial and Automotive practice in Greater China. Philip Leung is a partner in Bain's Shanghai office and leads the M&A practice in Greater China.

The current crisis in the auto industry outside China has opened up opportunities for mergers and acquisitions (M&A) worldwide—and has brought the Chinese industry to an important crossroads.

Sichuan Tengzhong's bid for General Motor's Hummer and the Geely Holding Group's negotiations for Ford Motor's Volvo division reflect the challenge many Chinese auto brands face: What type of a deal should I be looking for?

A recession can be the perfect time to find a bargain investment. The right deal can vault a company to the next level in domestic or overseas markets. Bain analysis of more than 24,000 transactions between 1996 and 2006 shows that acquisitions completed during or just after the 2001–2002 recession generated almost triple the excess returns of acquisitions made during the preceding boom years.

However, the wrong deal—or, worse, a hasty acquisition—can cripple a company and even put it out of business. Our experience shows that very few companies can painlessly carry off a merger or an acquisition. In fact, the Bain Deal Success Study, which looked at more than 750 acquisitions, found that only about 30 percent of the companies saw returns in excess of their investment; most ended up with a net erosion of value two years after the deal was announced. Nearly always, the single largest problem was post-merger integration. Very often, pre-merger, an acquiring company sees "synergies" and puts a high value on them to justify the deal. In reality, implementing the merger is hard and the market realities often turn out to be harsher than expected.

So what's an ambitious Chinese auto company to do? As it turns out, if the company employs the lens of post-merger integration, it quickly becomes clear how it can make the right choice. By ensuring that the valuation of the acquisition target is fully justified on it's own merits—and that all potential benefits from "synergies" are treated as a bonus—a company can make a much more realistic assessment of whether a deal is worth pursuing or not.

When we mapped China's leading auto players on a matrix of risk and strategic value, we found that there were three types of deals that most companies could pull off. The safest bets are those deals that consolidate Chinese local original equipment manufacturers (OEMs) or suppliers. As these transactions seek to build scale in the same or highly overlapping businesses, they have a much higher chance of succeeding—especially for first-time buyers.

The Chinese government's blueprint to push consolidation in China's fragmented auto-market, for example, is a step in the right direction. For companies such as FAW, SAIC, and Dongfeng a low-risk, high-return approach to identifying M&A targets is to focus on national consolidation, while others such as Beijing Auto, Guangzhou Auto and China National Heavy Duty Truck pursue regional consolidation.

A slightly more risky approach—but one that is tempting for Chinese companies with global ambitions—is to focus on buying assets from US or European suppliers to gain core technology.

For many companies testing the M&A waters for the first time, these deals are easier because post-merger integration is focused on technology transfer—and there are none of the "soft" issues that trip up most companies, such as merging two different cultures or managing people-integration.

For the more sophisticated Chinese companies—preferably with some M&A experience already—this recession might even offer the temptation to buy a US or European supplier with strong brand equity and technology. Once again, the more the deal focuses on adding value by the acquisition of "hard" assets such as technology, the easier it will be to digest.

The more the deal focuses on brand-integration or people-integration, the higher the hurdle to extract a worthwhile return on investment. Lenovo learned this the hard way when it first took over IBM's PC division. The company had to work hard to retain customers and manage brand perception after the deal—but eventually, the efforts did pay off.

Our matrix also reveals that there are two kinds of deals that most Chinese auto players should walk away from: "rescuing" dealers to access new markets or buying stakes in US or European OEMs in the hope of turning them around.

Such deals come with a lot of integration baggage—and are best done by companies that have already mastered the art of acquisition and the gritty job of merging operations. Ironically, these are the deals that often lure management away from the straight and narrow path—and often become a matter of prestige. In our experience, these deals usually suffer from one of two issues.

One: Not enough effort is put into carrying out a thorough due diligence on what the integration challenges will be before the offer is made.

SAIC's bid to gain a controlling stake in SSangyong did not account for the complexity of potential technology transfer or the trouble unionized labor could create; it also underestimated the cultural difference between the two companies.

Two: Sometimes companies focus too much on scale while pursuing an M&A target—and then face challenges when the total market size changes.

When TCL set out to acquire France's Thomson, it had the right numbers for how the deal would increase capacity.

However, the overall market demand for cathode ray tube televisions fell as flat-screen televisions became more popular. For Chinese auto companies this is particularly important to consider if they suspect that the current global auto market is showing signs of overcapacity and glut.

Our research on companies that pursue acquisitions shows that the penalties are greatest for those who chase mega-deals with no experience in M&A—or for those, at the other end of the spectrum, who simply sit on the sidelines. On the other hand, companies that fare best start with smaller deals, learn from the experience and then move on to larger acquisitions.

It is important for China's auto companies to grasp the opportunity of the current recession to develop their M&A capabilities.

Companies such as Wanxiang show that a steady M&A diet—that over time increases the size and scope of the acquisition—can fuel a fast-growth trajectory. As Chinese auto companies stand at the crossroads, they need only remind themselves that mergers and acquisitions are a competency that a company develops over time.

Once they master the art of the deal, from identifying the right target to implementing a smooth integration, it can be a great source of competitive advantage. When it comes to M&A in a downturn, driving too fast can be dangerous, but idling on the side can eliminate you from the race.

Raymond Tsang is a partner in Bain's Shanghai office and leads the Industrial and Automotive practice in Greater China. Philip Leung is a partner in Bain's Shanghai office and leads the M&A practice in Greater China.