Earlier this year, I did a post entitled, Buying A Chinese Company? Why China Deals DON’T Get Done. In that post, I talked of how a very high percentage of the China deals on which my law firm represents the foreign buyer simply never happen. In our experience, a Chinese M & A deal is maybe five times less likely to go through than a deal in a developed country. This is due mostly to the lack of transparency of Chinese companies, the differences between how Chinese and Western companies operate, the differences between how Chinese and American companies can operate in China, and to inexperience with such deals on the China side.
I thought of that post today when I read “Why Chinese Firms’ Cross-Border Deals Fall Apart” in the Harvard Business Review, written by Laurence Capron and Will Mitchell. That article talks of a soon to be published study that concludes that “cross border deals involving Chinese companies are almost twice as likely to break down (15% of the time) as deals involving companies from other BRICS countries (8%) and three times as likely as those involving Western multinationals (5%). Those numbers “seem” about right to me in that if you tease out the pecularly China reasons for incoming China deals to fail, I’d probably reduce my “five times less likely to go through” to three times less likely to go through.
The HBR article sets out some of the reasons for the low follow through rate on China deals:
Chinese companies are relatively new to the M&A game, governments in many target markets are quick to detect a political agenda, Chinese companies sometimes struggle to obtain financing or face unexpected political opposition at home, and many acquiring Chinese firms operate in particularly dynamic — and volatile — global markets.
But Chinese companies nonetheless need to start stepping up their game and becoming more sophisticated in choosing their deals and in setting up mechanisms for following through. The calls on Chinese companies to improve in four things:
- Make sure that acquisitions are aligned with strategy. Companies jump to an acquisition out of fear of missing an expansion opportunity. This is a recipe for failure and acquirers need to make sure that their M&A strategy is aligned with a well thought-through broader strategic plan. Obviously, this requires that you have a robust strategic planning process to begin with, which is not always the case in China.
- Assess the political attitude in the target country. Governments in most countries will review major foreign investments. As noted, several high profile deals involving Chinese firms, such as CNOOC’s 2005 attempt to purchase Unocal in the U.S., have been blocked, either formally or by delaying the negotiations to the point that the buyers withdraw. Before going too far with your acquisition process, Chinese acquirers need to assess how the target’s local government is likely to react.
- Make sure there is no opposition at home. Although some deals may be blocked in the target countries, others fail because of opposition at home. Tengzhong’s 2010 attempt to buy Hummer from General Motors, for instance, fell apart because of opposition from the Ministry of Commerce in China. Before embarking on deals that are likely to be controversial inside China, Chinese acquirers should first make sure there is a clear path for approval.
- Consider sequential engagement. When there is high uncertainty about the value of the combination or how you will be able to work with your foreign target, you may want to start out with a more focused partnership. You can start with a specialized alliance or undertake an initial equity stake and gradually deepen your relationship.
It then sets out what it (and I too) see as the “bottom line” reason for so many Chinese merger failures:
Bottom line, too many Chinese companies are opportunistic dealmakers.They need become more sophisticated in their M&A processes and should explore more carefully less headline-grabbing ways of acquiring new resources and capabilities, along the lines we set out in our book, Build, Borrow, or Buy. If they do so, their cancellation rates will fall and they will be seen as more reliable M&A counterparties, which will open up more opportunities for them.
I cannot tell you how many times we have been called in to represent an American company that is selling itself or some aspect of its business to a Chinese company and for the life of us, we do not see how the deal makes sense on the China side. We have had a couple of such deals where the Chinese company has put down real money as a non-refundable deposit and then walked away shockingly early in the deal, presumably because they then realized that the deal made no sense. I have often thought imagined that in those situations the Chinese company had some sort of mandate from somewhere to move forward with “a deal” and pretty much picked one at random. ”Let’s see, we are a very successful clothing company in China so let’s buy an American airplane parts company” or we have a lot of money from our successful mining operations in China so let’s buy a United States consumer software company.” I have made up these examples, but trust me when I tell you that they are very much similar to what we have seen.
So what do you think?