Just got a PR email touting a podcast by John Jullens, a Partner at Booz & Company based in Shanghai.  The podcast sets out eight “best practices” for partnering with a Chinese business and though none of the eight should be the least bit earth shattering for anyone doing business in China or with China, they do all make good sense.  Here they are as set out in my email, with my comments in italics.  

  • Focus on filling capabilities gaps by selecting a partner who is demonstrably able to provide the organizational capabilities a business needs to be successful in China.  In other words, partner with a Chinese company that actually understands China.
  • Don’t be fooled by guanxi, the importance of which is often overestimated and can deter focus from the goal of filling capabilities gaps.  I agree.  For most industries, there are many things more important than guanxi.  For more on the overvaluing of guanxi, check out How We Really Feel About China, Part I: Guanxi
  • Drop the marriage metaphor. This is consistent with Chinese antitrust laws, which allow for “non-monogamous” arrangements, such as joint ventures with more than one partner, including companies that are direct competitors.  My advice here is merely to be flexible.  Set up your deal so that the legal side serves the business side, not vice-versa. 
  • Keep on triangulating to fill data gaps. Because much data is simply not available or transparent in China, foreign businesses must create and constantly maintain their own information base by interviewing officials, friends and business leaders.  Put more simply, make sure that you know your Chinese partner and to know your Chinese partner you must conduct due diligence that goes beyond just documents.  For more on China due diligence, check out Doing Business In China Safely. The Due Diligence Basics.
  • Conduct a thorough stakeholder analysis before signing a deal to identify your Chinese partner’s key decision-makers and influencers, whose identities, interests and roles may not be clear initially. This is particularly important when dealing with Chinese businesses, where the key decision-maker(s) is oftentimes not clear.  
  • Clarify decisions rights up front to prevent unexpected actions by a Chinese partner.  For example, the Chinese partner of a western business once exchanged its entire management team with that of a direct competitor.  This definitely makes good sense. The thing I would add here is that you should not assume anything and, in particularly, you should not assume that your Chinese partner does business even remotely the same way that you do.  
  • Go easy on the integration so as not to impose your business’ processes and standards on a Chinese partner to the point of destroying its unique capabilities and value.  I agree and I think this is important.  I have seen too many deals in the United States where company A buys company B because of what company B has to offer and then goes in and completely remakes company B in company A’s own image, literally stripping off all of what caused company A to buy company B in the first place.  I think this tendency is even greater in transnational deals.  
  • Find ways to earn trust by stressing your long-term commitment, empowering the local deal team and showing respect for your Chinese counterparts. Sure.  Why not?  
What do you think?   What else do you recommend for succeeding at China M&A?

The South China Post did a story today on China’s having used its antitrust law to block Coke’s purchase of Huiyuan. The article is entitled, “China raises chills as Coke bid bottled up,” and it talks about whether the blocking of this deal will signal the death of foreign private equity investments in China.
My view is that it absolutely positively will not. In fact, a private equity company contacted me today regarding its desire to purchase a relatively small Chinese niche food company. They asked whether I thought the Coke deal would have any impact on their purchase and I predicted it would not. I told them I thought the company it was seeking to buy was way too regionalized, way too small, and way too insignificant in China’s grand scheme of things for their to be any linkage at all with Coke’s failed deal.
The South China Post hints otherwise, but I attribute that to same-day overreaction:
The article makes the requisite mention of how “US private equity firm Carlyle Group” was unable to buy a controlling stake in tractor parts maker Xugong “after three years of bureaucratic hold-ups” after “Chinese media raised eyebrows abroad by claiming repeatedly that Xugong was a ‘strategic’ national business.” It then quotes Tang Hao of H&J Vanguard Consulting Group saying foreign investors had thought juice was “not a sector that involved economic or national security issues.”
CLB’s own Steve Dickinson is then extensively quoted:

Steve Dickinson, a partner at US law firm Harris Bricken who has advised foreign investors in China since 1979, said the deal provided false hopes Beijing was opening up to foreign buyers.
“After the decision, I think leveraged buyout funds that have set up in Hong Kong will go home,” he said.
International buyout funds with local offices include US giant Blackstone Group and Europe’s largest buyout house, Permira, as well as Carlyle. Blackstone posted a US$1.33 billion loss last year.
“It’s anyone’s guess whether those large funds will stay [in China] or, given the problems back home, just focus on the US and Europe,” said Simon Littlewood, the chief executive of venture capital firm London Asia Capital.
* * * *
Some foreign investors may treat the Coca-Cola setback as a one-off decision. “It may be that lawyers realise after analysing the decision that, in substance, there is a very meaningful market share Coke could gain,” the China head of a western buyout house said.
Andrew Pawley, a corporate finance director at accountancy Baker Tilly, added: “No one talks about abandoning the US if a takeover fails there.”
And foreign private equity firms have been increasing investment on the mainland, with deal values rising from US$2.7 billion in 2007 to US$5.04 billion last year, according to Dealogic.
However, Mr Dickinson cautioned these were mostly small investments in obscure companies.
“China, fundamentally, 100 per cent discourages foreigners from entering the market and there are only three conditions China will permit,” he said. “Either the company is too small for the government to care about, or it is troubled and the foreign purchaser has agreed to improve the business, or the foreign company takes a minority stake and there is a transfer of technology or expertise or access to foreign markets.
“If you don’t fit into one of these three categories you can’t do mergers or acquisitions in China and that’s the end of it.”

Enough with the death knell pronouncements. Foreign private equity investments in China is not going to die, but it will need to modify. Wise foreign private equity firms are going to need to focus on the types of deals that have a real potential to work in China. China will accept the following sorts of foreign deals:
— Foreigners are permitted to purchase small Chinese companies that the central government is not interested in managing.
— Foreigners are permitted to purchase large, state-owned enterprises that suffer from financial difficulty, provided the foreign investor agrees to restructure the purchased company.
— Foreigners are permitted to purchase non-majority interests in strong, successful Chinese companies, but only if there is some added benefit, such as transfer of technology, advanced management or access to foreign markets.
Additionally, foreign private equity firms remain free to invest in foreign companies that are in China already as a Wholly Foreign Owned Entity (WFOE) or a Joint Venture (JV) or to invest in those foreign companies planning to go into China in some way other than by purchasing a large financially viable Chinese company.
For more on China’s denial of Coke’s purchase of Huiyuan, check out the post we did earlier today on this same topic, “China Rejects Coke Deal. We Told You All This Long Ago.
UPDATE: in a post entitled, “Coke, Huiyuan and the audiences that matter,” [link no longer exists] ImageThief does a great job explaining the public relations aspect of this and any other large foreign deal in China. Its summation: “So here it is in plain language: If you’re a large foreign firm taking over a Chinese firm, prepare to be flogged in public. And prepare for it before you announce your acquisition.” True.

For years, there has been talk in China of enacting new antitrust laws, but each time enactment looks closer, it is put off.  The current word is that 2006 will see such laws enacted.

The Wall Street Journal just ran a story (by subscription only) on those laws and on how they might be used against foreign companies.  The article stated that foreign companies’ “most pressing concern is that the law could allow trumped-up antitrust charges to chip away at their profitable patents. That fear is based on the latest known draft of the law, which prohibits the abuse of intellectual-property rights but doesn’t describe how regulators should interpret such offenses.”

There is also a concern that new antitrust laws might be used to protect state-owned monopolies because a section from a prior draft forbidding the abuse of government power to restrict competition has been dropped.

I actually began my legal career as an antitrust lawyer at the Chicago mega-firm Kirkland & Ellis.  Nonetheless, China’s proposed antitrust laws are in such a state of flux, so different from that which I am familiar, and so intricately tied in with so many governmental issues there, it is difficult to have much of an opinion.  I searched the web for commentary on the latest version, but did not find anything good.  I will intermittently keep checking and continue to report back.

At this point, I am of the view that it is simply too early for great concern, even for those who are already doing business in China in a big way.  I am, however, particularly looking forward to see how any new antitrust laws handle the fact that the Chinese government itself owns so many of China’s largest companies.