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» China-Business-Articles » Reading: "M&A in China: Deal breakers and pricing challenges"
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| M&A in China: Deal breakers and pricing challenges |
By:
Clarence Kwan of deloitte.com |
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M&A activity in China has exploded in recent years as domestic and international
players alike move to solidify their position in fast-growing markets. The rise in
activity can be measured not just in the number of deals done but in their size,
complexity and the range of industries involved:
• 2006 saw 579 completed M&A deals in China with a total disclosed
value of US$25.8 billion, a 40 percent increase over 2005.*
• Of these, 297 deals were cross-border, with a total disclosed value of US$15.4 billion, a 16 percent increase over 2005.*
• The average size of disclosed cross-border deals rose to US$93 million, up 51 percent over 2005, fueled in part by the expanding role of financial investors in China.*
• Sectors witnessing high levels of deal activity include not only automotive and other
manufacturing sectors but real estate, financial services and most recently, logistics and retail.
*Source: Thomson Financial
With double-digit annual growth forecast for most markets, strategic investors are now asking themselves whether they can really attain scale fast enough through organic growth alone. At the same time, financial investors scouting for opportunity have been encouraged by the much greater range of exit strategies, from increased potential trade sales to the multitude of global exchanges competing for Chinese IPOs today.
But while M&A can offer a shortcut to establishing or expanding a footprint in China, no one said it was going to be easy. Risks abound at every stage of the deal. Even for firms with vast experience in overseas acquisitions, China presents a number of M&A challenges with the potential to derail even the most experienced deal teams.
In the following pages, and in subsequent publications, we will examine some of these challenges from the perspective of the typical foreign investor looking to make key deal decisions in an environment where reliable information is often elusive.
Drawing upon the first-hand experience and collective wisdom of our M&A practitioners closest to the action, this issue will explore the most common deal-breakers and pricing issues in one of the most dynamic environments for M&A in the world today.
While the process for conducting cross-border M&A in China is similar to doing deals elsewhere, China’s very specific commercial, regulatory and cultural environment adds an extra layer of complexity at each stage. In this installment of China Issues: M&A Series we will look at the first pair of five key questions that potential buyers will need to ask themselves if they are to create value in China through M&A. In future issues, we will address the other three:
____ At what point should we walk away from a deal?
____ What is an acceptable price to both parties?
____ How should the deal be structured?
____ Does the deal present a compliance risk?
____ How can the acquisition be integrated into the global organization?
China’s expanding pool of M&A targets
While there is still no well-established deal flow in China, the pool of viable M&A targets is growing rapidly and opportunity exists for those willing to invest the time. Among the most attractive targets in China today are private companies of sufficient scale and state-owned enterprises (SOEs) where the government intends to diversify ownership.
This expanded target pool is directly related to the structural changes to the Chinese economy that have accelerated since WTO accession in 2001. Virtually every sector has been exposed to intensive global competition in its home market, forcing companies to grow and improve in order to survive. Government policy has encouraged this trend by explicitly favoring industry consolidation and privatization and by tearing down regional barriers to create a truly national economy.
Changing government attitudes toward the private sector have also helped create a hothouse climate for Chinese private enterprise. After years of struggle for capital, technology and other resources, many private firms are finally achieving scale. These companies, including many recently privatized SOEs, are often led by highly-motivated owner/managers, most with finely tuned ears for the next opportunity to carry their business to a higher level.
Likewise in the public sector, the Chinese government has been privatizing SOEs at the rate of roughly 4-5,000 a year. Among the tens of thousands that have yet to be privatized, there are growing numbers of commercially viable firms worth the attention of foreign buyers.
When coupled with improved regulations governing cross-border M&A, it is no small wonder that China has quickly emerged as one of Asia’s top M&A markets in terms of both value and volume.
According to our practitioners on the ground, some
of the leading deal-breakers in China today include:
1. Lack of integrity on the part of target’s management
China has been called the “Wild East,” and some managers have been known to employ all manner of questionable practices to win and perhaps personally prosper in China’s wide open markets.
Cases:
i. A US-based consumer goods manufacturer found that the management of its M&A target had been repeatedly registering the same business and assets in new locations to reap the tax benefits and other incentives granted to start-up businesses in China.
ii. A US manufacturer negotiating to acquire an operation in Southeast China learned that the target’s managing director had been making large payments to an overseas consultant for services rendered. The overseas consultant, however, did not exist and the payments were accruing to an offshore account belonging to the managing director himself.
iii. Management of a target company passed information to the acquirer’s due diligence team which it knew to be false while withholding other information from the acquirer entirely. Upon recognizing that the management was intentionally misleading the acquirer, trust between the parties was irreconcilably damaged.
Interestingly, despite widespread knowledge of the incident within the industry, another foreign buyer eventually did the deal, overlooking questions about the management in its single-minded pursuit of market share.
iv. In their drive to secure talent in a hyper-competitive marketplace, Chinese companies sometimes bring in capable individuals without fully investigating their past. A foreign investor performing an 11th hour due diligence on the target’s board learned that one member had been expelled from a Southeast Asian nation for pedophilia and has since remained on that country’s watch list. A potentially serious reputation risk was avoided when the acquirer walked away.
China M&A challenges
Recognizing deal-breakers early
Parties to an M&A transaction, when sufficiently motivated, can often overcome disputes by adjusting the purchasing price or altering the structure of the deal. In today’s China, there is usually no shortage of compelling reasons to get the deal done, but in some circumstances, agreement cannot be reached no matter how long talks drag on. For both parties, the key is to identify these potential deal-breakers as early possible and work to resolve them before further time money are wasted.
At what point should we walk away from a deal?
2. Disagreements over management control
...To read the rest of this article please visit:
http://www.deloitte.com/dtt/article/0,1002,sid=2318&cid=136723,00.html |
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