A Practical Guide for M&A deals for Chinese Bosses

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Illustration from 中国企业跨境并购交易要点和流程浅析  or

 “What you need to know and do to complete an M&A deal”

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Like the smart tv or a cheap fuel-efficient automobile, China M&A is the good business idea whose time never seems to arrive. There’s basically no one in the Chinese business community, or inside Wall Street investment banks, who doesn’t agree that China’s future must include a lot more M&A deals, both cross-border and domestic. Domestic industries are highly fragmented and in need of consolidation. Chinese manufacturers need to acquire brands and technology from abroad to keep growing at home and offshore.

Think of the China M&A market as a huge pile of dry sticks soaked in gasoline. You throw a lighted match on it, expecting it to explode into a spectacular bonfire. And then… nothing. M&A activity in China remains so subdued, particularly for an economy China’s size, it is almost an irrelevancy. Can this, will this, change? I’m certainly among those who think it must, and not because it promises to someday bring in fat fees for investment bankers. M&A needs to develop as a routine means to let some entrepreneurs (and the PE investors who backed them) exit, and allow others to accelerate growth and grab market share. Both should end up benefiting China’s economy.

So, where exactly are the stumbling blocks on the path to an efficient and dynamic market for corporate control in China? There are more than just a handful, and include psychological and national factors, as well as more typical business reasons. But, one of the key problems is actually a very practical, and very solvable, one — the fact most Chinese companies don’t often have a clear understanding of how to select and assess an acquisition target, and then how, if the will is there to do something,  to actually take control of another company.

Our most recent Chinese-language research paper offers some guidance here. For those with the requisite Chinese skills, you can download a copy by clicking here or visiting the Research Reports section of the China First Capital website. The research paper is titled ” 中国企业跨境并购交易要点和流程浅析“, which I’d loosely translate as  “What you need to know and do to complete an Offshore M&A deal” .

The main readership is the +4,000 Chinese company bosses and senior management of both private sector and SOE companies we have in our database. We’re also sharing it with those whose work sometimes involves facilitating or regulating M&A deals — partners at law firms, accounting companies, PE firms, brokerage houses and government officials. This adds about another 2,000 to the list of people we sent it to.

We have a reasonable amount of experience in  — and we hope knowledge of  — M&A involving Chinese companies, representing both sellers and buyers, cross-border and pure-play Chinese domestic transactions. In other words, all four quadrants on the M&A map in China.

The contents grew directly out of our client work. It’s light on theory. We’re not trying to compete with McKinsey or business school professors. Instead, we emphasize practical steps and offer a rather stripped-down timetable of how an M&A deal might go from concept to close. Investment banks, for reasons of self-interest as well as business efficiency,  are always telling companies why and how they should do M&A. You’ll need to believe me that this wasn’t our motive. I’ve been on both sides of M&A deals as a CEO and board member in the US, both as seller and buyer of companies. Now, I sit in the middle, as a banker in China. I wanted to provide a short operational guide to Chinese CEOs on when and why M&A might make sense.

A common thread among Chinese companies looking to buy is to use M&A as a way to beef up their company’s in-house technology. One example: a client of ours  is already China’s leader in the auto electronics industry but is well behind European, American, Japanese and Korean companies in developing systems to make using a mobile phone in your car both safe and efficient. That’s a very big market opportunity in China, which is now the world’s largest auto and mobile phone market by rather large margins. This client wants to buy, rather than build, to save time, and also make sure any product they eventually try to sell to their Chinese customers works smoothly, from the beginning.

This client found a good target in Europe but then got bogged down in technology DD — how to evaluate not just the obvious stuff like patents, but the trickier domain of “company know how”.  What can be learned, what can be transferred, what can walk out the door and into the arms of a competitor? So, another area our research paper tries to both explain and systematize is the process of technology due diligence. I doubt our simplification would satisfy the partners at McKinsey or the Big Four accounting firms who often get called into do this work, and make huge sums along the way. Our operative principle here is “better to light a candle than curse the darkness”. Again, we wanted to keep it practical, for busy folks mainly engaged in running companies. With few exceptions, I’ve yet to meet a Chinese company with a specialist in-house team to do M&A.

The Chinese word for M&A is 并购 , which joins together the characters for “to combine” and “to purchase”. Theoretically, it’s an appropriate choice of words. At this point, however, with M&A still very much in its infancy in China, the main requirements are “to understand” and “to execute confidently”.  I hope this research paper goes some way towards making both more common, more certain.