Thirty years ago, there was such nationalist angst in the United States over Japanese buyouts of American companies that Hollywood even made a movie about it. In Ron Howard’s 1986 comedy Gung Ho, the fictional Assan Motors Corporation swoops in to buy an idled auto plant in a desperate Pennsylvania company town. The film was a comedy and of course ended with cooperation prevailing and the plant being saved. There is an obvious parallel with the situation today with the US agonizing over Chinese investments in a remarkably similar way to how it worried about Japanese takeovers in the 1980s.
The Chinese economy grew by 6.9% in 2015, the slowest pace in 25 years. The slowdown is likely to last as China works to change the fundamentals of its economy and transition from relying on investment to growth driven by services and consumption. In November 2015, Chinese President Xi Jinping said: “We will work hard to shift our growth from just expanding scale to improving its structure.” Overseas deal making is one way China is transforming its economy. Once used primarily to acquire energy and resources from developing countries, China’s outbound mergers and acquisitions increasingly involve the acquisition of premium assets in the US and Europe.
Why do so many overseas acquisitions by Chinese companies not live up to expectations? Very often the blame is pinned on ‘cultural challenges’ a subjective and suitably vague term. But if you dig deeper, you’ll find that in most cases the problem begins with the acquiring firm’s motives. In the past few decades the majority of Chinese overseas acquisitions have targeted resources. Their aim is to improve performance or lower costs by acquiring other companies’ resources such as technology, raw material, talent, etc. Acquisitions with this purpose come with several challenges afterwards. Is there a better way to evaluate possible acquisition targets? If yes, what is it?
In 2014 rival taxi apps Didi Dache and Kuaidi Dache engaged in a fierce price war that left onlookers stunned. According to multiple sources, Didi and Kuaidi altogether splashed over RMB 2 billion (approx. $376 million) on subsidizing customer ride fares. Yet in early 2015, the two bitter rivals announced their decision to merge. It made little sense. They couldn’t possibly have buried the hatchet that soon. Cases like Didi-Kuaidi are becoming common in China’s internet industry, spanning areas like online travel, group buying and classified advertisement websites. Why is China’s online sector witnessing a series of frenzied mergers, acquisitions and partnerships between sworn rivals?
Even when a deal is signed, the acquisition is far from over. The next step, integration, can be even more challenging. Up to 80% of M&A transactions fail to create any new value. This becomes even more complex when a Chinese company is buying a Western company, purely due to the cultural differences. Given that marriages in rich countries end in divorce about half the time, it’s perhaps not surprising that a union between thousands of people also faces long odds. But integration experts say that with foresight, planning and clear communication, many of those challenges can be overcome.
Congratulations! After all the haggling, 14-hour flights, and 11th-hour dramas, you’ve closed the deal. Your firm now owns a business in another country. The bad news: that was the easy part. Post-acquisition legal and regulatory troubles can present huge challenges. There are many, many requirements, and companies ignore them at their peril. Depending on the market, there may be a lot to advise about. In the US, for instance, the Uniform Commercial Code runs to 2,698 pages, and each of the 50 states has adopted its own variation of those model statutes. In addition, companies should also be concerned about intellectual property law and labor compliance issues.
China’s internet world is ruled by three big players: Baidu, Alibaba and Tencent, collectively known as BAT. The three companies generated revenues of $20 billion in 2013 and $8.16 billion in the third quarter of 2014. The big three account for a significant, and perhaps disproportionate, share of China’s internet market. Another technology company that has risen to prominence pretty quickly is Xiaomi. BAT and Xiaomi are quickly making inroads into new areas outside their core business—by either investing in or acquiring companies. Take a look at the brand and companies that are backed by these four companies.
Like the movies, corporate acquisitions are a collaborative art: miscast one role, and you can ruin the whole picture. The CEO may be the star of the show, but a successful deal demands a strong executive board and chief financial officer—along with investment bankers, lawyers, accountants and public relations advisors—especially when the deal in question is the purchase of a foreign company. As Chinese companies look to expand abroad through acquisitions, it’s worth reviewing the difference each member of the team can make. Here’s our take on how a company should go about choosing the cast of characters prior to an M&A.
Few direct actions of the CEO can have as much impact on the future of a company as the decision to make an acquisition. For Chinese companies that have decided to buy a foreign company, the stakes may be even higher. Unfortunately, it’s not only lonely at the top; often, there’s not much oxygen. One of the biggest risk factors in a merger is that the CEOs involved pursue the deal based on a less-than-rational reading of its merits. Overconfidence, ignorance and greed can lead to the loss of thousands of jobs and billions of dollars in value in a CEO in the grip of a merger mania.
Chinese companies are on an acquisition spree abroad. On paper, buying abroad may make sense, but from strategy to execution, a lot can go wrong. For every company that buys the right asset at the right time for the right price, handles the regulators of its industry in the right way and manages the integration with just the right touch, as many as four others flounder. Many studies have found that 50-80% of mergers fail to create any additional value, and that in fact a bad acquisition can cost the new company dearly. So how do Chinese companies fare and how can they do better?