Having spent the last five years in China working on an average of 10 merger and acquisition (M&A) deals every year, Swedish M&A consultant Michael Thorneman, surprisingly, is advising against mergers and acquisitions for mainland companies looking to expand overseas.

 

Thorneman noted that most Chinese companies are not ready to expand overseas through acquisitions as they have limited experiences of international M&A.

 

"We should all keep in mind that two out of every three mergers and acquisitions in any geography fail. It is very difficult to successfully acquire and integrate companies," he said.

 

"This is the big paradox of mergers and acquisitions they are difficult to execute successfully, yet empirical evidence shows that it's extremely hard to keep on growing over a longer period of time if you don't acquire at some point," he said.

 

The implication is, he noted, that companies have to be fully aware of the challenges posed by acquiring and integrating with other enterprises, as well as of the skills they can bring to bear on the M&A process.

 

The answer is to be disciplined in decision making and follow four principles pick the right target, know when to walk away from a deal, integrate the two companies where it matters and be ready for the unexpected, Thorneman advised.

 

For Chinese companies that want to venture abroad yet lack experience in international M&A, growing organically may be a better option than to acquire, he said.

 

"For Chinese companies, one of the more dangerous strategies to pursue is to go global just because of increased competition in your home market or that you are jumping onto a trend.

 

"The best strategy to pursue is to ensure that they first build a strong position in their core business in the home market before going abroad," he said.

 

Since Chinese authorities started advocating the "Chinese companies go global" strategy in 2000, a flurry of high-profile global M&A deals made by Chinese companies such as Lenovo, Haier, TCL, CNOOC and CNPC have been sending shockwaves through the worlds of business and politics.

 

"Generally speaking, the jury is still out on which ones will be successful," said Thorneman, "Lenovo is an example of a Chinese company that has many of the right attributes for succeeding internationally."

 

Yet even post-merger Lenovo has to face a dizzying array of integration challenges such as limited cost reductions and synergies, according to analysts. The cost reduction possibilities through downsizing seem limited and synergies in integration of procurement between the ex-IBM PCD and the old Lenovo may not be feasible in the near future, noted the investment bank Goldman Sachs.

 

Though the number and size of outbound M&As by Chinese companies is still very small in a global context, it has been growing at a rapid rate in recent years from US$600 million in 2000 to more than US$8 billion in 2005, according to a recent Bain study quoting the Asian Venture Capital Journal.

 

More outbound M&As by Chinese companies are forecasted in the years ahead as macroeconomic imperatives push China beyond its export-driven model.

 

Foreign assets in the energy and branded goods sectors are expected to become particularly attractive to Chinese companies.

 

"Successful acquirers have a clear acquisition strategy, avoid overpaying and build up certain core skills in M&As" Thorneman said.

 

The same thing can be said for foreign acquirers embarking on inbound investments in China.

 

Foreign acquirers of Chinese assets fall under two broad categories, Thorneman noted. The first comprises strategic investors or called "corporate buyers," which are operating companies buying other businesses to expand or defend their market share and build a sustainable market position.

 

The second comprises private-equity buyers, also called "financial buyers," who buy minority or majority stakes in companies to improve their performance with the aim of eventually selling them at a profit.

 

With 15 years of consulting experience serving private-equity firms, Thorneman is ready to defend the role of private equity firms, which Chinese authorities maintain a cautious stance on.

 

"It is in the best interests of both China and the overall economy to allow both corporate as well as financial investors to have a role in developing the market economy by increasing the competitiveness of Chinese companies," he said.

 

Foreign corporate investors making acquisitions in China are primarily doing this by having a long-term perspective on the market, said Thorneman.

 

The corporate transactions in almost all situations are very long-term oriented. As for private equity buyers, "it is a misperception" to regard them as purely "cruel and barbaric" profit takers, said Thorneman.

 

"Many of the PE firms today are very growth-oriented," he said, "they work both on growing revenue and improving the cost position of the acquired company. When they do sell it, in many instances they sell it to corporate buyers which generally means that the company they bought is now a stronger and better-performing company than it was a few years back."

 

(China Daily September 5, 2006)