How China Can Succeed in the M&A WorldPhil Leung and Larry Zhu
The upcoming sale of bankrupt Korean automaker Ssangyong Motor (003620:KS) to India's Mahindra & Mahindra (MM:IN), marks the end of an attempt by a Chinese company to grow overseas. When state-controlled Shanghai Automotive Industry (SAIC) (600104:CH) won a heated takeover battle in 2004 for a nearly 50 percent stake in Ssangyong, it was the first acquisition by a mainland China company of a foreign car manufacturer, with potential for SAIC and Ssangyong to complement each other's businesses. After SAIC encountered a number of challenges, including an inability to get control of Ssangyong's operations and labor unions, it cut the stake to less than 4 percent.
Chinese companies such as SAIC are discovering that expanding into foreign markets is tricky. The odds certainly aren't in their favor. Worldwide, merger-and-acquisition efforts often fail to deliver their intended value. The stakes are even higher for companies—such as most Chinese buyers—that lack experience in M&A. A global survey by Bain & Co. of 750 companies shows that, a year after deals were announced, the shares of 55 percent of acquiring companies had failed to outperform the market.
Chinese companies should be mindful of those odds as the country becomes a player in a game it's just beginning to learn. China's explosive economic growth has spurred a corresponding boom in mainland companies pursuing expansion opportunities overseas through M&A, joint ventures, partnerships, or organic growth. Even as the financial crisis roared in 2009, the value of deals involving Chinese companies making overseas acquisitions totaled $35.9 billion. (As recently as 2004, it was $3.5 billion.) Several multibillion-dollar deals are in the works or have been completed, including the $7.7 billion acquisition last year of Canada's Addax Petroleum by Sinopec International Petroleum Exploration and Production. In April, state-owned Sinopec (386:HK) announced it would buy 9 percent of a Canadian oil-sands project, Syncrude, from ConocoPhillips (COP:US) for $4.7 billion.
China National Chemical's Expansion
What does it take to get M&A right? We've found that winners start slow and small, then gain experience and confidence with domestic acquisitions before expanding globally. They often monitor the growth of acquisition targets for years before making an offer. They focus on how the deal could take full advantage of synergies for both parties. Winning acquirers understand that to excel, they have to attract and retain top talent.
One Chinese company that has gotten it right is China National Chemical (601117:CH), the mainland's No. 1 chemical conglomerate. After more than 100 domestic acquisitions, ChemChina, on its own or through its Blue Star subsidiary, in 2006 targeted three major foreign companies—Adisseo and Rhodia's (RHA:FP) silicone business in France and Qenos in Australia. The deals, which were part of a string of acquisitions totaling $1.4 billion, helped catapult ChemChina onto the global stage, giving it the technology, management skills, capital, and market access required to become a multinational player. As the pace of global expansion accelerates, Chinese businesses need to learn several important lessons quickly to replicate the success of such companies as ChemChina.
Rule No. 1: Know which approach works best for you—and don't assume that conventional M&A is your only option.
Companies often learn the ropes by forming partnerships and joint ventures in foreign markets. That approach gives them crucial insights and experience via a relatively modest financial commitment. Advantages include using a partner's manufacturing facilities, piggy-backing off their already well-established brands, and accessing sales and distribution networks and talent.
The challenge is to know why you want a partner, what the winning scenarios are for both companies, and how to tackle the cross-cultural challenges. Haier (600690:CH), now a leading global white-goods manufacturer, is learning how to use partnerships with such U.S. players as General Electric (GE:US) for joint product development. It reciprocates by providing regional access in the Chinese market through Haier's distribution partners.
Rule No. 2: Know why you're acquiring. Understand the basis of competition and then create an investment thesis.
One of the best ways to avoid disastrous acquisitions is to articulate why buying a business will make your company more valuable. When we surveyed successful acquirers, we found that about 80 percent of fruitful transactions were based on a clear investment thesis; with failed deals, it was about 40 percent. Too often, companies failed to pinpoint the best opportunities for value creation or assess risks. A winning acquisition strengthens a company's basis of competition, such as its cost position, brand strength, and customer access and loyalty. All were goals in Lenovo's (992:HK) 2005 acquisition of IBM's (IBM:US) PC division, which helped the buyer achieve global scale, build a global brand, and gain access to leading-edge technology.
Rule No. 3: Know which deals you should close. Ask and answer the few questions that test your investment thesis.
Identifying potential acquisition targets and winnowing them to one or two best choices requires discipline. Instead of hastily reacting to acquisition targets as they come on the market, seasoned dealmakers know their basis of competition and are constantly thinking about the types of deals they should pursue. Their M&A teams create a pipeline of priority targets, each with a customized investment thesis, and then cultivate a relationship with each one. As a result, they can quickly close a deal. Because they know what they want to achieve with the acquisition, they're often willing to pay a premium or act faster than rivals.
Rule No. 4: Know where you need to integrate first and get at the key sources of value quickly.
Our research shows that cross-border deals carry a rate of success similar to that of domestic deals, but that integration typically is more complex. The unique challenges include tailoring the integration thesis to each region's circumstances, tackling actual and perceived cultural differences, and considering geographically dispersed operations and stakeholders, as well as complex legal and regulatory requirements that can derail the integration. To boost the odds of success, acquirers need to identify the best sources of synergies. They must ensure that the integration process isn't overly complex and they need to be able to make decisions quickly so critical milestones aren't missed.
Understanding whether deals are to boost "scope" or "scale" is vital. Chinese apparel maker Youngor Group's (600177:CH) $120 million acquisition in 2008 of the Smart Shirts business of Kellwood in Chesterfield, Mo., is largely a scale deal, designed to expand a core business, as opposed to a scope deal, aimed at expanding into adjacent lines of business.
Scope deals require a different approach to integration than scale deals, with the goal of fostering some of the capabilities of the acquired company and integrating where it matters most, rather than combining similar companies for maximum efficiency. For example, ChemChina's 2006 acquisition of Adisseo improved the Chinese company's manufacturing capacity for the amino acid methionine, while its acquisition of the Rhodia unit upgraded its silicone business.
Rule No. 5: Know what to do if the deal goes off track. Set up an early warning system and act quickly.
No deal goes exactly as planned. The best dealmakers install early-warning systems to detect problems, then tackle them as soon as they emerge. They distinguish between inevitable glitches and those that signal more serious problems. Acquirers must take decisive action to put their deals back on track—or not. It's not clear that SAIC had a "Plan B" for Ssangyong when the acquisition turned sour.
Ultimately, to improve the odds of a successful global expansion, knowing when to pull out of a deal is no less critical than the other four guiding principles: knowing the best approach for your situation, knowing why you're acquiring, knowing the best deals to go after, and knowing where to integrate. The more Chinese companies look for growth overseas, the more they need to be guided by these principles.