Strategy of China Enterprises in Global Merger and Acquisition Movement

Strategy of China Enterprises in Global Merger and Acquisition
Movement
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LI Yuan ZHAO Hui
School of Economics University of Jinan P.R. China
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Abstract
International merges and acquisitions are one of the most important strategies in the
process of Chinese corporations globalizations. The Chinese foreign direct investment legal framework
is still a blank area. Therefore the Chinese corporations involved in the international merges and
acquisition are in the great risks. On the government level the policies and regulation for Chinese firms
international acquisition are needed. From the corporations perspective the strategies of international
acquisitions involve various of elements.
Key words
Merges and Acquisitions Chinese Foreign Direct Investment Risk Management M&A
Strategy Integration
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Introduction
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Chinese corporations are playing more important roles in international market merges and acquisitions
strategy is adopted by Chinese corporation in FDI activities. The Business week reviews that Chinese
corporations are doing huge amount of international merges and acquisitions projects in the coming 10
years this will result in the change of the competition situation in international market. In 2006
Chinese foreign direct investments keep growing amount to $ 16.13 billion increase 31.6%. Among
the figures 47.9% was investments in stock market amount to $ 3.2 billion; 19.8% was investments by
profits amount to $ 3.2 billion; other investments took the rest amount to $ 5.21 billion. By the end of
2006 the total amount of Chinese corporation non-financial FDI was $ 73.3 billion the industries
involved were manufacturing service wholesale and retail resource and civil construction in around
160 countries and regions in the world.
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With an increasing number of Chinese enterprises going abroad, more and more of them are
participating in global acquisition campaigns. China National Petroleum Corporation (CNPC) acquired
Canada-based PetroKazakhstan Inc. (PK) through its wholly owned subsidiary CNPCI; Lenovo acquired
IBM's entire global desktop and laptop computer R&D and marketing business at the price of $1.25
billion; Haier group’s unsuccessful purchase of Maytag, the third largest appliance maker in the US
draw much attention from the international acquisition market. But Chinese corporations’ international
merge and acquisitions are still at an early stage from the view of amount of the deals and the proportion
in the world market.
2. Problems in Chinese corporations international M&A
2.1 On macro level
At present, Chinese corporations international merges and acquisitions are still at the emerging stage,
government policies and legislation supports are behind the corporation’s strategic actions. Therefore,
government cannot provide the legislation, policies and information that the corporations needed in
international mergers and acquisition decision-making procedure. The successful cases in international
merges and acquisitions indicated that the positive government policies in home country contributed to
the completion of the deals.
The following situations needed to improve in Chinese policy framework:
(1). Chinese corporations international merges and acquisitions need FDI legal support from the
government. Chinese corporate law and securities law both chapters for merges and actuations, but there
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is not a FDI legal system in China. The legislation of Chinese corporations international merges and
acquisition is far behind the corporations practice.
(2). Chinese government administration examining and approving system increases the cost of
international mergers. Under the current regulations, corporations need government approval prior to
international acquisition. This procedure not only increases the cost but also slows down the whole
process.
(3). Chinese corporations cannot gain financial support in international merges and acquisitions. The
limits in bank loans and foreign exchanges are obstacles that restrict the possibility of raising money in
domestic market to finance international acquisition. The complexity of Chinese government approval
procedure also leads to the failure of raising money in foreign capital market to finance the international
merges.
2.2 On micro level
2.2.1.
In international acquisitions, non-state owned corporations are majority. But in China, for
historical and social reasons, the ownership reform has not completed, most of the corporations
participate in international acquisitions are state owned. Compare to the large MNS, Chinese state
owned corporations are less competitive.
2.2.2.
Chinese corporations need more strategic acquisition plan. The targets of Chinese
corporations acquisitions are the ‘past’ of the large MNC. While on the other side, large MNC’s
acquisition targets in China are the ‘future’. IBM’s PC business acquired by Lenovo was not the core
business of IBM since the corporation changed to an IT service supplier 10 year ago. Thomson and
Alcatel acquired by TCL was another case.
2.2.3.
The methods of payment are costly. In mature market economy, capital market contributes to
the efficient acquisitions. Corporations can raise money to finance the international merges and
acquisitions by issuing stocks or bonds. Cash is the only method of payment for Chinese corporations
and bank loans are the financial tool to finance the international acquisitions. The high interests of the
bank loans put much pressure on the corporation.
2.2.4.
The lack of management team for international merges and acquisitions. Managers
participates in international acquisitions need the knowledge and back ground of international finance,
international business, international marketing, business law and be familiar with the local culture and
language. But at present, most of Chinese corporations involve in international merges and acquisitions
do not have a manager team equipped with the knowledge and background above mentioned.
2.2.5.
Lack of integration skills. The integration includes form a new corporate culture, the
reallocate of resources. Most of the merges and acquisitions failed because of the unsuccessful
integrations. Chinese corporations have not enough experience in integrations.
3. Comments and Suggestions
3.1. Improve Chinese foreign direct investment legal system; strengthen the government support
on the macro level.
International merges and acquisitions are not individual corporation behaviors, government has the
responsibility to build a legal environment to supply micro level support to enterprises.
(1). Support the corporations by improve legal and regulation system. The system includes government
approval procedures, foreign exchange administration, finance, insurance support, taxation etc.
(2). Support the Chinese corporation by favorable financial policies. Chinese government should create
favorable taxation environment for corporation in international acquisitions by signing double taxation
treaty with foreign governments. Government also should eliminate the limits on banks loans and
foreign exchange administration to decrease the corporations’ financial cost.
3.2. Improve the Chinese corporations’ competitiveness.
Compare to large MNCs, Chinese corporation are still weak from the point view of scales and
profitability. Innovations and new products are the core competitiveness of Chinese corporations’
development strategy. Therefore, amore competitive entities in international acquisition market are the
start point of successful acquisitions.
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3.3. Corporations form the acquisitions strategy based on the long-term development plan.
3.3.1.
Enterprises should select the target corporations carefully, and then form the targets list.
The firms in the target list should comply with the acquirer’s global long-term strategy. The acquirers
should carefully collect information, and rehearse the strategy and business practice based on the
analysis of those information. Research shows that the relative business field, proper scale of the targets,
the integration in cultural affairs is factors effect the success of emerges and acquisitions.
3.3.2.
Outsourcing consultants service from the global professional consultant firms.
Lenovo hired Weil, Gotshal & Manges LLP, McKinsey & Company, Inc. as consultant when they
acquired IBM PC business; China National Petroleum Corporation (CNPC) hired JP Morgan & Co.,
SKADDEN ARPS SLATE MEAGHER FLOM LLP when acquired PetroKazakhstan Inc.
On the other and, Chinese corporations also need to organize management team with international
perspective and management skills in international merges and acquisitions like HSBC Group does.
3.4. Chinese corporation should build risk management system.
3.4.1
The system assess the economics and political risks of the target markets in the decision
–making period. The risks could come from the conflicts of different classes, religions of the target
countries or the changes of government policies.
3.4.2
The system also includes risks warning mechanism. In the implementation of the FDI, besides
the localizing of management, the risks warning mechanism with functions of risks identifying, risks
assessment, risks forecast is necessary.
3.5. Thinking much of the integration.
3.5.1
The acquirers should be well prepared for the integration.
The factors like corporate culture, strategy and financial stability of the target firms should be assessed
carefully. Those factors will affect the new corporation value creating dramatically.
3.5.2
The acquirers need a detailed integration plan on hand.
Research shows that 72% of the unsuccessful acquisitions because of the lack of detailed, clear
integration plan.
3.5.3
Value the cultural integration.
A successful merge and acquisition is to build the new corporate culture, corporation mission, therefore
the cultural integration is the first task that the management should deal with in the new corporate.
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4. Conclusion
Although the Chinese corporations are still young and inexperienced in international merges and
acquisitions market they could prevent the risks listed above from happening if they develop detailed
strategies.
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References
[1] UNCTAD, World Invest Report 2000: Cross-board M & A and Development, United Nations Publication, 2000.
[2] UNCTAD, World Invest Report 2004: The Shift towards Services, United Nations Publication, 2004.
[3] UNCTAD, World Invest Report 2005: Transnational Corporations and the Internationalization of R& D, United
Nations Publication, 2005.
[4] J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin, Takeovers, Restructuring, and Corporate Governance,
Pearson Educational International, 2004, New Jersey
[5] Liu Hongxia China Foreign Investment Risk Management Journal of Central University of Finance and
Economics 2006 in Chinese
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The author can be contacted from e-mail : [email protected]
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