Chinese corporates climbing learning curve on outbound deals - M&A Forum

"We used to do a lot of handholding, but now many companies have internal M&A teams and are becoming more sophisticated, operating internationally with their own sourcing teams around the world. Chinese buyers are developing their skills and becoming more experienced," said Christos Tomaras, managing director and COO for Asia ex-Japan at Goldman Sachs, adding that processes are also made easier by foreign sellers having a better understanding of China.

Samson Lo, managing director and head of M&A in Asia at UBS, agreed that there has been a dramatic shift in behavior over the last 18 months: Chinese buyers are being bolder in their approaches, more willing to meet sale process timetables, and more attuned to financing and regulatory approvals. As such, bankers are no longer reluctant to involve these buyers in auctions.

"We like running auctions and involving Chinese parties, although a lot of the time they don't want to be in an auction - they would rather submit a bid ahead of the deadline and see if they can get a dialogue with the seller," Lo said.

On occasion, a Chinese company that has lost out in a competitive process will go back to its advisors and ask if there is any way the seller could be persuaded to break the sales and purchase agreement. There have also been instances of buyers making unsolicited bids for foreign assets, such as the challenge China Resources mounted late last year to ON Semiconductor's acquisition of Fairchild Semiconductor.

A combination of competition and the need to pay a premium for an asset in order to overcome sellers' wariness of working with Chinese parties have pushed up valuations to levels that in some cases appear barely sustainable. However, a Chinese buyer might be uniquely positioned to generate additional cash flow for a company by offering exposure to the China growth story.

At the same time, it can be difficult valuing a business from China without the benefit of a deep understanding of the target market.
This is where good advisors prove their worth by keeping a buyer out of a process because valuations are spiraling out of control, or keeping on track a process that is worth pursuing, said Tomaras of Goldman Sachs.

"Deals have failed because an approach was made but the buyer was not ready with the financing or had not thought through how they were going to get the right mix of debt and equity," he added.

A similar level of understanding is required of the target company's management so as to ensure effective post-deal integration. John Chan, a managing director in the M&A department at China Everbright, said that his company spends a lot of time communicating with management of target assets and seeks to have an integration plan available to interested parties within 100 days of closing.

However, Michael Weiss, vice president for investments at Sanpower, observed that Chinese companies' approach to negotiation and integration is not always well thought out. There is a tendency to enter into talks without clarity on the bottom line or the timelines - which can "lead to a lot of mistrust issues" - and this is followed by a failure to consider how additional value can be realized by taking products and technologies into China.

"In real estate, there are three important things: location, location, location," Weiss said. "In China outbound M&A it is: execution, execution, execution."

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• Topics
• Greater China
• Investments
• Outbound investment
• M&A
• China
• Goldman Sachs
• UBS