Deal advisory: Helping hands

The advisor roll call for China National Chemical Corporation's (ChemChina) $43.3 billion bid for Switzerland-headquartered seed and agrochemicals player Syngenta runs to 24 names. The prospective buyer alone has five financial advisors, seven legal counsel - some of which are acting for the banks - and two debt providers, according to Mergermarket.

Problems emerge further down the food chain, where the frequently-aired frustration is that Chinese companies are unwilling to pay up for top-quality advisors. It is not an unusual phenomenon in the financial services sector, where for years international banks have struggled to elicit fees for work on transactions for Chinese clients that matches what they normally receive in other markets.

However, in an outbound context, Chinese buyers are far more exposed. Many of these companies are venturing overseas for the first time, pursuing deals in unfamiliar markets with few if any staff on the ground to provide guidance. Even if they know the target business at management level - perhaps having worked with it on China inbound initiatives - they still have to perform proper due diligence, execute the transaction and formulate a plan for post-deal integration.

Potential pitfalls abound. Transactions have floundered because a law firm was engaged in the target market but no Chinese counsel was appointed to oversee the process, resulting in poor communication and chaos. Language and cultural barriers loom large, and bringing junior staff into the process because they have been educated overseas and speak English is no quick fix in the absence of deal experience.

Entering a competitive process without adequate advisory support could be a complete non-starter, given the short timeframe in which prospective bidders might have to develop and understanding of a business and submit a bid. Even in certain non-competitive situations or restricted sale processes, hiring the right lawyers, accountants and consultants is essential to being taken seriously. Above all, it is about making the seller comfortable that a transaction will close and the asset will be dealt with responsibly; just having the money might not be sufficient.

Some industry participants tie this relative lack of sophistication to the economic environment in which most Chinese companies emerged: they are accustomed to robust growth driving the top line and so developed market business models represent an oddity. But the people and processes are just as unusual. It is worth noting that the more experienced and active Chinese outbound investors tend to have learned from their mistakes and are well-advised and well-staffed - in terms of executing a deal and bringing the product, brand, technology or expertise into the domestic market.

It will take time, and no doubt a few missteps, for others to move along the learning curve, and also to appreciate that advisors can helps smooth the way.

In doing so, they might also value private equity firms as partners in these outbound forays. There are various examples of GPs participating in deal-sourcing and execution, helping strategic investors with little overseas experience complete transactions that might otherwise have been beyond them. But there is also a broader governance role.

ChemChina does not require assistance from private equity in pursuing assets overseas, but it still teamed up with AGIC Capital and Guoxin International Investment Corp. on the $1 billion acquisition of Germany-based machinery manufacturer KraussMaffei earlier this year. The Chinese conglomerate is said to appreciate the contribution that private equity can make to corporate governance and professional management. This is particularly important if the ultimate objective is to list the acquired assets in order to create a diversified portfolio.

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• Topics
• Greater China
• Buyouts
• Advisory
• China
• AGIC Capital