Chinese companies have strong overseas M&A momentum and high failure rate

In recent years, the boom in overseas mergers and acquisitions by Chinese companies has gradually increased. According to the latest BCG report "Welcome to the New Era of Chinese Companies' Overseas Mergers and Acquisitions", in 2014 alone, Chinese companies completed 154 overseas mergers and acquisitions. Mergers and acquisitions transactions, the transaction value is as high as 26.1 billion US dollars. However, it also found that the completion rate of overseas M&A transactions by Chinese buyers was only 67%. It can be seen that although the momentum of China's overseas mergers and acquisitions is very strong, the quality of completion is not high, that is to say, the internationalization process of Chinese enterprises is still in its infancy.

What causes so many M&A deals to fail? The report found that unclear M&A strategies and inadequate due diligence were the main reasons why deals fell through. Even when deals go through, companies often fall short of their expectations—and poor post-merger integration (PMI) planning and execution are the sticking points.

Europe and the United States become the first choice for China's overseas M&A

In recent years, the European and North American markets have surpassed Asia to become the preferred destination for Chinese companies' overseas M&A. In 2014, the number of deals targeting Europe and North America accounted for about 60% of the total overseas M&A deals of Chinese companies, while the number of deals targeting traditional M&A destinations such as East Asia plummeted.

In this regard, Ms. Luo Ying, a partner of BCG, believes: "In order to ensure the normal operation of the national economy and enterprises, and to resist the fluctuation of international commodity prices, energy and resource-based targets have always been overseas mergers and acquisitions by Chinese enterprises. However, with the deepening of China's internationalization process, a larger and larger proportion of Chinese enterprises hope to gain market share and enhance core capabilities through overseas mergers and acquisitions. They try to seek new profits through overseas mergers and acquisitions. Growth points, occupy new markets, and become a leader in global competition. They also hope to acquire foreign advanced technology and valuable brand and overseas market management experience through overseas mergers and acquisitions, and hedge against the impact of domestic economic fluctuations.”

Although Chinese companies' overseas M&A destinations have changed, many Chinese companies lack a clear roadmap for overseas M&A, the purpose of M&A is ambiguous, or they have insufficient understanding of the value of synergies and how to grasp them. In addition, the due diligence teams of many Chinese companies lack international experience and do not know much about the overseas business legal environment, so they cannot accurately identify risk points during the due diligence process.

After the deal was completed, some Chinese buyers were unable to achieve the expected post-merger integration results because they did not fully and thoroughly consider and plan the integration process, which in turn led to buyers and the acquired company. Unable to agree on cost and revenue synergies, and to share best practices in areas such as promotions, product mix, and supply chain.

Three Pillars of Successful Overseas M&A of Chinese Enterprises

How should Chinese enterprises deal with the many challenges and difficulties they face in overseas M&A? A clear strategy, effective execution and capacity building are the three key pillars.

A clear strategy is the foundation.

The M&A strategy should specify the direction of the company's overseas M&A in detail, and reflect the concepts and ideas of overseas M&A, including: whether the purpose of the company's overseas M&A is to enter new markets, acquire new technologies, or secure key resources. supply? Which industry segment is the company seeking to enter through overseas M&A? Which areas to focus on? What is the most appropriate transaction structure and financing method for a planned outbound M&A transaction?

Enterprises should also establish specialized systems for the formulation and revision of overseas M&A strategies.

Effective execution is key.

Companies must have the ability to identify transaction risks, make decisions, plan and execute post-merger integration, and realize synergies and business growth. In order to do this, corporate executives must establish effective mechanisms to manage the due diligence process and review process across business, legal, financial, technology and more.

The problem of personnel cannot be ignored. Enterprises can reserve cross-cultural management talents through internal training or external recruitment. Cultural differences are a long-term concern for enterprises. Therefore, enterprises also need to establish mechanisms to manage uncertainty and change in order to adapt to internal and external environmental changes.

Build relevant competencies and hone them in new projects.

In the long run, to make mergers and acquisitions an engine that boosts company development, companies need to cultivate and improve a series of core capabilities in the fields of strategy, organization, process, and control: strategic planning capabilities, international high-end talents Appointment, professional management of merger and acquisition process, and performance appraisal system.