Overseas M&A of Chinese Enterprises Essay

The purpose of this oblige is to summarize the problems related to the abroad M&A of Chinese firms and to propose suggestions on its corresponding improvements. It firstly describes the brief narrative of main get chinas oversea M&A in tercet phases and its current stead including the growth trend, the location preference and the sector distri besidesion iand illust swans unrivalled succesussfulrvived instance of Lenovo and two failed plaints of Chinalco and SAIC.Then Seondly it analyzes the factors contributing to the success parsimoniousness growth, exchange rate, unusual cash reserve and proper counselling points let out the reasons of visitation political resistance, strategy geological fault, integration difficulty and cultural difference. afterward that it refers to the practice of Nipponese enterprises on image making, strategy selection, management local anestheticization principle and congener maintaining.Finally it fork upoffers recommendations to improvebetter the execution of Chinas abroad M&A including regarding common descent, strategic thinking, management call d proclaimment and cultural parley and draws a conclusion that whether the overseas M&A is cake or trap depends on what we choose to do. Overseas M&A of Chinese Companies Cake or Trap? Introduction On 26th February 2013, China National Offshore Oil Company (CNOOC) announced in capital of Red China that it successfully completed the 15. 1 cardinal US$ eruditeness of a Canadian oil and gas company Nexen Inc NXY.TO, which was Chinas largest-ever contradictory takeover. This was exactly the epitome of the Great Leap Forward of overseas M&A of Chinese companies. Along with the economical boom in more than than thanof 30 forms, encouraged by the go-out strategy of the government, Chinese companies fork over madeseen kind-iron strides in supranationalisticist investment foodstuffs. However, wereas closely M&A cases unappealing as successfully as th e case of CNOOCs achievement of Nexon? The consequence must be negative should you s often concern to more hardships much(prenominal) as Chinalco1s acquisition of Rio Tinto2.Did every successful starting snuff it a happy ending? Neveror the answer would be affirmative since the bloody(a) costs Chinese companies get paid in overseasabroad m trade places. The flummox of this article is to raise a critical question to the overheated vehemence on world-wide acquisitions of Chinese enterprises would it bring a pricey government issue or rather a bottomless pit? Serving this purpose, the article will firstly draw a brief portrait of the business relationship and the present situation of Chinas overseas M&A and summarize its characters, experiences and lessons.Then it will analyze the reasons for the successes and failures and comp be Chinas performance with the practice of its international peers. FinallyIn the end, t, he authorit would like to propose some(a) recommenda tion on the improvement of the M&A operation of Chinese enterprises. Status quo The overseas M&A of Chinese enterprises started in the mid-nineties and could be roughly divided into three phases. The first phase was from the nineties to the year 2001, when Chinese enterprises just entered the international market and tried to crossway the river by feeling the stones and to discover acquisition opportunities.The annual nitty-gritty look of transactions at that time was below 0. 1 billion US$. The second stage was after China joined the World patronage Organization in 2001 when the volume of overseas purchase takeovers reached 1 billion for the first time and till 2005 when the amount climbed to about 5 billions. The trey period was fromafter 2006 till now especially after 2009 afterwardswhen pictureetary monetary crisis seriously grilled struck the earths major economies.During this period, the home base of Chinas abroad overseas acquisitions exploded and each year it saw a join act up of tens of billions of dollars. In 2010, it was up to the crown of 38 billion dollars, occupying 11% of the worlds transactions amount of that year3. There were some trends underlying the wavesis of overseas acquisitions waves. In terms of the measuring stick of deals, it was climbing climbed constantly with a numeral of 27 in 2003, 45 in 2005, 61 in 2007, 97 in 2009 and arrived at the record-breaking 147 in 20104.Meanwhile, the size of one transaction increased remarkably and the substantial warning was the abovementioned takeover of NEXON by CNOOC in 2013, a single deal of 15. 1 billion US$, overpassing exceeding the annual total of many previous years. With regard to the areas where Chinas enterprises invested, American,USA Europe and Asia were their top 3 priorities, making up 27%, 21% and 15%5 severally of the abroad acquisition volumes in 2010. About the sectors where they were interested in, the energy and mine fields were undoubtedly their first choice since 65%6 of the transactions occurred in this industry in 2010.Nonetheless, compared with the general traits, the individual cases are worth researching more carefully. A perfect example is the caseTake the story of Chinas giant PC producer Lenovo7 as example, i. In December 2004 Lenovo acquired the PC department sector of IBM at the price of 1. 75 billion US dollars. After al virtually 10 years development, it was impressive that IBM became a ace brand of business laptops and PCs and Lenovo had successfully enhanced its brand value and market share during the integration of two firms. It was this deal that made Lenovo a world PC giant.Conversely, the majority of Chinese buyers tasted the bitter flavor of defeats. check to the statistics of Mckinsey8 published in 2010, in the past 20 years, the success rate of international M&A was less than 50% while the failure rate of Chinas overseas acquisitions was more that 67%9. In 2008, the total loss of Chinas multi-national deals was nearly 35 billion US$10. For instance, in June 2009, Rio Tinto Group unexpectedly announced to breach the acquisition apprehension with Chinalco and although Rio Tinto paid 0.195 billion US$ break-up fee to Chinalco, the latter had to must pay multifold btimes of breaching compensation to Chinas state-owned commercial banks and assume tremendous losses resulted from the dropping share price of Rio Tinto. A nonher perfect example is the case SAIC Motor11 took over SsangYong Motor12 which illustrated a impuissance integration after a exultant acquisition. SAIC invested 0. 5 billion US$ to buy 48. 92% shares of SsangYong Motor in 2004 and increased its to 51. 33% in 2005.However, a smooth deal did not forecast a disaster of cultural integration. Neither SAIC achieved the aim of applied science importation nor the new management team solved the annoying strikes and payment disputes so that the new enterprise staggered till 2009 when the local court approve the bankruptcy protecti on of SSangYong Motor, indicating the death of this acquisition. Analysis Based on the facts and cases revealed in previous chapter, we could can not help wondering that what was inside the cuff?In other words, what experiencepoints we can summarizecould summarize from the successful cases and what lessons we should strike from the failed ones? On one hand, the significant development of Chinas overseas M&A might be generated by the following contributing factors. Firstly, the speedy economy growth drove solid requests forof the raw materials such as oil, gas or mining but subject to the limited municipal resources, Chinese enterprises turned their attention to spheric markets by active group meeting and acquiring.Secondly, since the exchange rate reform starting from 2005, the Chinese Currency RMB was appreciating gradually, for example the rate of US$ to RMB was 1 8. 2 in 2005 but is 1 6. 1 in 2014. In addition, the global financial crisis resulted from the subordinated debts storm in the USA remarkably dropped the share prices of listed companies in global capital markets. two factorsThis change considerably lowered the costs of international acquisitions in novel years and created actuallyistic opportunities for Chinese companies.Thirdly, holding the massive foreign currency reserve, for instance, 3820 billion US$ in the end of 201313, the central government of China broadened the control of foreign exchange and frameed a go-out policy to stimulate the internationalisation of domestic enterprises, creating a relatively loose macro surroundings for Chinese companies. Fourthly, some Chinese companies were playing games in global markets more and more expertly.They adopted correct strategy to obtain global as dictateds and products, executed it in accordance with international conventions, gained the advanced technology and sales networks, expanded the market share, established competitive edge and moved forward to the aim of multi-nationalization. O n the other hand, it is indeed necessary to jut find out what caused the noticeable failure of Chinese acquirers. From my point of regard, the reasons could be explained in four aspects. semipolitical resistancePolitical factors bear the brunt of the failure of Chinas overseas acquisitions.Most Chinese enterprises engaging in international M&A were state-owned enterprises, which in the westerners eyes were regarded as the representatives of Chinese government. Although they emphasized the independence status and commercial orientation when doing business in other countries, the soldiers governments were as prone to link them to the Communist Party of ChinaChinese government. Even if they were not state-owned, the universal media often mislabeled them as Chinese SOEs because it was hard for the foreigners to distinguish the reputation of one Chinese firm from the other.This was truly an extra risk of Chinese firms and constituted one fundamental obstacle toof Chinas overseas a cquisitions. Unfortunately, in most cases, Chinese firms had no say and did not fill in how to communicate with the local government or the public, only to accept the pile of defeat. For example, the government of USA denied the 18. 5-billion-dollars acquisition of UNOCAL14 by CNOOC for the reason of state security. The failure of Chinalco acquisition of Rio Tinto was likewise attributed to the concern of economic safety of Australia.Strategic errorThe core value of enterprise M&A probably is increase the critical competitive advantage and sustainable development capacity perfect obtaining the essential resources of acquired firms, which requires thorough and appropriate strategies. Nevertheless, most Chinese enterprises, when operating international M&A, did not have a complete and collect strategiesy or did have a strategiesy but lost control of the operation and could not survive the ever-changing global markets.Some of them failed to properly evaluate their general strengt hs and to completely understand the rules of international acquisitions therefore executed rush transactions sievely just catering for the individual preference of the boss or following the going-out fashion of going-out. TheA lack of strategiesy must not realize an judge results. After a series of losses in international acquisitions, TCL15 admitted that the scrimpy strategic preparation was the major reason contributed to its failure16.Another relevant case is the cutterding for Hummer17 by Tengzhong18. Although had published an official industrial protrudening aiming at developing new energy vehicles in 2009, Tengzhong announced a bid for Hummer, the producer of large displacement vehicles, which completely contradicted its strategy of energy obstetrical delivery and emission reduction. Integration difficultyAfter applause, flowers, champagnes and wines in the signature ceremony, the real challenge just starts because of the integration or management difficulties of Chinese firms.though more and more Chinese enterprises blown-up tremendously in fresh years, for example, 100 Chinese firms were listed on the Fortune Global 500 Rankings 201419, taking up one fifth of the worlds biggest companies. But compared with international giants such as Exxon Mobile, BP or Shell, Chinese firms are weak on management issues such as corporate governance, business operations, management intercourse skills, international reputation and marketing channels and internal integration etceteraMulti-national acquisition and integration is so compound that Chinese companies are brusk of not only managers who could communicate professionally with their counter-parts and standardize the operation with global horizon but also experts who are familiar with international market operations from legal, financial or managerial background20. Take TCLs acquisition of Thomson21 for instance, after the deal was done, in less than three years, all the reason executives of Thomson l eft the new company22 and it fell into a crisis of management resulting in Brobdingnagian profit losses in the following fiscal years.It was truly a failure of team integration due to managerial incompetence. Even worse, Chinese firms were used to manage the integration after acquisitions with domestic management styles and most of them were caught in serious internal frictions, causing which caused productivity declining and profit dropping. Moreover, Chinese firms were still accustomed to employ Chinese workers no matter where they were doing business, which exerted massive concerns in the host country.For example, when Chinese firms acquired a local mining, a railway system or harbor construction project in Africa, thousands of Chinese workers were hired to work there. It maybe impressive for many when we watched TV that more than 30,000 Chinese workers retreated from Libya after the civil war following the collapse of the Gaddafi authorities in 2010. In the countries with tight policies on foreign labors, the employment patterns of Chinese acquisitions were controversial.Culture differenceCultural is an indispensible influential factor in international M&A yet ignoring its significance is a common failing of Chinese acquirers. Many host countries complained that Chinese firms were mining robots or gold machines, developing business simply on their own without incorporating themselves into the local communities and respecting the remarkable cultural backgrounds. The failure of SAICs acquisition of SsangYong, discussed mentioned in previous episode, could cast light on how the glossiness conflict ruined a takeover.It seems that the primary(a) reason was SAICs insufficient acknowledgement of socialisation difference. Korea is an island country and its spate have tremendous national pride therefore when SsangYong was acquired by SCIA which is from an unexploited country of China, its employees were reluctant to accept the reality of control change and to co-operate well up with the new boss. That was why they behaved negatively in the integration and apparently SAIC failed to figure out a proper strategy to deal with this issue.Moreover, SAIC underestimated the power of sweat Union and the complexity of labor disputes while paid more attention to enhance the relationship with the governmental authorities, which is anan exact reflection of Chinese culture, not suitable in Korea. The result of ignoring it was remarkable. Comparison After the analysis of what caused Chinese firms poor performance, before giving advice on how to improve it, it seems necessary to induce a glance at how the international peers did their M&A deals. Japan, one neighbor of China, is a perfect model we could refer to.Similar as todays China, Japan is a country short of internal resources, from the 1960s when Japanese economy began to soar, Japanese enterprises invested massively in overseas markets to pursue a steady resource supplies. In the 1970s and 1980s, they also encountered various barriers and obstacles but Japanese firms gradually diminished the hostility and carefulness and successfully took initiatives in global investment sectors23. Image-makingJapanese firms laid fury on image-polishing via the think tank and the news media.In the 1980s, in solution to the increasing hostility, Japanese firms implemented diverse strategies to turn them acceptable to the American society. Since most official critics were from the Congress, major Japanese companies established or enlarged the representative offices in Washington, DC. They tried to create the mainstream opinion via the cooperation with the think tanks, journalists orand reason governmental officials and in return the think tanks held periodically forums on Japanese investments and published reports arguing that Japanese investments were beneficial to the USA economy.In most cases, Japanese firms sponsored or funded the researches or cooperated with the scholars in this field. Sustainable strategy Japanese firms focused on a long-term effect of investments, pursued a resource-preferred acquisition strategy and did not deviate from the aim easily even if confronting temporary losses or missing profitable opportunities. As a result, the investment terms of Japanese firms were longer than those of Chinese firms. In addition, Japanese companies coordinated well with each other and avoided internal malicious competitions (which often happened among their Chinese peers) to maximize their coalition strength.Differing from Chinese acquirers in Australian market, Japanese companies were used to form an acquisition group of 3-4 firms to optimize the bargaining electric potential and profit margin. Local management Unlike Chinese companies which preferred to diagnose Chinese executives in overseas subordinates, Japanese investors trusted localAmerican managers and appointed them as executives. Besides, they tried to localize material supplies as muc h as possible. According to the report published in 2002 by the Bureau of Economics Analysis24, USA, from 1982 to 2002, the number of American suppliers of Honda25had climbed from 40 to 55026.Likewise, when negotiating with partners for acquisition deals, Japanese companies seldom requested to participated in the business operation so that they could avoid the employment, salary or land disputes, which considerably reduced the management risk and integration failure. Community relation When investing in overseas countries, Japanese firms endeavored to integrate themselves to local culture and contribute to the construction of local communities.For example, sponsoring a baseball team or funding a cancer research center, Japanese firm had donated millions of dollars for local charity. All of these merits of goodness conveyed the information that Japanese firms respected local culture and put high value on local development. This is a precipitously contrast to Chinese firms behavior i n that they were only keen on making money but were indifferent to the lives of local residents. Recommendation alike to the problems figured out discussed and the comparisons analyzed above, I would like to share my view on how to improve the overseas M&A operations of Chinese enterprises.Firstly, we should reduce the role the state plays in international acquisitions and create legal communications with stakeholders. To be honest, many overseas M&A cases illustrated the economic targets of Chinese government, which is the most controversial issue and the biggest concern in foreign markets. As the government, it must be aware of its duty and the boundary of public power, decrease the interference to micro economic operation and liberate the creativities of Chinese enterprises in overseas markets.On the other hand, Chinese government should provide necessary supervision and guidance of overseas acquisitions, reform improper and complicated formalities of abroad transaction and fac ilitate the currency flow by loosing strict exchange control. However, to eliminate political obstacles, the majority of the tasks are at the shoulder of Chinese enterprises themselves. It shouldmay be necessary for them to put public relationship management top of their agenda.For example, learn to communicate with the public media and the local communities in the language and style they could understand, find spokesmen in think tanks and sponsor local research academies or educational institutions are all constructive measures to enhance the soft powerimage of Chinese enterprises. In principle, we must try to let the host country, the local public, the local staff and other stakeholders believe that Chinese acquisitions are not only a business but also a kindness, not a threatens but an opportunitiesy, to all of them.Secondly, it is essential to break the musical composition of speculation and to adopt strategic thinking. Acquisition is not gambling but rather implementation of s trategy, hence before initiating offers Chinese buyers must set up definite targets and strategies. In short, what do we exactly want? every(prenominal) overseas acquisition case must have a clear strategic demand to enhance the buyers weight in the value chain to extend the brand reputation to expand the business line or to extend the market share? We should not launch an acquisition merely because the target company is cheap or the acquisition is an eye-catching advertisement.Nothing would be more surprising than the news that a Chinese Millionaire Chen Guangbiao, whose business is recycle resourcing, announced a plan to buy New York Times. After the aim is set up, Chinese enterprise should establish and hold a firm strategy, draw an feasible plan in details to implement the strategy yard by step and unless the market surroundings changes fundamentally, do not occur up the furbish up strategy easily. Thirdly, it could be urgent for Chinese firms to substantially enhance their management strength to survive the integration difficulties after takeovers.It is desirable for the acquirer to uphold the previous management team of the acquired firm as much as possible and to pursue a win-win target by satisfying both the requirements of the buyer and the demands of the seller as well asand its employees. Plus, they also should build a thorough management systems in accordance with international convention, enhance overall managerial strengthability, perfect internal corporate governance and establish thinking(prenominal) incentive mechanism, to achieve a smooth integration and a sustainable development.Fourthly, it is not exaggerating to say that the failure of an overseas acquisition is actually the failure of cultural communication, which reminds Chinese buyers to take care of the cultural difference. Currently, most of the targeted firms are matured western enterprises which have built their own tradition and culture and hope to maintain rather than chan ge it. In the contrary, Chinese firms have not developed a systematic and matured cultures.That is, China buyers have to absorb the advanced elements of the existing cultures and mix them in the formation of a new culture. Under some unique circumstances it is necessary to give up or reform the unreasonable parts in our own cultures that iare s unacceptable to the host country. Conclusion To summarize, overseas M&A is an effective way for Chinese enterprises to realize the hyper-normal development in global markets. But every opportunity could also be seen as a crisis and vice versa. It is a cake or a trap merely depends on what areis our choices.Friendly market, clear strategy, efficient management and proper communication may bring you a bright perspectives while hostile surrounding, blind expansion, poor administration and cultural conflict could catch usyou in a deep traps. For the better preparation to survive international M&A competitions, it is high time for Chinese enterpri ses to sum up the successful experiences and to learn from the costly lessons. If this article could provide some advisable suggestions on this topic, it would be my greatest pleasure.