Cross Border M&A with China: Will It Really Happen?
When I predicted at the end of 2010 that 2011 would be a banner year for cross-border mergers and acquisitions between China and the United States and China and Europe, I was not alone. Many investment bankers, lawyers and accountants have been gearing up for what everyone believes will ultimately be a big surge in cross-border M&A activity as cash rich Chinese companies search for new technology and markets. Unfortunately, we’ve all been a bit disappointed.
At the 2012 Automotive News World Congress held in Detroit this week, Tim Leuliette, managing director of FINNEA Group, an investment banking firm in suburban Detroit, told the audience that last May, China’s central government had earmarked $60 billion to acquire U.S. industrial assets. “The Chinese did that because they need access to expertise to grow their economy,” Leuliette said during the China panel discussion that I also served on. “They want to convert their [trade surplus] into hard assets,” he added.
I was a bit surprised by Leuliette’s statement because it seems at odds with the way China actually works, but assuming he is correct, where are the deals? That’s what the moderator of our panel wanted to know. “Show me the money,” he said.
There are several reasons why buyers from China have been slow in making the plunge into the overseas acquisition business.
First and foremost, Chinese CEOs are cautious when it comes to looking abroad. While they know how to do business in China and are willing to take risks there that most Western CEOs would never consider, they are nervous about entering slow growth economies, negotiating with labor unions, managing Western managers and employees and dealing with a host of other issues that are part and parcel of running a business outside China. The global financial crisis and the ongoing crisis in Europe have only exacerbated those fears.
Second, Chinese CEOs don’t have the luxury of learning from the experience of others since so few Chinese companies have successfully completed and managed overseas acquisitions.
Third, Chinese companies find it difficult to keep pace with the auction process that investment bankers routinely use to sell Western businesses. The need to review, analyze and absorb a great deal of new information in a compressed time frame represents a very real challenge for most companies. While it’s easy for a CEO in Chicago to schedule a trip to meet the management of a company in St. Louis, it’s a much longer trip for a Chinese CEO and the need for a visa makes last-minute trips all but impossible.
Fourth, obtaining the necessary approvals to go forward with a deal, or to convert renminbi into hard currency, can be time consuming and problematic.
Finally, the notion of buying a company after a six-month “getting to know you” period runs counter to every instinct in a Chinese executive. In China, relationships are built over a long period of time and significant deals are seldom done between individuals who have only known each other for a few months.
The difficulties of overcoming these challenges are now giving potential Chinese acquirers a bad reputation among investment bankers and company owners, creating a new challenge.
For example, Bright Food Group Co., China’s second-largest food company, has been notorious for its repeated failures to close proposed acquisitions. Over the past two years, Bright Food held negotiations and then backed away from announced deals for UK-based United Biscuits and GNC, an American retailer of nutritional products. In other failed acquisition attempts, Bright Food lost out to General Mills Inc. for a stake in French yogurt maker Yoplait in 2011 and was outbid by Wilmar International Ltd. for CSR Ltd.’s sugar unit in 2010.
In addition, the decision by Xinmao, a Chinese company, to drop its 1 billion-euro ($1.3 billion) bid to buy Draka, a Dutch cable maker, in early 2011; the failed bid by CNOOC for Unocal in the face of U.S. political opposition in 2005; the failed attempt by Qingdao Haier to purchase U.S. appliance maker Maytag in 2006; and the inability of little-known heavy machinery maker Sichuan Tengzhong Heavy Industrial Machinery to obtain Chinese regulatory approval to buy the Hummer unit from General Motors in 2010 are all cited as examples of the unreliability of bids from Chinese companies.
In the most recent example, Wescast Industries Inc., a Canadian manufacturer of exhaust manifolds with 2,000 employees and facilities in six countries, said that its memorandum of understanding with Sichuan Bohong Industry Co., Ltd. of China had “automatically” terminated on December 31, 2011 because Bohong had still not secured a financing commitment letter from its would-be financier, the government-controlled China Development Bank. On September 6, 2011, Bohong had agreed in an MOU to pay $13.60 per share in a transaction valued at just more than $200 million. Only two weeks later, Wescast revealed that Bohong had not come up with the $2 million deposit required by a September 19 deadline specified in the MOU.
Making overseas acquisitions is difficult for even the most experienced companies, and Chinese companies are new at the game. In the meantime, repeated failures to close are making Western bankers and owners increasingly skeptical regarding bids from China. The best way for Western owners to avoid such pitfalls going forward is to truly get to know any potential Chinese acquirer before proceeding too far in negotiations. Chinese companies, whether private or state-owned, come in all shapes and sizes. Knowing which companies have the ability to deliver is particularly important in these early days of cross border M&A.