BEIJING (AdAgeChina.com) -- Chinese companies plan to take a more cautious approach to foreign acquisitions, avoiding outright buyouts and seeking more partnerships and alliances, according to the Economist Intelligence Unit.
Chinese companies made a record number of cross-border acquisitions in 2009, some 298 in total. Much of this investment has been welcomed by cash-strapped western companies that would be hard-pressed to survive without it. But China's buying spree has raised a number of concerns, particularly where it has involved state-owned enterprises (SOEs).
Like their western counterparts before them, Chinese companies are discovering just how difficult it can be to get mergers and acquisitions right, especially when they are cross-border deals. That's leading companies to lower their ambitions.
This reading of the climate for Chinese M&A abroad is based on indepth interviews with large Chinese companies with experience -- both successes and failures -- investing abroad, through an online survey of 110 Chinese executives, and interviews with several foreign participants and advisers in Chinese deals overseas.
The key findings include:
-- Chinese buyers feel unprepared for cross-border acquisitions. Eighty-two percent of survey respondents cited a lack of management expertise in handling M&A as the biggest challenge for Chinese companies making purchases abroad.
Only 39% feel they know what is required to integrate a foreign acquisition and only 39% say they had identified attractive targets within their chosen geographic markets, increasing the risk that Chinese buyers will succumb to the temptation to buy assets that have become available as a result of the global financial crisis, rather than focusing on carefully-researched prospects.
-- As a result, they are lowering their ambitions. In the past, Chinese buyers have tended to seek outright ownership or at least managerial control. The Economist Intelligence Unit's analysis of transactions worth more than $50 million between 2004 and 2009 shows that half the deals involved the buyer taking at least 50% ownership of the target. But Chinese executives are beginning to sense that this may not be the best approach, not least because it can set off alarm bells among the public and regulators.
Among survey respondents who say they are likely or will definitely make an overseas investment, 47% would prefer to strike either joint ventures (29%) or alliances (18%); only 27% say they will make acquisitions.
-- Outbound M&A remains dominated by state-owned enterprises. According to the analysis of deals worth more than $50 million between 2004 and 2009, an overwhelming majority of China's outbound M&A transactions -- 81% -- were made by state-owned entities. This will remain a cause for concern abroad, not only because many deals involve control of natural resources but also because state ownership seems to confer unfair advantages on the acquired companies.
-- As the economy improves and competition for deals heats up, Chinese buyers could be at a disadvantage. Foreign counter-parties to deals and M&A advisers say that with the worst of the financial crisis over, the competition for M&A targets is also recovering. The need for Chinese companies to gain approval from their government to invest -- and the time required and uncertainty created -- is likely to put them at a disadvantage against rival bidders. Would-be buyers could also find potential acquisition targets less willing to sell as the recovery of financial markets gives them other ways to raise funds.
-- Lack of communication is a major obstacle to successful deals. Most of the Chinese companies interviewed are well aware of the tensions involved in some high-profile deals and are concerned about the environment that creates.
Deal participants and advisers from Washington to Canberra say Chinese investors need to take a less narrow, procedural approach to investment and look at the bigger picture, to present the commercial and economic rationale for their acquisitions and a clear plan of what they will do with them, and also to explain who they are and what role, if any, the Chinese government plays in their decision making.
They should be prepared to explain these things to all stakeholders -- politicians, media, communities, employees -- even if a deal does not face regulatory scrutiny.
-- Demands for reciprocity will grow. Despite years of foreign investment in China and membership in the World Trade Organization (WTO), many foreign multinationals complain that access to the China market is far from unfettered.
China has its own complaints about western protectionism, particularly when it comes to trade. But as many industries in western countries continue to struggle with sluggish economic growth or recession, they will be asking their governments why they should allow Chinese companies access to their markets if their openness is not reciprocated.