Risk warning to Chinese buying Europe firms
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The euro-zone crisis presents cash-rich Chinese companies with prime opportunities to acquire European firms, but dissimilar cost structures and operational hiccups could hinder a smooth transition, industry experts warn.
Antonio Alvarez, managing director of global professional services firm A&M, which specialises in turnaround and interim management, said mainland companies tended to underestimate the operational risks following acquisitions.
'If Chinese businesses are seen to be acquirers that typically replace the management and the CEO, they won't be viewed as friendly acquirers, and there will be resistance from CEOs and their teams,' said Alvarez. 'It is smart to be a friendly acquirer. If you think you can parachute a Chinese CEO into a company in France, Italy and Greece, you need to be aware of and anticipate problems.'
Initiating corporate changes in foreign companies, Alvarez said, would involve confronting alien laws and resistance from the workforce, which could catch Chinese buyers off guard.
Cost issues have been a common problem in China acquisitions.
Mary Ma, chairman of mainland private equity fund Boyu Capital and the non-executive vice-chairman of Chinese computer firm Lenovo, recalls that after Lenovo bought IBM's personal computer business in 2004, 'for more than a year after the acquisition, I was flying economy class on business trips while my juniors from IBM would fly business class. And while I was allowed 200 yuan a night on a hotel, their limit was 400 yuan'.
It took three years to reconcile the differences in costs structures between IBM and Lenovo, Ma said, and to create a new salary structure for both companies.
But according to Oliver Stratton, Asia co-head of A&M, post-acquisition transition management is more a challenge for Chinese companies themselves than for their foreign targets. Lack of sensitivity to staff concerns and management co-ordination can backfire, as seen recently in the protests by Putzmeister employees in Shanghai. Mainland equipment major Sany Heavy Industry paid more than Euro500 million to acquire the German pump maker in February, sparking fears of job losses and pay cuts among Putzmeister's mainland employees.
'In the US, typically you have professional management and an independent board. And when the independent board is not satisfied with the management, it will be a classic situation for A&M to provide professional advice and potentially to take an interim management role,' Stratton said.
'However, in China, it's different. Typically an entrepreneur has heavy influence on the board, is very involved in the operations of a business and needs to be convinced of the benefits of bringing in expertise from outside. It's less easy to instigate changes in the management.'
Protests such as those at Putzmeister are increasingly a risk that Chinese companies have to factor in as they enter a new phase of outbound acquisitions, shifting their focus from natural resources to industrial assets and retail brands in Europe.
According to data from Thomson Reuters, the value of Chinese outbound acquisitions have been steadily increasing over the last few years. In 2009, such deals totalled US$39.7 billion, but jumped to US$59 billion last year. So far this year, US$7.6 billion worth of deals have been closed.
Gabriel Wong, head of China corporate finance with PricewaterhouseCoopers, said Europe was becoming increasingly appealing to Chinese buyers. Most of the target companies in the deals that are in the pipeline are in Europe. He said value addition, instead of production costs, was of more importance for Chinese buyers, which is why fears about job and wage cuts when Chinese companies take over are misplaced.
'The differences in cost structures and labour matters are just a reflection of the different mindsets,' Wong said. 'For example, the Chinese and Western companies' handling of R&D could be very different. A Chinese auto company may have 10,000 research and development staff for the entire company but a European automaker of similar size may have a couple of thousand engineers and scientists just for a single unit.
'It's not a matter of who's right or wrong in cost matters. It's just that [the Chinese] are at different stages of economic development and China simply does not have enough experienced researchers at the moment.'
Trust needs to be built as early as the pre-deal stage, Wong said. International sellers might find it hard to deal with Chinese companies because whether these are state-owned or private, they were once part of the state-controlled economy, making it hard for Chinese buyers to follow the 'timetable' of the sellers. This means it may take less than half a year to close an M&A deal in the West, but two years in the case of Chinese outbound acquisitions.
Chinese companies also tend to spend more time on due diligence and internal management discussions for outbound acquisitions because that's what they do on the mainland, where the business environment is less regulated and more effort is needed to study a target.
'International companies have to learn to appreciate the economic and political context under which mainland companies operate,' Wong said.
was the value, in US dollars, of Chinese outbound acquisitions last year •In 2009, it was US$39.7 billion