Art of persuasion can help Chinese companies find global welcome
Antoine Denry advocates being more open to build trust, ahead of any bidding for acquisition deals
The US$4.7 billion deal by meat processing enterprise Shuanghui International to buy the US firm Smithfield Foods has again raised questions about the price of overseas acquisitions. Is it wise for Shuanghui to acquire the US pork producer at over 30 per cent premium without any requirements?
Of course, Chinese companies are acquiring European and US companies at an increasing pace and are becoming more proficient in the financial and legal challenges of outbound mergers and acquisitions, but they still have a long way to go in using communications and "soft power" to realise the full potential of deals. Indeed, these acquisitions are currently often realised with a costly premium: an estimated 15 to 20 per cent due to the point of origin.
And even the highest bid does not guarantee success: Bright Food, for instance, failed in a bid for Yoplait in 2011 despite being the highest bidder.
In the context of mergers and acquisitions, Chinese companies do not seem to be considered on the same level as other foreign companies.
First, as outlined in a recent survey of 1,600 people across the US, Britain and France by MSLGroup, 58 per cent of respondents see the prospect of their company being acquired by a Chinese company as a threat because of working conditions, management style and ethical issues; only 15 per cent see it as a potential opportunity. This is the perception Chinese companies face before they even enter the bidding process.
Second, China's political roots and unprecedented growth have politicians across the globe concerned about remaining competitive and protecting local industries. Chinese buyers are sometimes accused of being spies on behalf of the Chinese government by political opponents, which was the case with Huawei's acquisitions in the US. Despite the keenness of numerous governments to attract Chinese money, there is a degree of conflicting feelings.
The general public and, indeed, a significant segment of politicians remain fearful of "being eaten by the dragon". This is compounded by politicians who seek to make political capital out of the deals.
Another critical issue is the branding of Chinese companies. Most are unknown outside China and social resistance stems from fear of the unknown. Even if the brand is known, the perception of Chinese products is often associated with being cheap or low quality, which is seen as a disadvantage by employees who fear for their job security and the company's reputation.
In addition, Chinese companies are usually seen as being less transparent than other global companies; organisations like Muddy Waters highlight irregularities in the financial disclosures of some companies, thereby tarnishing the overall image of "corporate China". The issue is further compounded by the traditional style of leadership in China, which shuns media coverage and publicity.
Any overseas acquisition poses challenges for the acquiring company: labour laws, tax regimes, intellectual property protection, banking systems and regulations, local authority concerns, company and competition laws, and the like. But Chinese companies also face challenges with regulatory issues at home. This has an impact on the attractiveness of Chinese companies as bidders in the auction process. This dynamic is also sometimes abused by vendors, as a Chinese bidder will be brought in simply to help drive up the bids.
"Hard" factors such as denial of approval from Chinese authorities tend to receive a lot of media attention; however, in many cases, inexperience in dealing with "soft" communications issues was one of the main factors contributing to failure.
So what can be done? A comprehensive communications strategy is key. The aim is to create a positive context and inspire trust.
Companies must, first, understand the threats and opportunities of the deal and analyse the environment. Second, develop a cohesive set of messages to address specific concerns and respond to crises. Third, engage with stakeholders early and seek support from key opinion leaders and decision-makers, and enhance relationships with all players. Finally, show a face to humanise the company.
Those that take a holistic and strategic approach well ahead of any bidding will close deals with the smallest or no premium and will do so with a supportive stakeholder base.
It is no coincidence that Huawei has begun to open up and demonstrate transparency. Founder and chief executive officer Ren Zhengfei gave his first-ever media interview in May and its chief financial officer Cathy Meng discussed the company's financial performance with journalists in China for the first time in January.
As Chinese companies become more skilled in communications, we'll see a more level playing field in global mergers and acquisitions.
Antoine Denry is a director of MSLGroup Hong Kong