Culture clash: Why Western companies are better at mergers than their Chinese and Japanese counterparts

Japanese and Chinese companies still have room to improve, say merger and acquisition experts

PUBLISHED : Friday, 28 October, 2016, 6:47pm
UPDATED : Friday, 28 October, 2016, 10:18pm

Cash may be flooding out of China and Japan as the two countries buy up overseas companies, but the big spenders still have room to improve on how they handle mergers, according to experts.

There’s a greater chance of a merger ending successfully if the acquirer is American or European than if they’re Japanese, according to a new Baker & McKenzie study, which looked into what makes for a successful merger and acquisition – and what doesn’t.

Japan was the most active Asian buyer in terms of value for the third quarter, with 69 deals worth US$44 billion.

It’s also an activity increasingly dear to China’s heart, with the country undertaking more global cross-border M&As than any other nation in the first nine months of the year – for the first time ever.

Volumes reached a new annual high of US$173.9 billion, up 68 per cent on last year’s record US$103.2 billion, Dealogic data released earlier this month showed.

Europe was the most targeted region, with deal value led by state-owned chemical company ChemChina’s US$46.7 billion pending acquisition of Swiss agribusiness Syngenta, the largest mainland Chinese outbound M&A deal ever.

Although over 90 per cent of the respondents surveyed by Baker & McKenzie said their acquisition had been successful, mergers exceeded expectations or targets for 64 per cent of respondents at US or European acquired companies, compared to 52 per cent at Japanese-acquired companies.

“There is still room for improvement as many companies, and particularly those from Japan, face ongoing challenges in certain areas that are preventing them from fully achieving their aim of becoming a truly global organisation,” said Hiroshi Kondo, Tokyo-based Baker & McKenzie partner.

And there’s no surprises when it comes to the biggest problem area: handling different corporate cultures.

“When cultures collide the result can sometimes be a synergy-creating combination where workforces collaborate and business continues unimpeded. At other times, it can be a tumultuous affair,” the report said.

Japanese buyers tended to develop blueprints for the entire project and were less likely to correct course after the project was launched as it could be seen as a sign of incompetence.

“Conversely, the method often adopted among US and European companies embodies a spirit of

‘launch first, find solutions later’ that allows them to act swiftly and set a more engaging tone for the transformation,” the report found. “This approach emphasises rapid, aggressive change while recognising that unnecessary delays can cause disruption and lost momentum.”

Japanese acquirers involved high performing employees in the retention process to select other key talent 42 per cent of the time compared to 57 per cent for US and European companies. Ultimately, Japanese companies were 59 per cent effective at retaining key talent compared to 68 per cent for US and European companies.

“By failing to take these steps, companies from Japan may be missing out on opportunities to retain top talent,” Baker & McKenzie said.

Kondo said Japanese corporations should continue to develop their own methods while studying their Western counterparts.

“Learning from their weaknesses and amalgamating what has worked in other post-acquisition integration techniques is one aspect which will help them succeed in the next wave of outbound acquisitions,” he said.

How Chinese buyers are soothing fears amid record spree of overseas deals

China’s own flood of outbound investing hasn’t been without problems. Mainland-based conglomerate Fosun International terminated two potential foreign acquisitions – Anglo-German banking group BHF and Israeli insurer Phoenix – after its founder and chairman, billionaire Guo Guangchang, disappeared last year, with sources saying he had been taken away by government officials for questioning.

Just this month, Anbang Insurance Group’s planned takeover of a landmark American hotel located near a US military base collapsed after the seller, Blackstone Group, called off the transaction following opposition from US national-security officials.

Although the Baker & McKenzie study did not focus on Chinese acquisitions, the issue of top-down leadership occurred in both Chinese and Japanese companies, said Carl-Johan Skold, a director at Shanghai-based Stenvall Skold and Company, who handles mergers and acquisitions.

“Chinese companies have even greater challenges than the Japanese,” he told the Post.

“Both of these companies face a language and cultural barrier which creates misunderstandings.”

For Chinese companies, the major source of conflict when acquiring an overseas company was the centralised leadership, where most decisions were made by top management rather than a more consultative approach.

The two problem areas for Chinese companies acquiring overseas firms were inexperience and not investing enough in due diligence and staff that specialise in handling mergers.

“Chinese companies are quite reluctant to spend money on advisors or consulting services,” Skold said. “It’s a mindset – if something is physical, they are willing to pay for it. If it’s something that’s a report, they don’t see the same value as they see in physical goods.”

Chinese companies are quite reluctant to spend money on advisors or consulting services
Carl-Johan Skold, Stenvall Skold and Company

Japanese companies and Chinese companies differed in that Japanese companies wanted to “turn every stone and figure out everything”.

Although Chinese companies tended to act fast to seize opportunities, they often took twice as long as a European or US company to make an offer as they were less experienced with handling a merger than European or US companies that tended to have standardised processes.

“In many cases, a seller prefers selling to a US or European company because the risk is lower and the profit is much faster,” he said.

Bain Asia Pacific mergers and acquisitions partner Philip Leung, who is also based in Shanghai, said Chinese companies had got better at handling acquisitions over the last five years.

Leung agreed that Chinese bosses tended to take a top-down leadership approach, although he had seen a growing number of leaders be more open with their style when they expanded overseas.

He said there had been “a few dead bodies” in the past, referring to previous deals that had not worked out, but said businesses and their advisors had learned from that.

“We have seen a lot more of our clients be more thoughtful along different stages of the transaction as apposed to five years ago. [Back then] it would be a lot more of ‘well, let’s grab that asset and figure it out later’,” he told the Post.

Although Leung said his views were skewed by the sophisticated clients he has worked with, he was still seeing Chinese companies going after some very big and complex deals.

“We believe M&A is actually a capability and you get better as you build up that muscle overtime. But if the first time you actually do an M&A deal you do $50 billion deal ... your chance of succeeding will be low.”