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17 November, 2016
For Chinese investors considering entering into a merger or joint venture arrangement in Germany or elsewhere in Europe, the Ashurst China Desk has prepared a list of top 8 recommendations to be taken into account when executing cross border transactions.
In 2015, the State Council of China officially initiated a plan named Made in China 2025 aiming to transform China's manufacturing industry into technology-based industry with high-quality "Made in China" products. Driven by PRC government's support, Chinese outbound M&A activity has grown significantly reaching a level of 134.3 billion US dollars in the first six months of 2016 as compared to 64.9 billion US dollars in 2015.
A significant amount of PRC outbound M&A relates to acquisitions of high-tech enterprises as illustrated in Germany by the recent public takeover transactions of KUKA AG and Aixtron SE.
Despite of the strong increase in the volume of Chinese outbound M&A activity there is still a high number of failed or aborted outbound M&A deals. In our experience, the most spectacular failures in mergers or joint venture arrangements are often caused by a misunderstanding (or refusal to understand) the goals, motivations, and objectives of the other party.
For Chinese investors considering entering into a merger or joint venture arrangement in Germany or elsewhere in Europe, the Ashurst China Desk has prepared a list of top 8 recommendations to be taken into account when executing cross border transactions.
1. Perform a business analysis instead of making a rash decision
While Chinese state owned enterprises (SOE) are still active players in Germany's M&A market, 2016 has seen a significant growth in the number of deals involving private owned enterprises (POE) whose size, management and decision-making process are fairly different. In POEs, very often investment decisions are made by the entrepreneur alone based on his own experience or vision. On one hand, this facilitates the decision making process which is of particular advantage in an highly competitive structured auction context. On the other hand, POEs sometimes have the tendency to make business decisions or enter into preliminary agreements without having carried out an appropriate analysis of the business opportunity and market standard feasibility analyses.
The feasibility analysis should also take into account a high-level assessment of certain regulatory requirements in the target company's jurisdiction. For example, under Germany's Foreign Trade Act, any acquisition of at least 25% of the voting rights of a German company by a non-EU purchaser is subject to review if the German company is active in particular sensitive business areas, e.g. defence. In such cases the German Ministry of Economy has the authority to block the deal on the grounds of public order and national security. To obtain transaction security, a buyer can apply for a certificate of non-objection prior to a deal. This risk of an intervention by the Ministry of Economy should be closely analysed by Chinese investors seeking to acquire German companies in the high-tech sector as illustrated by the Ministry of Economy's recent withdrawal of approval in the acquisition of Aixtron SE stating that the Aixtron technology might be used for military purposes.
2. Build a presence in target's country
More and more foreign media and managers are referring to Chinese investors as 'CMB', Chinese Mysterious Buyer. Large companies such as PetroChina and Wanda Group have already built a track record in the international market, but SMEs, who are currently active players, are much less known to potential sellers, or in some cases, completely mysterious because no information is available online. In order to solve the trust issues, Chinese investors should start the 'brand-building' process prior to the deal, for example by paying site visits to Europe, participating in investor conferences, communicating with local media, communicating with investment banks, etc.
3. Engage internationally reputable advisors
Due to lack of knowledge about the potential buyser's home country, German sellers sometimes have quite a few doubts about the creditability of audited accounts or confirmation of financing issued by a local service provider which is unknown to the rest of the world. A good solution is to engage internationally reputable accounting firms, law firms, investment banks and commercial banks because they are believed to adhere to the same high standard of professionalism and ethics in business conduct everywhere in the world. This helps to present the potential buyer as highly trustworthy and gives the seller 'one less thing to worry about'.
4. Have a clear schedule and follow it
Western sellers are goal-oriented, and they aim to achieve a certain result by the given time frame. One kind of behavior that usually causes concern or even tension between parties is that Chinese investors may sometimes simply 'go with the flow' and learn things while doing them. This, from the perspective of a western seller, is a sign of unprofessionalism and of uncertainty. Strictly following the given schedule and delivering results stage by stage will assure the seller that the Chinese purchasers take the deal seriously, have the relevant expertise, and promises a more smooth deal going forward.
5. Make timely communications regarding government approvals
The confusing relationship between Chinese companies and the government casts another shadow onto the transaction. Western managers often find themselves asking, how hard is it to obtain government approvals? How long does it take? Does it depend on the internal evaluation of the government? All of these question directly affect the successful signing and closing of the deal, therefore creating a high level of uncertainty and risk for the seller. In response to this concern, it is advisable that Chinese investors proactively offer a detailed exchange of information regarding the categories and respective procedures of the government approvals and the time needed, in order to provide the seller with more assurance.
6. Understand the cultural differences in negotiations
A significant difference is shown in M&A negotiations: Western negotiators have a clear agenda and strategy when they sit down by the table, so they view the discussion as an opportunity to reach certain understanding and solid conclusions, whereas sometimes, Chinese negotiators see it merely as a means to gather more information for decision-making later in time or to test the attitude of the seller. Different anticipations may create a misunderstanding from the very beginning. For the Chinese investors, understanding how important efficiency of decision-making is to German negotiators, and going into the room well-prepared, will facilitate the process and ensure that both parties are on the same page.
7. Make sure the negotiator is empowered to make a decision
A frustrating issue that can hinder the process is that the representative is not authorized to agree to a proposal. This is more common for Chinese representatives in that western sellers usually confer to the representatives the authority to reach a decision within a certain scope, whereas owners of Chinese small and medium-sized enterprises are often the only decision-makers, and their representatives present at the negotiations need to constantly confirm or ask for permission in the face of a proposal. If a representative does not have any decision-making authority, it is unlikely to achieve the goal as anticipated. A solution is for the Chinese decision-makers to send a high-ranking representative or to empower those present at the negotiations so that results can be achieved in an efficient way.
8. Give certainty by being clear about the final goal
Some Chinese investors are not being straightforward or clear about the strategy or the final goal of the acquisition, which casts a doubt on the seller, especially when the seller is a family business which cares tremendously about the prospects of his life-long work. By fully communicating the envisaged plans to achieve synergy or guarantee the long-term growth of the company, the purchaser will be able to display his determination to follow through the transaction and also to gain an advantage over other bidders in an auction context by giving more certainty and assurance that 'your company will do better'.
For further information, please contact:
Michael Sheng, Partner, Ashurst
michael.sheng@ashurst.com
