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‘Assessing synergies, making sure they happen’
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MERGER-AND-ACQUISITION activities have shown signs of recovery this year despite China’s economic slowdown — or perhaps because of it.
In July, China’s domestic and cross-border deals rose for a third consecutive month to 141, a 38.2 percent rise from a year earlier, information provider Zero2IPO Research said in a report.
The value of 135 deals that revealed transaction figures surged 424 percent to about US$16 billion, according to the report.
Domestically, state-owned enterprises are undergoing reforms that encourage the private takeover of state-owned stakes. Many state companies are still seeking to acquire overseas energy and resource companies, while private companies attempting to access overseas markets are most interesting in acquiring advanced technology.
Shanghai Daily invited Tony Tsang, China leader of transaction support at Ernst & Young, to share his observations about the latest market trends and the intricacies of mergers and acquisitions.
Tsang, now based in Shanghai, has more than 20 years of experience in helping Chinese and multinational companies close domestic and cross-border deals.
Q: The value and volume of announced mergers and acquisitions declined in the past two years but seem to have been picking up in recent months. Is this a new trend?
A: It is difficult to know the exact level of M&A activity because many transactions are not made public. In addition, because these transactions can take anywhere from one month to over one year to close, it is not easy to assess the real underlying trend. Looking back over the last three years, however, we do feel that multinationals have not been as active in M&A in China as they were previously. Perhaps one reason is that many have already established their bases here.
For outbound transactions, the trend is different. There, the momentum is very strong. We are seeing more mid-sized privately owned enterprises engaging in overseas acquisitions. Given its strong economic power, we expect China will have a fair share of the global M&A market. However, at present, this is still relatively small, compared with the Americas or Europe.
Q: Any interesting observations from the latest M&A deals you have closed?
A: There are some very interesting and successful stories on how domestic companies have transformed themselves to become truly global through M&A. We have a client who is designing and producing products for young people for brand owners in overseas markets. Historically, the company had weak direct access to retailers in the US and Europe. Earlier this year, we helped the company acquire a company in Europe and close a deal in the US. These two transactions allowed the Chinese company to gain direct access to overseas retailers in two globally important markets, and also to expand its manufacturing base from China to the Americas. It now has research and development centers in a number of countries.
I think Chinese companies are becoming more sophisticated and more familiar with cross-border M&A. They are also more keen now to engage professional advisors for M&A services.
Q: What industries do you think will see the most active M&A in the coming months?
A: Manufacturing is still the pillar industry in China, and we will continue to see deals in this segment. However, I believe that technology, media, telecommunications, consumer goods, agriculture products and life sciences will be the sectors generating more M&A volume in future.
Locally, I think there will be more buy-out deals as older entrepreneurs retire, leaving younger family members who may not be interested in continuing the businesses.
The initiatives on ownership diversification of state-owned enterprises will also drive more M&A.
For outbound deals, besides the energy and resources sectors, I think deals will come from a wide variety of sectors. However, I believe a common agenda is that Chinese acquirers will want to bring overseas products, technology or brands to China.
Q: What’s the most difficult part of the M&A process?
A: M&A requires making important and timely business decisions, whether for Chinese companies or multinationals. I think the most difficult part is assessing the synergies beforehand, then making sure they happen afterward. That is especially true when the buyer and the seller have different organizational cultures, different staff compensation structures and different market segments.
If the acquisition is a 100 percent buyout, the acquirer should assess the strategic fit of the target company in the due diligence process and determine how to execute the business plan after the acquisition. It is more complicated when the acquisition is not a full buyout but leads to a joint venture situation. In that case, it is important that the acquirer and the seller have a mutual agreement on the company’s future strategy and post-acquisition operating model.
Q: Employees often worry about losing their jobs or having to change jobs after an M&A deal. How do employers address this situation?
A: Retaining key staff after a transaction is a common and critical issue, especially for cross-border M&A. From our experience, acquirers generally deal only with senior executives during the due diligence process and announce the closing of the deal to staff just before it becomes public. The timing and the communication methods need to be handled carefully to avoid any unnecessary concerns and speculation. For certain key executives, acquirers will likely interview them as part of the due diligence process and work out a staff retention plan. Usually, a post-acquisition integration plan is drawn up in parallel with the due diligence phase to address all the organizational and staffing issues.
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