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August 12, 2016

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Home » Opinion » Foreign Views

How Chinese buyers and German sellers can work together on successful M&A deals

IN Germany, a fierce discussion is underway regarding the increasing share of foreign investors in the M&A market. Recently, German company KUKA has been making headlines since China’s Midea Group acquired a majority stake in it.

In the extensive coverage by German media about the acquisition, an open discussion concerning protectionism has also emerged. However, this acquisition proves to be a special case as it is not about the purchase of a company on the verge of insolvency, but rather concerns the sale of a company with an economically and technologically leading position.

Sun Yi, leading partner of China Business Services at Ernst & Young Germany, specializing in advisory services for Chinese investors in Germany, Switzerland and Austria, has provides some insights in this interview.

Q: Ms Sun Yi, what advice would you give Chinese investors who are seeking to acquire a German company regarding preparation?

A: Although well begun is half done, we have seen that more than half of the Chinese investors were not sufficiently prepared before they carried out an M&A transaction.

Investors often ask me for a potential M&A target, and my follow-up question is typically: what is the size of the target company that they are looking for? The answer normally is that funds for acquiring the target are not an issue as long as the target fits. My response: It is about more than just funds. Sufficient funds are important, but it is also important that the investor has evaluated whether he/she will be able to manage and integrate the target company.

It is essential to set up a well-prepared transaction team well in advance. In most transactions (carried out by Chinese investors), a temporary team, comprising members who typically have English language skills and perform different functions, is organized when the project is going to kick off and they will carry out the project; whereas a traditional M&A function is already in place in most Western countries.

We compare the M&A transaction to a marriage: it needs mutual respect and a deep understanding among one another. It is strongly advised that the parties involved have a deep understanding of the target company and will participate in the management of the target after the deal. Such understanding can be gained by being involved in the deal from the beginning.

If the management team selected by the Chinese parent company has limited understanding of the target when beginning work at the German target company, they will have more challenges and need more time settling in. Unfortunately, it is often the case that Chinese investors assign management team members from the Chinese headquarters to the German company who are not well informed about the target company.

Furthermore, investors should also consider the funds needed for the additional working capital requirements of the target company following the deal. These are the key issues we touch upon in the advisory services we provide our clients prior to the M&A transaction.

Q: How much time should an investor plan in for an M&A transaction?

A: There are two types of transaction processes. One is the auction process which must be set to a particular time schedule, where the investors are invited and submit bids. The second is the one-one situation, in which only one exclusive buyer is involved and the structure of the process is then defined.

Most of the transactions nowadays are carried out using the auction process. In an auction process, there is a tight schedule which normally lasts between three to five months, beginning with market responses to the auction, sending out invitations, negotiations between the buyer and seller and finally the signing of the agreement.

For example, during a transaction to buy a medium-sized company, the first information will be received through the so-called “teaser.” Then a confidential agreement is signed and an information memorandum is drafted. The non-binding offer is then submitted within three to four weeks. Afterwards, a number of potential buyers will be invited to the upcoming due diligence phase. Decisions have to be made within a short period of time. In a period of four to six weeks, the financial due diligence, tax due diligence, legal due diligence, pension and HR due diligence and commercial due diligence are carried out. This is followed by the binding-offer period with a maximum of three to four weeks of negotiations, and then the signing of the purchase agreement. The transaction time is even shorter in the event of a takeover of an insolvent company.

In the case of a one-one transaction, the seller does not want to waste any time either. The seller offers exclusivity to only one investor. This exclusivity is limited to a maximum period of three to four months. Since the process is determined by the buyer and the seller jointly, the time pressure is not as high as in an auction process. As a result, Chinese investors today prefer a one-one situation from start to finish of the transaction process. I once had a client from a very large Chinese industrial group. Since the schedule was very tight, shortly before the submission of the offer the client asked us to persuade the seller to grant an extra two months to give them more time to make their decision. The seller rejected this request.

Q: What are the main obstacles that sellers and buyers have to overcome in the transaction process?

A: The biggest challenge is time, as decisions need to be made in a short period of time. To avoid any last-minute decisions, Chinese investors should have a well prepared schedule.

Another big challenge for investors is the post-transaction integration which must be planned in detail in advance. There are transactions in which Chinese investors take over a business unit from a large German corporation. Such transactions are known as a carve-out.

Investors need to consider what measures will be necessary during the transition period. As in the past, the business unit was a part of a corporation — independence could be problematic following the transaction in terms of IT, procurement, legal function, etc., which had been managed centrally by the previous company.

Typically the first two years following the transaction are considered to be a transitional period. The investor should draft a Transition Agreement with the seller to ensure the continuation of operations during this period. After all, the transitional phase is much more challenging than the closing phase, as integration and synergies between two companies require a relatively longer time to realize. The transitional period should be given more attention.

Q: How can Chinese investors prepare for the new corporate culture and foreign cultures?

A: The shareholder structure of different target companies can be diverse, for example a family-owned company versus a company managed by private equity. Irrespective of this, Chinese investors should always try to communicate with their target as closely as possible and in a timely manner to be sure that they are making the right choice. Sometimes the communication can go well very easily.

We have witnessed certain harmonized transaction processes where a Chinese investor has taken over a typical German family-owned company that have gone smoothly.

This is because both sides already knew each other over a long time through a supplying relationship, which provides a basis for close communication with each other in the right way.

Hence, communication is key to adapt a new corporate culture. We recommend that both sides get to know each other in various ways, for example managers’ meeting, site visits, business dinners, etc. Even after closing the transaction, an exchange program should be organized in which German managers and Chinese managers visit their partners’ country to get better understanding of the different culture backgrounds.

Q: Which employees of both companies should be involved from the beginning in the planning process?

A: Key employees in finance, legal, tax, sales and marketing should all be involved from an early stage, especially the leaders of those departments, as they need to make critical decisions both before and after the transaction.

Many Chinese investors look for Chinese professionals already located in Germany to manage their acquired German company.

Given their experience of living and working in Germany over the years, the employer hopes those overseas talents will help them in interpreting cultural differences.

However, it does not always turn out as expected. For example, we once had a client that asked us to find such a Chinese manager candidate in Germany.

The problem then is that the Chinese manager may have lived in a different country for too long to be able to adapt to the corporate culture of a Chinese state-owned enterprise.

The Chinese manager complained to us about the long decision-making process at the Chinese company, while our client was not satisfied with the manager’s working style.

Therefore both, investors and their target companies, should align their post-transaction integration strategy at an early stage with the help of key personnel from various departments.

The author is a researcher on Chinese investment in Germany. She has been working in Shanghai in executive positions at Chinese companies for many years. Shanghai Daily condensed her article because of space limitations.


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