A one-company approach is needed

Multinationals may provide insight on the ultimate outcomes for Chinese entities that expand overseas

Over the past five years, a clear shift in focus has occurred regarding Chinese outbound mergers and acquisitions, prompting unique challenges in terms of integration and deal complexity.

In tandem with China's aspirations to become a more advanced economy, outbound M&As are no longer dominated by the resources sector, but rather, since about 2011, a more diverse ambit that includes technology, agriculture, consumer products, and sports and culture sectors.

Driven by a desire - if not need - to move up the value chain, Chinese companies now aspire to buy brands, know-how, markets and human capital overseas, notably in developed economies. Such a trend has led to deeper complexities given the typically more stringent regulatory environments, greater scrutiny by the media and public, and differing, entrenched business cultures. Integration thus becomes increasingly important to realize deal synergies and justify the deal premiums.

Chinese companies have generally faced two key issues related to the integration of acquired overseas businesses. First, Chinese firms often lack operating models as strong and replicable as multinational companies, which operate as cohesive entities irrespective of sector or geography. Second, despite substantial recent improvements, Chinese companies still have a relatively limited talent pool suited for overseas posting to manage the acquired business, and limited employer-brand visibility, presenting further difficulties in recruiting local talent abroad.

As a result, these companies have often managed acquired companies by retaining the acquired team and entrusting the business entirely to the legacy management to ensure continuity. This buys time for the new owner to develop a deeper understanding of the business. Then, after about a year or two, integration activities may commence to achieve the synergies initially planned.

This approach can be risky. The buyer's agenda may differ from the acquired management's priority, and investment can often be put on the back burner. Consequences can be grave for the buyer - deals managed this way can trigger a loss of momentum and result in delayed or unrealized synergies. Legacy management, accustomed to a high degree of autonomy, can resist efforts down the road to become integrated, seeing it as an interference and a source of distraction. Strained relations between management and owner can ensue, damaging employee morale and overall performance.

However, several best practices have emerged to help smooth the cross-border integration process.

First, a detailed "100-day integration plan" with quantifiable targets can send a positive message to the target, signaling that the buyer brings not only money, but also access to new markets and growth opportunities. The plan should be led by a dedicated team and credible managers to effectively bridge both organizations. A clear integration governance structure should be established between the Chinese and overseas subsidiaries to steer that team.

Second, the legacy management team can be managed by an effective set of key performance indicators supported by incentives. To reduce dependence on the legacy team, the buyer can also prepare a succession plan for senior management, by nurturing mid-level management or recruiting talent from the local job market.

This dovetails with the more recent concept of reverse integration, which is where a Chinese buyer injects its existing business in the same sector into the acquired business and manages under a joint management team led by the legacy management. Done correctly, reverse integration breaks down internal inertia to change and allows for cross-pollination of leading practices and leveraging of respective strengths of both organizations, such as the combination of the advanced global operating model and the commercial platform to penetrate the China market.

Chinese companies also need to win the hearts and minds of employees and local stakeholders. Companies should adopt a one-company approach, dismantling barriers between existing and acquired employees by fostering a management mindset and creating a work environment that embraces cultural diversity and multifaceted viewpoints.

Perhaps the journey of multinationals in China may also offer valuable lessons. Most multinationals entered China by finding local players. As regulations relaxed and talent quality improved, they increased their presence in China, some even cementing regional hubs to support global operations.

Given a general expectation among Chinese companies that their outbound deals are for the benefit of the home market, the success of multinationals in China as solid operating entities in their own right, woven into the local communities, may provide insight on the ultimate outcomes for Chinese entities overseas.

That outbound deals today are bigger and more complex than five years ago reflects the gravitas Chinese firms place on overseas targets. Driven by favorable government policies such as the Belt and Road Initiative and supportive free trade agreements such as with Australia and South Korea, this trend is likely to continue.

By adopting effective integration measures, it is hoped Chinese companies can further accelerate their learning curve and adapt their operating mode to maximize deal synergies from overseas acquisitions to become the new generation of multinational enterprises.

The author is a partner specializing in integration at KPMG China. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 03/04/2016 page9)