Economy

5 things Chinese firms need to know about global expansion

By Phil Leung and Larry Zhu (chinadaily.com.cn)
Updated: 2010-07-23 17:02

Rule 3: Know which deals you should close

Ask and answer the few questions that test your investment thesis.

Identifying potential acquisition targets and winnowing them to one or two best choices requires discipline. Instead of hastily reacting to acquisition targets as they come on the market, seasoned deal makers know their basis of competition and are constantly thinking about the types of deals they should pursue. Their M&A teams create a pipeline of priority targets, each with a customized investment thesis and then cultivate a relationship with each one. As a result, they can quickly close a deal.

Because they know what they want to achieve with the acquisition, they're often willing to pay a premium or act faster than rivals.

But before closing a deal, winners overinvest in due diligence. In cross-border deals, rigorous due diligence is even more critical to head off problems before a purchase is completed and requires extra attention. The process should start by zeroing in on potential roadblocks such as regulatory or political issues. To develop an insider's point of view, companies can tap their existing networks or customers and dispatch an advance team to review the target firm thoroughly.

Rule 4: Know where you need to integrate first

Prioritize getting at the key sources of value quickly.

Our research shows that cross-border deals carry a similar rate of success as domestic deals, but integration typically is more complex. The unique challenges include tailoring the integration thesis to each region's circumstances, tackling actual and perceived cultural differences, considering geographically dispersed operations and stakeholders as well as complex legal and regulatory requirements that can derail the integration.

To boost the odds of success, acquirers need to:

• Identify the best sources of synergies and prioritize them

• Ensure that the integration process isn't overly complex

• Be able to make decisions quickly so that critical milestones aren't missed

• Provide strong leadership of the integration process

Understanding whether deals are to boost "scope" or "scale" is vital. Chinese apparel maker Youngor Group Ltd's acquisition of US based Kellwood Co's Smart Shirts business is largely a scale deal designed to expand a core business, as opposed to a scope deal aimed at expanding into adjacent lines of business. Scope deals require a different approach to integration than scale deals, with the goal of fostering some of the capabilities of the acquired company and integrating where it matters most, rather than combining two similar companies for maximum efficiency.

Meanwhile, when it comes to people issues, many companies wait too long on organizational and leadership decisions. Poor performance in the base business frequently occurs when integration soaks up too much energy or drags on, distracting managers from the core business. As a rule of thumb, at least 90 percent of the organization should be focused on the base business, and these people should have clear targets and incentives to keep those businesses humming.

Rule 5: Know what to do if the deal goes off track

Set up an early warning system and act quickly. No deal goes exactly as planned. The best deal makers expect to hit a few potholes. They install early-warning systems to detect problems and tackle them as soon as they emerge. They distinguish between the inevitable glitches and those that signal something far more serious. Here, the need for unsentimental discipline reaches its peak: Acquirers must let go of the past, admit errors and take decisive action to put their deals back on track—or not.

Ultimately, to improve the odds of a successful global expansion, knowing when to pull out of a deal is just as critical as the other four guiding principles: knowing the best approach for your situation, knowing why you're acquiring, knowing the best deals to go after and knowing where to integrate. The more Chinese companies look for growth overseas, the more they need to be guided by these principles.

Phil Leung is a partner with Bain & Company's Shanghai office and leads the firm's Greater China Mergers & Acquisitions practice. Larry Zhu is a partner with Bain & Company's Shanghai office and a member of the firm's Greater China Mergers & Acquisitions practice.