Trials and tribulations of foreign mergers and acquisitions

To buy or not to buy? That is the question.

The year 2009 saw private Chinese companies - mostly "nobodies" before the global financial crisis - being given the chance to merge with overseas industry leaders that had suffered heavy blows or even went bankrupt in the downturn.

The latest high-profile case involves Geely Automobile, a 12-year-old Chinese carmaker. It announced in November it would spend between $1.5 billion and $2 billion on buying the 82-year-old luxury Swedish brand, Volvo Cars, from Ford Motor Co. Ford paid $6.45 billion for Volvo in 1999.

In the last few years, Volvo's sales had declined continuously amid a global auto market slump. In 2008, Volvo posted a $1.5 billion loss.

But the Hong Kong-listed Geely is growing fast thanks to a big sales boom in China, which replaced the United States as the world's largest auto market in 2009.

China is expected to sell more than 13 million vehicles in 2009, up more than 40 percent from 2008.

More private enterprises

Geely netted a profit of 560 million yuan in the first half of 2009, up 110 percent year-on-year. It aims to sell 300,000 vehicles this year, up from 204,000 units in 2008.

Geely's robust sales fuelled a big stock rally this year. Geely. Its shares, which nosedived to a mere HK$0.15 on Oct 31 last year, closed at HK$3.95 on Dec 18 on the Hong Kong stock market.

"Geely's market value totaled more than 30 billion Hong Kong dollars. There are banks that are willing to give Geely loans for mergers and acquisitions (M&As). So money was not a problem over Volvo's acquisition," Geely Board Chairman Li Shufu said.

Ba Shusong, a renowned economist with the Development Research Center under the State Council, the government's think-tank, agreed. "Chinese enterprises don't lack money in overseas M&A," he said.

The global financial crisis has given Chinese enterprises a window of opportunity to seek overseas M&A since their relative economic power has been strengthened and they have good liquidity, according to Ba.

Pros and cons

Chinese business people and experts say overseas M&A can bring benefits, but they also bring high risks, and so far there have been few successful M&A transactions completed by private Chinese companies.

The benefits are obvious: Chinese companies will be able to quickly acquire resources, technology, brands and the sales channels of these overseas companies, said Ba.

"Private Chinese companies have been facing shrinking profit margins. Overseas M&A can improve their status in the industrial chain and increase profit," he added.

But in the face of tough M&A processes, wide differences in cultures and laws as well as the problems of integrating acquired companies, Chinese private companies - most of which are young and fledgling - often balk at overseas M&A.

According to a report entitled The Emergence of China - New Frontiers in Outbound M&A, which was released by accounting giant Deloitte LLP earlier December, Chinese companies made 61 overseas deals worth $21.2 billion in the first three quarters of 2009.

But experts and Chinese business people, including some involved in successful overseas M&A transactions, are less optimistic than the Deloitte report's findings indicate.

Li Wenfu, a professor with Xiamen University, said so far there have been few successful overseas M&A deals completed by private Chinese companies.

In the M&A game, private Chinese companies are just too immature at both negotiations and the management of the acquired company, he said.

Li Zhenhui, president of Fujian Shuangfei Daily Chemicals Co Ltd, which acquired parts of a US-based cosmetics company in 2008, said the acquisition was basically "an accident" after the US company went bankrupt.

Shuangfei, a supplier of skin care products in Southeast China, acquired two brands owned by its largest client the Miami-based Solar Cosmetics Lab.

"To be honest, at that time, we were very unprepared to make the acquisition," said Li. His first response was sending a team to the US to demand the debt payment.

"The first choice was to take back all the debt. If not, then we would allow it to pay the debt in installments. Acquiring Solar's assets was actually the last choice," Li recalled.

Before Solar's bankruptcy in May in 2008, Shuangfei was Solar's largest creditor, with the latter owing it about $1.43 million.

Li maintained the acquisition decision has been right so far. But he also readily admitted difficulties in managing and integrating the acquired company.

Xinhua

(China Daily 12/28/2009 page8)