If at first you don't succeed, merge, merge again or at least try to.
In recent months, Chinese enterprises have displayed unprecedented enthusiasm for overseas mergers and acquisitions (M&A).
Despite China National Offshore Oil Co's (CNOOC) failure to take over US-based Unocal and Haier's withdrawal from its Maytag bid, domestic ambitions to go global are stronger than ever.
China National Petroleum Corp (CNPC), the parent firm of Asia's top listed oil firm, PetroChina, responded by winning its bid to buy PetroKazakhstan for US$4.18 billion in August.
Chinese State-owned enterprises and private companies are embarking on a global strategic push, whether through overseas M&As or initial public offerings (IPOs). Unfortunately, risks go hand in hand with growth.
"They are a part of strategic growth, the cost of being happy," says Paul G Clifford, director of Marsh, a leading provider of risk and insurance services and solutions.
"Transferring or mitigating potential risks, especially hidden ones related to overseas M&As, is vital for successful deals," Clifford says.
"Address all the risks early on as you begin to look at an M&A transactin rather than leaving it to the last minute. Otherwise, the costs of acquisition can become much higher than expected."
Chinese companies may have developed in a very different business environment than the firms that they are merging with or acquiring.
Risks range from market and strategic risks to regulatory and legal ones. Each is country-specific.
In the United States, for example, there are many subtle issues related to the US Government and labour unions. US labour laws are also very complicated, which could raise many human resource-related difficulties.
Compensation for laid-off workers, for example, is a tough issue that needs to be dealt with once integration starts.
Pension liabilities for retired workers should never be overlooked or underestimated.
"It could become costly, much higher than expected," Clifford says.
Due diligence can prevent mistakes that bear long-term consequences.
TCL is a Chinese electronics firm that acquired two European companies. Guangdong-based TCL experienced considerable losses in the first quarter of this year after setting up a joint venture company with French firm Thomson and German company Schneider.
"At first glance, some German companies seem like good buys. They are affordable, and have solid foundations," says Stefan Baron, editor-in-chief of Wirtschafts Woche, Germany's largest weekly business magazine.
Failure to address social and cultural issues in a foreign country can seriously hurt a business, however.
"Purchasing a German company might not cost much because the economy is struggling," Baron says.
"But it could be very expensive to keep the company afloat later."
TCL officials hoped the purchases would help the firm expand in Europe, and that the Schneider brand, an old trademark in Europe, would offer TCL access to its worldwide distribution network.
Baron says TCL failed to win over the German market with its Schneider image.
"To many German consumers, Schneider comes off as old-fashioned," Baron says.
"TCL attempted to explore the market with fancy, high-tech products, but the Schneider brand could not help."
Thomson has factories in several European countries where labour laws are very strict, which presented a lot of difficulties for TCL.
"Following thorough due dilligence, transferable risks, such as property, environment and employee issues, could be addressed through different types of insurance," says Clifford.
"Other problems, such as market risks and strategic risks, can be mitigated through careful analysis and planning."
Clifford says the most challenging part is post-M&A integration.
"In that phase, risks have to do with how to retain the key staff and officers on the foreign side, maintaining existing business and customer relationships, and fostering the continued success of the acquired company."
A large number of M&A deals suffer from poorly executed integration, Clifford says. Some of them lead to de-merger, or the break up of the merged company. More often than not, merged companies do not become more profitable.
"To ensure effective integration, companies should carefully design risks management plan packages," says Clifford.
"Internally, the plan retains staff at all levels. Externally, it aims to maintain existing business and customer relationships."
Marsh recently set up a Chinese Client Service group in New York to provide services and solutions.
"The centre will help us respond to customer needs more quickly," says Clifford.
Marsh also plans to strengthen its presence in China by doubling its size over the next five years.
From PalmSource's US$22 million purchase to Procter & Gamble Co's US$1.8-billion buyout of a joint venture partner, overseas companies last year more than tripled their M&A investments in China to a record US$16.5 billion.
"China is going to host the biggest M&A boom in world history over the next decade," says Donald Straszheim, president of Los Angeles-based Straszheim Global Advisors LLC.
"Now we're seeing second-tier companies go in. We expect this trend to reach down to small firms as well."
"Being profitable in this lucrative market is not as easy as expected," warns Clifford.
"Foreign investors face domestic competitors in almost every sector."
To keep ahead of the competition, foreign companies should carefully define the part of the market they are going to go after, Clifford says.
"They should review their strategies frequently."
(China Daily 10/08/2005 page4)
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