Mergers & Acquisitions

Buying a Chinese company is often the easiest and fastest way to penetrate the Chinese market. Mergers & Acquisitions not only offer chances to obtain valuable market shares, channels of distribution, and customer relationships, but also opportunities to diversify into new business areas. Moreover, important relationships with relevant authorities can be established. M&A opens up exceptional growth possibilities for US companies in China.

Risks regarding M&A in China

In China, Mergers & Acquisitions also involve serious risks, described below.

Economic situation	Low efficiency and profitability. Often hidden debts and need for recapitalization. Dependence of the company on national subsidies that can be withdrawn at any time.
Ownership structure	Often interlaced, unclear ownership structure and shared ownership ratio among companies, families, clans, and persons. Unclear land usage rights.
Economic environment	Massive governmental interferences possible. Corruption, influence of guanxi (connections). Great regional distinctions. No adequate legal certainty. Shortage of resources, water and energy. Imminent restrictions due to rigid environmental laws.
Competitive environment	Often high degree of competition, price competition, market risks. Existing or impending overcapacity. Import and export restrictions, especially with regard to US and Europe. Threats by piracy and counterfeiting.
Finance	No or low equity, high debt ratio, not recoverable debts. Insufficient medium-term financial planning. No financial diversifications, therefore extreme dependence. No transparency due to lacking or insufficient cost, revenue and liquidity planning. No status reports and ad hoc coverage.
Management	Lack of professional and personal qualification of managers. No sustainable strategy, but short-term orientation on single details. Less professionalized management practices. Ineffective internal control and steering tools. Insufficient IT support.
Human Resources	Lack of skilled employees and executive managers. Lack of experience of employees, highstaff turnovers. Loss of institutional knowledge. Increasing labor costs in many areas, especially in the booming coastal regions.
Goods and services	Approved amount of business operations unclear. Often deficits in quality, problems with utilizations, outdated production facilities and technologies. Lack of product innovation, no R&D, inefficient manufacturing process. Missing or faked certificates, no flexibility in the case of market changes. Unprofitable because of too complex business portfolios. Increasing risk of liability.
Sales and Marketing	Lack of a marketing concept, marketing competence, great dependence in sales, logistic problems.

Detailed investigation of candidates

As hard data on Chinese companies are often not available or reliable, US investors must investigate the credit and history of companies prior to acquisition. Evaluation of companies in China is not primarily based on the traditional management data, but on information from the company's environment gathered from undercover investigation.

In China, it is common to analyze the biographies of firm owners, share holders and managers within the scope of an investigative Due Diligence. During this investigation information about bad management or penalties against the company and its managers are gathered. Liabilities of the evaluated company are detected from suppliers, sales partners, investors, and subsidiaries. A reconstruction of the company's history discloses the current economic power of the firm. By using benchmarks of competitors or companies of similar business fields or regions, the validity of data can be checked.

Evaluating the future of the company, investors can review different scenarios and hypotheses about the capabilities of the firm. Potential risks include impending shortages of power supply and resources, possible restrictions due to tightened environmental laws, increasing labor costs, price declines in the sales markets, and the saturation of sales markets. Based on this evaluation, a reasonable purchase price can be calculated. After the M&A contract is concluded, it will be crucial to manage the transaction process skillfully.