Mergers & Acquisitions

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

Risks regarding M&A in China

In China, Mergers & Acquisitions also involve various and serious risks. The most important risks are shown below.

Economic situation	Low efficiency and profitability. Often hidden debts and need of recapitalization. Dependence of the company from national subsidies that can be withdrawn at any time.
Ownership structure	Often interlaced, unclear ownership structure and share ownership ratio between companies, families, clans and persons. Unclear land usage rights.
Economic environment	Massive governmental interferences possible. Corruption, influence of guanxi. 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, ruinous price competition, high market risks. Existing or impending overcapacity. Import and export restrictions, especially with regard to USA 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. Unprofessional management, acting on instinct. Ineffective internal control and steering tools. Insufficient IT support.
Human Resources	Lack of skilled employees and executive managers. Lack of experience of employees, great staff turnovers. Loss of know-how. Increasing labor costs in many areas, especially in the booming coastal regions. Compulsion of employment of needless, unqualified or inefficient personnel.
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 Often deficits in quality, problems with utilizations, outdated production facilities and technologies.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, little marketing competence, great dependence in sales, logistic problems.

Detailed investigation of candidates

As relevant hard facts of Chinese companies are usually not sufficiently available and reliable, investors have to test the credit standing by investigating the environment and the history of the company. That means that the evaluation of companies in China is not primarily based on the management, but on information from the company's environment gathered from undercover investigation.

In China it is common to analyse 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 of 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 possible economic power of the firm today. By using benchmarks of competitors or companies of similar business fields or regions, the validity of data can be checked. Against the background of their market environment, many Chinese companies appear in a different light.

Evaluating the future of the company, different scenarios and hypotheses are proposed about the capabilities of the firm. Risk-related parameters are 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.