Mergers and Acquisitions in China 2009

Deal Cultivation – Key to Success in Making Acquisitions in China Steven H. Ganster, Managing Director Technomic Asia A Subsidiary of Tompkins International [email_address] www.technomicasia.com www.tompkinsinc.com Presented at the… 2009 & 6 th Annual Mergers & Acquisitions in China Summit

Topics
China’s M & A Landscape
Evolution of M & A as a growth strategy in China
Unique complexities in China’s M & A process
Strategy vs. Structure
Cultivating the deal
Key principles of success

The M&A Landscape China is in a “late adolescent” phase in terms of market maturity... Infant Toddler Young Teen Late Adolescent

The M&A Landscape
Opaque financial systems
Corruption
Rule of man versus rule of law
Unpredictable regulations
Huge cultural differences
Expensive and time consuming to get things done
Lacking enough local talent
Defining your addressable market
Dealing with high level of uncertainty
Access to local markets
Being cost competitive
Dealing with counterfeits and IP infringement
Understanding Chinese business culture
Successfully China-fying your business model
A number of planning and operating challenges color the backdrop of making acquisitions in China…

The M&A Landscape
Business is getting tougher
No “low-hanging fruit”—obvious ones gone or unavailable
Margins being squeezed--Increased competition
Companies are suffering financially
Motivations for buyers to buy are solidifying
Control supply chain
Accelerate penetration of local market
Obtain cheaper assets
Motivations for sellers to sell are poorly defined but clarifying
SOEs privatizing
Cash out
Thirst for technology (hard and soft)
Lock in big ticket customer
Access to global distribution and customer list
Possible alternative to listing (though still a motivation for many)
Given this environment, several key issues are shaping M&A in China today…

The problems in the “early days” of the JV are leading to altered strategies today…
What went wrong…?
JV-structure before strategy
WOFE-reactionary response
Acquisition-using a hybrid approach via M&A
Evolution of M&A as a Strategy 80s – 90s 2000 2010 50/50 JV WOFE Acquisition

There are many complex issues surrounding acquisitions or joint ventures in Asia.
Opaque management structures
Complex state and township - owned conglomerates
Added political risks
Transaction sizes small
Regional fragmentation
Market environment more fluid
Government/regulatory impasses
Reliable information scarce
Legal system ambiguity
Lack of professional management
Thin historical data
Dynamic competitive landscape new entrants
Unique Complexities in China M&A
Unsophisticated sellers

Market/Competitor Assessment Develop Strategic Intent Partner Qualification Deal Cultivation LOI Due Diligence Deal Close Integration / Start up WOFE, Other Alliance Unique Complexities in China M&A
Fluid market environment
Reliable information scarce
Dynamic competitive environment with new entrants
Deal flow – identify appropriate targets
Finding right deal size (often too small)
Unsophisticated sellers
Lack of professional management
Understanding motivations of all players
Satisfying multiple wants/needs
Not enough focus
Less meaning in China – no “teeth”
30% close rate
Opaque management structures
Multiple books
Regulatory impasses
Gov’t obstruction / intervention
High cost/deal ratio
Keeping deal together until final agreement signed

Non linear
Time consuming
Expensive
Frustrating
A discovery process
… a lot like a ride on Disney’s Space Mountain!
Unique Complexities in China M&A

Strategy vs. Structure China’s tough market environment necessitates doing “strategy before structure” In the past… Structure (JV) China Strategy Force-fit the strategy to the structure Find the structure to fit the strategy Structure (any) China Strategy Today…

Foreign Investor Chinese Company LTD FIE (JV, WFOE) Non-China offshore company (NCOC) FIE (JV, WFOE) China border FIE (JV, WFOE) Buy shares or the whole NCOC to own the FIE in China* Convert the Chinese Company to an FIE in case of equity deals or concurrently set up an FIE to hold acquired assets The Foreign Investor owns or intends to set up an FIE first Direct acquisition Buy and run acquired assets The NCOC owns the FIE Strategy vs. Structure *It is also popular when establishing a JV, to set up the partnership outside of China which entity then wholly own the China WFOE FIE (JV, WFOE) Convert JV to WFOE in case of buying equity form Chinese owner(s) or concurrently set up an FIE to hold acquired assets

China sellers often have a different deal paradigm that is critical to appreciate … Everything flows from financials… Everything flows from relationships… vs. Cultivating the Deal – Buyer and Seller Motivations
Types of Sellers
Unsuspecting
Inexperienced
Resistant
Desperate
“ The West”
Financial due diligence
Commercial (calculated)
Structure
… ..
Relationship
China
Commercial (intuitive)
Relationship
……
Structure
Financial due diligence

The Acquisition Process… Transaction Structure & Execution Candidate Identification & Qualification Acquisition Strategy Legal, Financial & Commercial Due Diligence LOI Signed In China, acquisitions require more upfront target cultivation and pre-due diligence than is typically needed in the West. Cultivating the Deal – Doing the Work! Deal Cultivation & Pre Due Diligence Market Assessment & Business case These areas often short changed

At the Discovery Stage, “Level of insight per dollar” is very high!
The Acquisition Process… Approach to target companies Negotiation of Framework Agreement Discovery Stage Formal DD Stage and Valuation Definitive Agreement Signing of LOI Transaction costs can be quite high in China, compared to the deal sizes available, so effective “discovery” is important before spending substantive dollars in due diligence. Cultivating the Deal –Discovery Stage Transaction costs

Some Key Principles for Deal Success
Strategy before structure!!
Start with a clean company whenever possible—asset purchase
Know what assets you really need to own
Be creative—don’t just transplant your western business model
Controlling the operation is paramount (key management functions)
… but you don’t have to own everything to control it
Consider “strange bedfellows” as targets/alliances
Work closely with local government from the beginning
Invest in RELATIONSHIP building
Observe the 6 Ds

Thank You!

Introduction to Technomic Asia A Division of Tompkins Associates Summer 2009 For more information, contact: Steve Ganster Managing Director [email_address] Technomic Asia China Office Room 502, Jin Tai Building 58 Mao Ming Road (South), Shanghai 200020, China Tel: +86-21-6473-2588 Fax: +86-21-6390-6659 www.technomicasia.com www.tompkinsinc.com

Background
Technomic Asia recently became the Asian arm of Tompkins Associates, a renowned global business and supply chain consultancy.
As of January 2008, Technomic merged into Tompkins Associates.
Technomic Asia has over 25 years of consulting experience in Asia having assisted over 200 multinational clients with their Asia business strategy, sourcing and supply chain strategies.
Technomic Asia and Tompkins have deep experience in the acquisition process from candidate identification/qualification through due diligence.

Technomic Asia provides the following solutions for multinational firms to support their Asian strategy needs for both new investments and existing operations:
Asian entry and growth planning and support including market assessment, business case development and entry strategy.
Acquisition support from candidate identification, qualification, deal structure and negotiation and commercial due diligence.
Asian sourcing and supply chain assessments including supplier relationship and improvement programs.
Assessment of Asia “ readiness” for portfolio companies based on our proprietary methodologies.
Technomic Asia Core Services

We have been on-the-ground in China since 1985 (JV) and have assisted over 200 MNCs in their China strategy and operational initiatives.
Legal status comprises WOFE and Representative offices
We have broad experience in multiple industrial areas, including commercial, residential, industrial and infrastructure segments.
China Capabilities Through its subsidiary in Shanghai, Technomic has extensive operational experience in China (as well as the Asian region in total).
Our China consulting services are supported by a set of effective tools at the corporate level to assist companies in the benchmarking process.
Our China operation is well integrated with Tompkins worldwide to enable the seamless implementation and rollout of global programs.

China Capabilities (cont’d)
~20 professional staff with varied backgrounds
All but one are mainland Chinese citizens
Most have masters degrees both from China and overseas business schools
Multilingual Chinese, English and other
All with industry experience
Priority characteristics of our China operation include…
Longer Time Based Experience in China, Ahead of Any Other Major Firms
Innovative, Pragmatic, “Street Smart” Approach
Client Centered Solution
Possessing In-depth China know-how and Cultural Sensitivities
Deep experience working with MNC management on their China initiatives
Direct involvement of senior management in program engagement
Broad industry experience, including capital equipment
Trust and Integrity

Technomic Asia was one of the first foreign consulting firms licensed to practice in China
We have completed over 650 programs in China alone across a wide range of industries
Technomic Asia provides a unique value proposition which differs from other consulting and firms in Asia. Our Value Proposition
Basic data
Limited analysis
Minimal strategic direction
Low cost
On-the-ground, “street-smart” approach.
Deeper, more mature market understanding
Ability to filter, sort and process insight to determine implications
Extensive experience to recommend how client can respond to “win”
Can take client all the way to an actionable business plan
Moderate cost
High level market view “35,000 feet”
Often “valuation” focused
Limited tactics
High cost

We provide capabilities in candidate identification, qualification and due diligence, as well as underlying alliance/acquisition strategy and deal support. Candidate Qualification and Screening Market Based Due Diligence Negotiation and Close Core Services Include... Acquisition Strategy Development
Screen on first level criteria
Qualify and focus on primary candidates
Profiling of short-listed candidates and attractiveness level
Determine candidate interest
Develop & Sign LOI
Deeper assessment of target candidates from perspective of customers, suppliers and the supply chain
Validate viability of business case.
Deal Structure
Negotiation Support
Optimize Government subsidies
Legal & Financial due diligence
Integration Planning
Closure
Acquisition Services
Core Objectives of Deal
Target Products & Technologies
Geographic Focus
Critical success factors
Candidate Criteria
Develop long-list of candidates

http://www.slideshare.net	80
http://www.technomicasia.com	33

Mergers and Acquisitions in China 2009

by Technomic Asia on Jun 26, 2009

Accessibility

Categories

Tags

Upload Details

Usage Rights

2 Embeds 113

Statistics

Mergers and Acquisitions in China 2009 — Presentation Transcript