KSF For Chinese Companies Investing Abroad Value Partners

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"International M&A, Investments and Beyond: Doing the Deal Abroad" - Value Partners' speech at the conference, held in Beijing devoted to Chinese enterprises involved in outbound M&A activities.

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KSF For Chinese Companies Investing Abroad Value Partners

  1. 1. China M&A Conference 2008-P0 The information contained in this document belongs to Value Partners S.p.A and to the recipient of the document. The information is strictly linked to the oral comments which were made at its presentation, and may only be used by attendees of that presentation. Unauthorized copying, disclosure or distribution of the material in this document is strictly forbidden and may be unlawful. Beijing, October 2008 0
  2. 2. China M&A Conference 2008-P1 1• Chinese outbound FDI have increased sharply and this process is likely to accelerate in next years, driven by the stronger position of Chinese companies and by the current international scenario 2• Over the past years there have been some remarkable success stories of foreign expansion by Chinese companies, while other initiatives have encountered some difficulties. As a matter of fact, Chinese companies are often hesitant to pursue outbound opportunities because of their lack of international experience 3• In order to succeed in their overseas expansion, Chinese companies should go through four key steps: a) Develop a clear international strategy; b) Prepare the organization and resources to succeed; c) Build strong understanding of target markets; d) Manage carefully the post acquisition phase 4• Chinese companies should move quickly in this direction to capture the opportunities offered by the current scenario 1
  3. 3. China M&A Conference 2008-P2 1• Chinese outbound FDI have increased sharply and this process is likely to accelerate in next years, driven by the stronger position of Chinese companies and by the current international scenario 2• Over the past years there have been some remarkable success stories of foreign expansion by Chinese companies, while other initiatives have encountered some difficulties. As a matter of fact, Chinese companies are often hesitant to pursue outbound opportunities because of their lack of international experience 3• In order to succeed in their overseas expansion, Chinese companies should go through four key steps: a) Develop a clear international strategy; b) Prepare the organization and resources to succeed; c) Build strong understanding of target markets; d) Manage carefully the post acquisition phase 4• Chinese companies should move quickly in this direction to capture the opportunities offered by the current scenario 2
  4. 4. China M&A Conference 2008-P3 CAGR 2003-2007 USD billion, 2003-2007 Key drivers: • Chinese companies’ strong demand to gain 26.5 access to: 75% - Natural resources 21.2 - New markets - New technologies • Strengthening competitiveness of 12.3 Chinese companies • Sufficient FX reserves 5.5 accumulated in the past 2.9 • China government incentives 2003 2004 2005 2006 2007 Source: Ministry of Commerce, Statistic Bureau, Value Partners analysis 3
  5. 5. China M&A Conference 2008-P4 %, 2007 Accumulative Outbound FDI as % of GDP by 2007 UK 61.5 • Compared to developed France 54.7 countries, China outbound FDI vs. GDP is still very low Taiwan 41.3 • The low ODI reflects that Chinese companies still Germany 37.3 rely heavily on domestic market as well as resources Malaysia 31.2 • Going forward, along with 20.2 GDP growth and US globalization of Chinese companies, there is a huge 12.4 potential for increase of Japan Chinese outbound FDIs China 3 Source: United Nations Conference on Trade& Development, Ministry of Commerce, Statistic Bureau, Value Partners analysis 4
  6. 6. China M&A Conference 2008-P5 ! quot; # # Analysis based on 46 outbound FDI transactions above USD10mln in 2005-Sep.2008 Chinese outbound FDI by industry Chinese outbound FDI by geography 100%=49.5 billion USD (~53% of total ODI) 100%=49.5 billion USD (~53% of total ODI) Machinery:2% Telecom & high-tech: 2% Latin Transportation & Consumer goods: 1% America • Shift from Asia to other logistics: 2% Others: 1% Oceania geographies 5% 5% 26% North Africa America 17% Natural Financial resource 51% services 40% Europe 23% 24% Asia Source: Thomson Financial, Value Partners analysis 5
  7. 7. China M&A Conference 2008-P6 # $ $ % & Analysis based on 46 outbound FDI transactions above USD10mln in 2005-Sep.2008 Reasons for outbound Value of deals No. of deals Top industries Top target areas investment (bln USD) 1 Entering new market • Banks • USA 26 29.5 • Investment advice • Hong Kong • Semiconductors • UK 2 Financial investment/ • Banks • Hong Kong diversification 28.9 • USA 22 • UK 3 Access to natural • Oil and gas • Kazakhstan resources 19 19.9 • Iron ores • Canada • Gold ores • Australia • Used to be primary 4 reason in previous years Access to capabilities • Banks • USA (e.g. risk management, 12 17.8 • Hong Kong product design) 5 Increase manufacturing • Semiconductors • Japan scale 9 2.8 • Medical apparatus • USA Source: Thomson Financial, Value Partners analysis 6
  8. 8. China M&A Conference 2008-P7 $ Chinese companies among Fortune 500, 2003 vs. 2007 Number of Chinese companies Average revenues CAGR 03‘-07’ USD billion CAGR ‘03-’07 35 12% 37.6 24% 23.9 15 2003 2007 2003 2007 • New companies joining the list are mainly in Energy, Financial sector, Telecom & High-tech industries, reflecting strengthening diversification of China economic structure • Thanks to quick increasing of revenue size, 6 Chinese companies newly join in top 200 and 3 newly join in top 25 (Sinopec, State Grid, China National Petroleum) Source: Fortune500, Value Partners analysis 7
  9. 9. China M&A Conference 2008-P8 Jan 2007 P/E ratio in different countries, Jan.2007 vs. Oct. 2008 Oct 2008 Countries Index P/E change % change 17.4 USA S&P 500 -18% 14.2 24.5 USA Nasdaq -30% 17.0 14.0 UK FTSE 100 -33% 9.4 Germany DAX 14.2 -18% 11.7 France CAC-40 15.4 -36% 9.9 Spain IBEX 35 21.2 9 -58% Italy MIB 30 17.1 8.3 -51% Australia S&P/ASX 200 17.3 -29% 12.3 Singapore Straits Times 14.3 6.7 -53% • Average PE for above countries in Oct.2008 is 9 • For comparison, PE in Shanghai index is 16 Source: Stock exchanges in different countries, Value Partners analysis 8
  10. 10. China M&A Conference 2008-P9 ' (!# (!# Cases Key consideration to make a M&A case abroad Lack of international Possibility to get Difficulty to develop Difficulty to work with expansion experience targets’ key information Greenfield projects foreign partners Chinese M&A investments abroad • As newly emerging • The target markets, if in • Due to limited • Chinese companies may global players, Chinese developed countries, international local market face significant difficulty companies are fairly have systematic experiences, it is hard for due to then lack of weak in international company database for Chinese companies to understanding on foreign expansion experiences M&A reference start up a new entity in culture foreign environment Foreign M&A investments in China • Developed countries • China enterprise • Foreign companies • Foreign players must have established strong database is still under usually can leverage on develop capability of track records in construction own experiences and adapting to Chinese international expansion • Still need to dedicate a local professional culture lot of efforts to verify the support to set up WOFE information in China 9
  11. 11. China M&A Conference 2008-P10 1• Chinese outbound FDI have increased sharply and this process is likely to accelerate in next years, driven by the stronger position of Chinese companies and by the current international scenario 2• Over the past years there have been some remarkable success stories of foreign expansion by Chinese companies, while other initiatives have encountered some difficulties. As a matter of fact, Chinese companies are often hesitant to pursue outbound opportunities because of their lack of international experience 3• In order to succeed in their overseas expansion, Chinese companies should go through four key steps: a) Develop a clear international strategy; b) Prepare the organization and resources to succeed; c) Build strong understanding of target markets; d) Manage carefully the post acquisition phase 4• Chinese companies should move quickly in this direction to capture the opportunities offered by the current scenario 10
  12. 12. China M&A Conference 2008-P11 ) $ % $ Company Introduction Some • Acquired the whole PC business unit of IBM in May, 2005 remarkable success stories… • By 2007, Huawei set up more than 100 branches in the world and gets 72% sales revenue from overseas market • Zoomlion acquired the Italian company CIFA in September, 2008 …some • CNOOC bid to buy Unocal in June, 2005 initiatives that encountered difficulties • Haier bid to buy Maytag in June, 2005 • TCL found a JV (TTE) with Thomson in July, 2004 • A Chinese textile • Tried to buy assets of an Italian company company Source: Industry research, Value Partners analysis 11
  13. 13. China M&A Conference 2008-P12 * $ +( , - . KSF Description Rationale Combined • The acquisition brings together most valuable • Lenovo can quickly access to strengths of competencies of two companies: target markets and customer two companies - IBM’s strong product design, customers segments thanks to IBM’s long services and branding established market position - Lenovo’s competitive production, supply chain • IBM can focus on providing IT management and procurement solutions by giving up non • Successfully • Through the acquisition, Lenovo gains access to strategic business to a leading penetrated into target global corporate client computer market player markets • Gained strong product design and advanced customer service Realized the • In order to smooth the acquisition impact, little • Smooth transition after the competencies importance of change on organizations and processes in the acquisition helps to retain cultural fit and first year post acquisition customers and talents • Effectively generated made it top • Located the HQ in US and hired foreign • Two companies’ culture might synergies after the priority post management team compensate with each other acquisition acquisition • Carefully introduced Lenovo’s key sales model and benefit the new entity in the to overseas markets since the third year after long term acquisition Source: Industry research, Value Partners analysis 12
  14. 14. China M&A Conference 2008-P13 / $ $ % % & KSF Description Rationale Started • Entered Africa, mid-east, Asia-Pacific, CEE • Emerging markets have lower expansion from and Latin America since 1995 entry barriers and are more emerging - Emphasize on competitive price strategy sensitive to pricing markets • Developed countries require • Later entered developed countries in Europe stricter qualifications and • Successfully and USA longer entry time penetrated into both - Started with partnership with world leading emerging and competitors developed Created a pool • Recruited qualified talents and retained them • Chinese sales team not only is countries of managers with competitive salary packages competent to win contracts in capable to fierce international competition, • Built a strong work in • Deployed key personnel in sales team to but also has strong international sales international develop international markets since 2000 commitment to company culture team environment - Accounts for ~50% of overseas staff • Effectively delivered products and services Retained • Invited consulting firms who specialized in • Effectively identify local customer to meet local clients’ advisors to Telecom industry to conduct detailed local needs so as to develop right needs help it market research products/service to fit with it understand customer needs Source: Industry research, Value Partners analysis 13
  15. 15. China M&A Conference 2008-P14 0 1 # % KSF Description Rationale Strong • CIFA is an Italian manufacturer of concrete • Rapidly move production of rationale for machineries, the only one with a full range of some components to generate the deal products cost reduction synergies for • In several segments CIFA is a recognized CIFA leader, thanks to technology, quality and • Leverage CIFA’s distribution • Successfully reasonable price channels to sell low end completed • A rigid labour environment in Italy makes products manufactured by acquisition changes and efficiencies difficult Zoomlion • Zoomlion recently emerged rapidly thanks to • Reduce duplicated investments • Created global the explosion of construction sector in China in several markets leader in the industry and enjoying the cost advantages of China production • Started integration Participation of • CIFA’s ownership, a PE fund was looking for process • Financial partner could help to financial an exit find the right investor through its partner • It identified Zoomlion as a potential investor strong network both in investment and industry area Recognition of • Zoomlion already started to approach some • Understanding of different cultural foreign emerging markets cultures could help to facilitate diversity • Both parties had good communication during the negotiation process the process Source: Industry research, Value Partners analysis 14
  16. 16. China M&A Conference 2008-P15 quot;22 / 1 $ $ Player Description Why did it stop? • In June 2005, CNOOC placed a bid for Unocal, • Unable to identify the sensitivity of the the NO.9 petroleum company in USA bid at early stage CNOOC • In July 2005,Chevron emerged as competitor of - US might worried about China’s the bid and soon got Unocal shareholders’ ambition to get its strategic energy support resources through the bid • Both companies launched PR and lobbying activities, but in the end USA government decided • Lack of experience in communication to examine CNOOC bid with US media and government • As a result, CNOOC withdrew the bid and - Too late to start lobbying and PR Chevron won • In June 2005, Haier submitted LOI to Maytag and • Faced challenges from US people and started due diligence government due to CNOOC bidding Haier • Ripplewood and Whirlpool joined in the acquisition competition with higher price • Lack of experience in communication • Haier withdrew the bid and Whirlpool won with US media - Not actively disclosed to media the bidding plan/intention, leading to suspicions from US people Source: Industry research, Value Partners analysis 15
  17. 17. China M&A Conference 2008-P16 ' * & ' $ % & $ 3 ) Player Description Why did it experience problems? • In July 2004,TCL set up TTE, a JV with • Lack of understanding of differences Thomson, in which ~9,000 employees of between French and Chinese culture TCL Thomson joined - French might prefer work and life balance, while Chinese might not • In 2005, TTE lost ~70 mil EUR care to mix work and life together • In Nov 2006, TCL launched restructuring plan • Lack of experience in dealing with on TTE, stopping its sales activities in European European Unions market - European Unions strongly protect workers’ rights, leading to tough • By 2006,TTE lost ~250 mil EUR due to business negotiations and high restructuring loss and restructuring cost cost Source: Industry research, Value Partners analysis 16
  18. 18. China M&A Conference 2008-P17 # & Context Rationale of deal Why did it fail? • A world wide textile production • By acquiring assets, Chinese • The Chinese company saw the shifting from USA/EU to Asia company could have deal only as an opportunity to (not only China) - Shorter time to market make some savings but did not - Faster than long row of realize the value of anticipating • An Italian textile company was competitors to win the competitions of ~2 years looking for a buyer for some competition assets (machines) • Different cultural approach to • For Italian company: negotiate: • A hot market where buyers had a - Assets has interesting value - Italian company changing 1.5/2y waiting list to buy these - Not necessary to sell the whole opinion very frequently types of machines company, which might make - Chinese company not always the potential buyer afraid of giving clear messages liability/employee issues Source: Industry research, Value Partners analysis 17
  19. 19. China M&A Conference 2008-P18 # % & Key weakness of Chinese companies Implications • Limited knowledge of international markets, e.g. • Chinese companies often - Market situation hesitant to pursue - Regulations outbound opportunities - Customers • Approach tends to be • Limited availability of managers who can operate in reactive rather than international context, e.g. - Language proficiency proactive, leading to - Foreign culture understanding suboptimal selection of - Social network opportunities • Lack of systematic process, e.g. - Strategy definition - Roadmap development - Execution process 18
  20. 20. China M&A Conference 2008-P19 1• Chinese outbound FDI have increased sharply and this process is likely to accelerate in next years, driven by the stronger position of Chinese companies and by the current international scenario 2• Over the past years there have been some remarkable success stories of foreign expansion by Chinese companies, while other initiatives have encountered some difficulties. As a matter of fact, Chinese companies are often hesitant to pursue outbound opportunities because of their lack of international experience 3• In order to succeed in their overseas expansion, Chinese companies should go through four key steps: a) Develop a clear international strategy; b) Prepare the organization and resources to succeed; c) Build strong understanding of target markets; d) Manage carefully the post acquisition phase 4• Chinese companies should move quickly in this direction to capture the opportunities offered by the current scenario 19
  21. 21. China M&A Conference 2008-P20 & % 1 2 3 4 Develop a clear Prepare the organization Build strong Carefully manage the international strategy understanding of target Post Merger Integration markets phase • Define objectives • Define need for resources • Build market database • Quickly take key strategic decisions, to define main • Understand internal • Prepare organization • Create networks in target directions to follow strengths/weaknesses responsible for countries international expansion • Identify key resources in • Analyze global competitive • Identify most suitable charge and involved in the scenarios • Recruit/train people targets process • Define priorities • Define process to scout • Understand valuation and • Define initiatives and their - Countries and pursue opportunities value drivers priorities, targets to - Targets achieve and monitoring • Manage negotiations tools • Ensure alignment of top management • Understand the relevance of cultural and communication issues 20
  22. 22. China M&A Conference 2008-P21 1 2 3 4 45 Activities Key success factors Define objectives • Objectives need to be clear, both qualitatively and quantitatively • Develop specific goals for different timelines (short term, mid term and long term) Understand internal • Leverage on both outsiders’ and insiders’ observations to form strengths/weaknesses objective opinions • Tailor international strategy to internal capability of companies Analyze global competitive • Proactively collect and analyze competitors’ moves to understand scenarios the full picture of global competition • Focus on most similar competitors to gain further understanding Define priorities • Priorities should reflect above considerations/analysis, i.e. - Consistent with objectives - Matched with internal capabilities and help to strengthen competitiveness Ensure alignment of top • Make sure all top management are on board to discuss the strategy management and express opinions • Keep timely sharing of opinions among top management 21
  23. 23. China M&A Conference 2008-P22 1 2 3 4 3& 4 Company Key actions Effects China Minmetals • Defined a clear mid to long term strategy • By now has 21 branches & • Decided to shift from “trader” role to the comprehensive metal companies located in Asia, group, covering full industry value chain Europe, America, Oceania, • Carried out series of international investments in order to access and Africa to ore resources (upper stream) and overseas distribution channels (down stream) Haier Group • Aims to create an international brand • Set up local R&D center, • Investments follow importance of regional markets in terms of trading company and sales revenue: from Southeast Asia to Western market factories in more than 30 • In regional markets, priority of investments are first in sales, countries second in setting up factory • Design customized products with local R&D center Industrial & Commercial • Mainly to follow its client’s, e.g. Chinese SOEs’ • Open 9 overseas branches & Bank of China internationalization path: 3 representative office - Focus on nearby economic areas that are strongly related to • Acquired 6 foreign banks Chinese business activities during 2000-2007 • Provide products/services customized to different countries’ clients Source: Industry research, Value Partners analysis 22
  24. 24. China M&A Conference 2008-P23 1 2 3 4 -5 . Activities Key success factors Define need for resources • Identify suitable talents/experts to focus on international expansion • Allocate sufficient funding to support possible expansion Prepare organization • Dedicate specific departments/teams to focus on international responsible for expansion international expansion • Clearly define the roles of all related departments as well as work process Recruit/train people • Target both Chinese and foreign talents who have solid overseas business experiences • Provide practical training, e.g. on site training in foreign markets Define process • Standardize target market screening criteria • Clarify decision making process to speed up possible initiatives 23
  25. 25. China M&A Conference 2008-P24 1 2 3 4 3& - Company Key actions Effects Huawei • Deployed Chinese sales talents to overseas market, providing: • 50% overseas staff are - Competitive salary package Chinese - Promotion based on overseas performance - Intensive training China Mobile • Defined needs for HR resources according to international • Set up dedicated team for expansion plan overseas expanding • Prepared HR resources both from internal training and outside • Mainly rely on in-house headhunting expertise but start to attract • Strengthened HQ management structure to cope with higher outside talents risk and cost pressure from international operations Aluminium Corporation • Cooperate with foreign universities to develop specific project • Build up international talent of China dedicated to develop international talents pool covering law, finance • Recruit international M&A experts from market channels and non-ferrous metals, etc. • Provide overseas on job training for talents who are going to be sent to overseas market Source: Industry research, Value Partners analysis 24
  26. 26. China M&A Conference 2008-P25 1 2 3 4 6 Build strong understanding of target markets 5 Activities Key success factors Build market database • Build comprehensive fact books of player in target market • Collect key data about most interesting players • Update information frequently Create network in target • Identify insiders who can effectively help to facilitate the process countries • Start contacts with local regulators and keep timely communications • Leverage local professional firms and business partners to reach important contacts Identify suitable targets • Cleary define the target screening criteria • Leverage local networks and professional firms to identify target pool • Shortlist targets based on quick verification on their business soundness and interests to discuss investments Understand valuation and • Conduct in-depth due diligence to understand target’s financials and value drivers business potential • Referring to industry experiences, find out key value drivers and quantify the impact to valuation Manage negotiations • Approach targets in co-operative manner • Pay attention to the undisclosed subtle message of stake holders of the targets and correctly address their real motivations when proposing deal solutions 25
  27. 27. China M&A Conference 2008-P26 1 2 3 4 3& 6 Company Key actions Effects ShenZhen Mindray Bio- • Working closely with many professional firms e.g. investment • Acquired Datascope in medical Electronics bank, auditors, lawyers and HR advisors, etc. on due diligence, USA in March, 2008 synergies analysis and negotiation • Conducted in-depth market analysis on USA market China Merchants Bank • Identified HK as target market, following CMB’s strategy to focus • China Merchants Bank on nearby markets succeeded in acquiring • Working with international investment bank to develop Wing Lung Bank in Hong valuation on targets based on due diligence Kong in June, 2008 • Cleary understood needs of the shareholders of target, facilitating the negotiation process Eurizon Capital • Developed in-depth China market understanding with the help of • Acquired 49% (maximum consulting firm to define a clear market entry strategy shares a foreign investor • Mainly monitored the investment criteria and valuation can get) of a leading process, leaving consulting firm to organize all relative parties to Chinese fund management close the deal (lawyers, auditors, etc.) company (Acquisition of Penghua Fund) Source: Industry research, Value Partners analysis 26
  28. 28. China M&A Conference 2008-P27 1 2 3 4 7 ( Activities Key Success Factors Quickly take key strategic • Quick identification of macro priorities, consistent with the decisions identified rationale behind the deal • Definition of main objectives to achieve and milestones • Clear leadership to orchestrate the entire process Identify key resources • Selection of a joint (contribution from both the involved parties) Integration Team in charge of defining guidelines to follow • Appointment of a skilled Integration Manager, accountable for the end-to-end process Define initiatives and • Detailed function/area analysis with following prioritization of the priorities initiatives to activate (trade-off impact vs. ease of implementation) • Clear timing and deadline • Frequent progress reviews and interactions Understand cultural and • Open communication among team members… communication issues • …taking into account cultural differences • No conflicting environment between the entities (“we” vs. “they”) 27
  29. 29. China M&A Conference 2008-P28 1 2 3 4 3& 7 Company Key actions Effects Lenovo / IBM • Quick understanding that solution to the potential cultural clash • Powerful leader in the PC with cultural integration was a key factor to succeed industry, with very broad • Significant attention paid in recruiting US-educated Chinese portfolio middle-managers • Global player integrating two • Some experienced managers from IBM put in charge of the cultures, languages, international portion of the combined business processes and markets Nissan / Renault • Identification of the synergies and of the targets to achieve • 5th largest global through the partnership: automaker − Brand complementarities: Nissan for US, Renault for EU • Global market share of 9% − Marketing, design and small cars expertise as contribution from (by volume) Renault, large cars and manufacturing excellence from Nissan • 38 industrial sites in 17 • Intercultural challenges harmonized through the charismatic markets leadership of Carlos Goshn Arcelor Mittal • Identification of the synergies (purchasing, manufacturing and • World leader steel company, marketing) as pillars for the entire process with over 320,000 employees • Definition of special governance mechanisms to facilitate in more than 60 countries effective integration • Industrial presence in • Significant effort in managing “external” relations before, Europe, Asia, Africa and during and after the deal signature America 28
  30. 30. China M&A Conference 2008-P29 1• Chinese outbound FDI have increased sharply and this process is likely to accelerate in next years, driven by the stronger position of Chinese companies and by the current international scenario 2• Over the past years there have been some remarkable success stories of foreign expansion by Chinese companies, while other initiatives have encountered some difficulties. As a matter of fact, Chinese companies are often hesitant to pursue outbound opportunities because of their lack of international experience 3• In order to succeed in their overseas expansion, Chinese companies should go through four key steps: a) Develop a clear international strategy; b) Prepare the organization and resources to succeed; c) Build strong understanding of target markets; d) Manage carefully the post acquisition phase 4• Chinese companies should move quickly in this direction to capture the opportunities offered by the current scenario 29
  31. 31. China M&A Conference 2008-P30 ' & 1 % Opportunities in current scenario Priorities for Chinese companies • Increasing strengths of Chinese companies 1• Develop international strategy • Favourable economic context - Attractive valuation of foreign companies 2• Prepare organization for - Increasing need for capital in foreign countries international growth - Appreciation of RMB 3• Actively scout for M&A targets • Government support through a disciplined process 30

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