Mergers and Acquisitions in China 2009

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Steve Ganster Presentation to GIC Global Summit on Mergers and Acquisitions in China 2009 http://www.gicglobal.com/

Steve can be reached at sganster@tompkinsinc.com

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  • the China market for M & A will heat up in 2010. Working with a client in Shanghai and the US securing speaking opportunities on the topic.
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Mergers and Acquisitions in China 2009

  1. 1. 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
  2. 2. Topics <ul><li>China’s M & A Landscape </li></ul><ul><li>Evolution of M & A as a growth strategy in China </li></ul><ul><li>Unique complexities in China’s M & A process </li></ul><ul><li>Strategy vs. Structure </li></ul><ul><li>Cultivating the deal </li></ul><ul><li>Key principles of success </li></ul>
  3. 3. The M&A Landscape China is in a “late adolescent” phase in terms of market maturity... Infant Toddler Young Teen Late Adolescent
  4. 4. The M&A Landscape <ul><li>Opaque financial systems </li></ul><ul><li>Corruption </li></ul><ul><li>Rule of man versus rule of law </li></ul><ul><li>Unpredictable regulations </li></ul><ul><li>Huge cultural differences </li></ul><ul><li>Expensive and time consuming to get things done </li></ul><ul><li>Lacking enough local talent </li></ul><ul><li>Defining your addressable market </li></ul><ul><li>Dealing with high level of uncertainty </li></ul><ul><li>Access to local markets </li></ul><ul><li>Being cost competitive </li></ul><ul><li>Dealing with counterfeits and IP infringement </li></ul><ul><li>Understanding Chinese business culture </li></ul><ul><li>Successfully China-fying your business model </li></ul>A number of planning and operating challenges color the backdrop of making acquisitions in China…
  5. 5. The M&A Landscape <ul><li>Business is getting tougher </li></ul><ul><ul><li>No “low-hanging fruit”—obvious ones gone or unavailable </li></ul></ul><ul><ul><li>Margins being squeezed--Increased competition </li></ul></ul><ul><ul><li>Companies are suffering financially </li></ul></ul><ul><li>Motivations for buyers to buy are solidifying </li></ul><ul><ul><li>Control supply chain </li></ul></ul><ul><ul><li>Accelerate penetration of local market </li></ul></ul><ul><ul><li>Obtain cheaper assets </li></ul></ul><ul><li>Motivations for sellers to sell are poorly defined but clarifying </li></ul><ul><ul><li>SOEs privatizing </li></ul></ul><ul><ul><li>Cash out </li></ul></ul><ul><ul><li>Thirst for technology (hard and soft) </li></ul></ul><ul><ul><li>Lock in big ticket customer </li></ul></ul><ul><ul><li>Access to global distribution and customer list </li></ul></ul><ul><ul><li>Possible alternative to listing (though still a motivation for many) </li></ul></ul>Given this environment, several key issues are shaping M&A in China today…
  6. 6. The problems in the “early days” of the JV are leading to altered strategies today… <ul><li>What went wrong…? </li></ul><ul><ul><li>JV-structure before strategy </li></ul></ul><ul><ul><li>WOFE-reactionary response </li></ul></ul><ul><ul><li>Acquisition-using a hybrid approach via M&A </li></ul></ul>Evolution of M&A as a Strategy 80s – 90s 2000 2010 50/50 JV WOFE Acquisition
  7. 7. There are many complex issues surrounding acquisitions or joint ventures in Asia. <ul><li>Opaque management structures </li></ul><ul><li>Complex state and township - owned conglomerates </li></ul><ul><li>Added political risks </li></ul><ul><li>Transaction sizes small </li></ul><ul><li>Regional fragmentation </li></ul><ul><li>Market environment more fluid </li></ul><ul><li>Government/regulatory impasses </li></ul><ul><li>Reliable information scarce </li></ul><ul><li>Legal system ambiguity </li></ul><ul><li>Lack of professional management </li></ul><ul><li>Thin historical data </li></ul><ul><li>Dynamic competitive landscape new entrants </li></ul>Unique Complexities in China M&A <ul><li>Unsophisticated sellers </li></ul>
  8. 8. 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 <ul><li>Fluid market environment </li></ul><ul><li>Reliable information scarce </li></ul><ul><li>Dynamic competitive environment with new entrants </li></ul><ul><li>Deal flow – identify appropriate targets </li></ul><ul><li>Finding right deal size (often too small) </li></ul><ul><li>Unsophisticated sellers </li></ul><ul><li>Lack of professional management </li></ul><ul><li>Understanding motivations of all players </li></ul><ul><li>Satisfying multiple wants/needs </li></ul><ul><li>Not enough focus </li></ul><ul><li>Less meaning in China – no “teeth” </li></ul><ul><li>30% close rate </li></ul><ul><li>Opaque management structures </li></ul><ul><li>Multiple books </li></ul><ul><li>Regulatory impasses </li></ul><ul><li>Gov’t obstruction / intervention </li></ul><ul><li>High cost/deal ratio </li></ul><ul><li>Keeping deal together until final agreement signed </li></ul>
  9. 9. <ul><li>Non linear </li></ul><ul><li>Time consuming </li></ul><ul><li>Expensive </li></ul><ul><li>Frustrating </li></ul><ul><li>A discovery process </li></ul><ul><li>… a lot like a ride on Disney’s Space Mountain! </li></ul>Unique Complexities in China M&A
  10. 10. 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…
  11. 11. 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
  12. 12. 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 <ul><li>Types of Sellers </li></ul><ul><li>Unsuspecting </li></ul><ul><li>Inexperienced </li></ul><ul><li>Resistant </li></ul><ul><li>Desperate </li></ul>“ The West” <ul><li>Financial due diligence </li></ul><ul><li>Commercial (calculated) </li></ul><ul><li>Structure </li></ul><ul><li>… .. </li></ul><ul><li>Relationship </li></ul>China <ul><li>Commercial (intuitive) </li></ul><ul><li>Relationship </li></ul><ul><li>…… </li></ul><ul><li>Structure </li></ul><ul><li>Financial due diligence </li></ul>
  13. 13. 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
  14. 14. <ul><li>At the Discovery Stage, “Level of insight per dollar” is very high! </li></ul>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
  15. 15. Some Key Principles for Deal Success <ul><li>Strategy before structure!! </li></ul><ul><li>Start with a clean company whenever possible—asset purchase </li></ul><ul><li>Know what assets you really need to own </li></ul><ul><li>Be creative—don’t just transplant your western business model </li></ul><ul><li>Controlling the operation is paramount (key management functions) </li></ul><ul><ul><li>… but you don’t have to own everything to control it </li></ul></ul><ul><li>Consider “strange bedfellows” as targets/alliances </li></ul><ul><li>Work closely with local government from the beginning </li></ul><ul><li>Invest in RELATIONSHIP building </li></ul><ul><li>Observe the 6 Ds </li></ul>
  16. 16. <ul><li>Thank You! </li></ul>
  17. 17. 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
  18. 18. Background <ul><li>Technomic Asia recently became the Asian arm of Tompkins Associates, a renowned global business and supply chain consultancy. </li></ul><ul><ul><li>As of January 2008, Technomic merged into Tompkins Associates. </li></ul></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>Technomic Asia and Tompkins have deep experience in the acquisition process from candidate identification/qualification through due diligence. </li></ul></ul>
  19. 19. <ul><li>Technomic Asia provides the following solutions for multinational firms to support their Asian strategy needs for both new investments and existing operations: </li></ul><ul><ul><li>Asian entry and growth planning and support including market assessment, business case development and entry strategy. </li></ul></ul><ul><ul><li>Acquisition support from candidate identification, qualification, deal structure and negotiation and commercial due diligence. </li></ul></ul><ul><ul><li>Asian sourcing and supply chain assessments including supplier relationship and improvement programs. </li></ul></ul><ul><ul><li>Assessment of Asia “ readiness” for portfolio companies based on our proprietary methodologies. </li></ul></ul>Technomic Asia Core Services
  20. 20. <ul><li>We have been on-the-ground in China since 1985 (JV) and have assisted over 200 MNCs in their China strategy and operational initiatives. </li></ul><ul><li>Legal status comprises WOFE and Representative offices </li></ul><ul><li>We have broad experience in multiple industrial areas, including commercial, residential, industrial and infrastructure segments. </li></ul>China Capabilities Through its subsidiary in Shanghai, Technomic has extensive operational experience in China (as well as the Asian region in total). <ul><li>Our China consulting services are supported by a set of effective tools at the corporate level to assist companies in the benchmarking process. </li></ul><ul><li>Our China operation is well integrated with Tompkins worldwide to enable the seamless implementation and rollout of global programs. </li></ul>
  21. 21. China Capabilities (cont’d) <ul><li>~20 professional staff with varied backgrounds </li></ul><ul><ul><li>All but one are mainland Chinese citizens </li></ul></ul><ul><ul><li>Most have masters degrees both from China and overseas business schools </li></ul></ul><ul><ul><li>Multilingual Chinese, English and other </li></ul></ul><ul><ul><li>All with industry experience </li></ul></ul><ul><li>Priority characteristics of our China operation include… </li></ul><ul><ul><li>Longer Time Based Experience in China, Ahead of Any Other Major Firms </li></ul></ul><ul><ul><li>Innovative, Pragmatic, “Street Smart” Approach </li></ul></ul><ul><ul><li>Client Centered Solution </li></ul></ul><ul><ul><li>Possessing In-depth China know-how and Cultural Sensitivities </li></ul></ul><ul><ul><li>Deep experience working with MNC management on their China initiatives </li></ul></ul><ul><ul><li>Direct involvement of senior management in program engagement </li></ul></ul><ul><ul><li>Broad industry experience, including capital equipment </li></ul></ul><ul><ul><li>Trust and Integrity </li></ul></ul>
  22. 22. <ul><li>Technomic Asia was one of the first foreign consulting firms licensed to practice in China </li></ul><ul><li>We have completed over 650 programs in China alone across a wide range of industries </li></ul>Technomic Asia provides a unique value proposition which differs from other consulting and firms in Asia. Our Value Proposition <ul><li>Basic data </li></ul><ul><li>Limited analysis </li></ul><ul><li>Minimal strategic direction </li></ul><ul><li>Low cost </li></ul><ul><li>On-the-ground, “street-smart” approach. </li></ul><ul><li>Deeper, more mature market understanding </li></ul><ul><li>Ability to filter, sort and process insight to determine implications </li></ul><ul><li>Extensive experience to recommend how client can respond to “win” </li></ul><ul><li>Can take client all the way to an actionable business plan </li></ul><ul><li>Moderate cost </li></ul><ul><li>High level market view “35,000 feet” </li></ul><ul><li>Often “valuation” focused </li></ul><ul><li>Limited tactics </li></ul><ul><li>High cost </li></ul>
  23. 23. 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 <ul><li>Screen on first level criteria </li></ul><ul><li>Qualify and focus on primary candidates </li></ul><ul><li>Profiling of short-listed candidates and attractiveness level </li></ul><ul><li>Determine candidate interest </li></ul><ul><li>Develop & Sign LOI </li></ul><ul><li>Deeper assessment of target candidates from perspective of customers, suppliers and the supply chain </li></ul><ul><li>Validate viability of business case. </li></ul><ul><li>Deal Structure </li></ul><ul><li>Negotiation Support </li></ul><ul><li>Optimize Government subsidies </li></ul><ul><li>Legal & Financial due diligence </li></ul><ul><li>Integration Planning </li></ul><ul><li>Closure </li></ul>Acquisition Services <ul><li>Core Objectives of Deal </li></ul><ul><li>Target Products & Technologies </li></ul><ul><li>Geographic Focus </li></ul><ul><li>Critical success factors </li></ul><ul><li>Candidate Criteria </li></ul><ul><li>Develop long-list of candidates </li></ul>

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