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Earlier this year, I did a post entitled, Buying A Chinese Company? Why China Deals DON’T Get Done. In that post, I talked of how a very high percentage of the China deals on which my law firm represents the foreign buyer simply never happen. In our experience, a Chinese M & A deal is maybe five times less likely to go through than a deal in a developed country. This is due mostly to the lack of transparency of Chinese companies, the differences between how Chinese and Western companies operate, the differences between how Chinese and American companies can operate in China, and to inexperience with such deals on the China side.
I thought of that post today when I read “Why Chinese Firms’ Cross-Border Deals Fall Apart” in the Harvard Business Review, written by Laurence Capron and Will Mitchell. That article talks of a soon to be published study that concludes that “cross border deals involving Chinese companies are almost twice as likely to break down (15% of the time) as deals involving companies from other BRICS countries (8%) and three times as likely as those involving Western multinationals (5%). Those numbers “seem” about right to me in that if you tease out the pecularly China reasons for incoming China deals to fail, I’d probably reduce my “five times less likely to go through” to three times less likely to go through.
The HBR article sets out some of the reasons for the low follow through rate on China deals:
Chinese companies are relatively new to the M&A game, governments in many target markets are quick to detect a political agenda, Chinese companies sometimes struggle to obtain financing or face unexpected political opposition at home, and many acquiring Chinese firms operate in particularly dynamic — and volatile — global markets.
But Chinese companies nonetheless need to start stepping up their game and becoming more sophisticated in choosing their deals and in setting up mechanisms for following through. The calls on Chinese companies to improve in four things:
It then sets out what it (and I too) see as the “bottom line” reason for so many Chinese merger failures:
Bottom line, too many Chinese companies are opportunistic dealmakers.They need become more sophisticated in their M&A processes and should explore more carefully less headline-grabbing ways of acquiring new resources and capabilities, along the lines we set out in our book, Build, Borrow, or Buy. If they do so, their cancellation rates will fall and they will be seen as more reliable M&A counterparties, which will open up more opportunities for them.
Very true.
I cannot tell you how many times we have been called in to represent an American company that is selling itself or some aspect of its business to a Chinese company and for the life of us, we do not see how the deal makes sense on the China side. We have had a couple of such deals where the Chinese company has put down real money as a non-refundable deposit and then walked away shockingly early in the deal, presumably because they then realized that the deal made no sense. I have often thought imagined that in those situations the Chinese company had some sort of mandate from somewhere to move forward with “a deal” and pretty much picked one at random. ”Let’s see, we are a very successful clothing company in China so let’s buy an American airplane parts company” or we have a lot of money from our successful mining operations in China so let’s buy a United States consumer software company.” I have made up these examples, but trust me when I tell you that they are very much similar to what we have seen.
So what do you think?
We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.
2012-12-19 23:42:03
Source: http://www.chinalawblog.com/2012/12/why-china-deals-dont-get-done-part-ii-the-overseas-edition.html