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Failure factors of Chinese companies in cross-border M&A

17737-business-man-hand-pvYou have probably read about the recent success stories of Chinese companies making significant acquisitions in The Netherlands, such as Nidera that is acquired by the Chinese COFCO, or Vivat that is bought by Anbang for € 1. What you probably do not know is that 70% of Chinese cross border transactions have failed. Today we are unveiling a few failure factors that prevent Chinese prospective buyers from succeeding.

Wait and see
Many Chinese buyers would rather wait for acquisition opportunities to pop up instead of proactively look for targets. They believe that this is the way to secure a transaction and smoothen the process. However, the contrary is the case when a company is put on the market for sale, the potential transaction will be made known to more prospective buyers. For the Chinese buyer, it means a more complex and competitive process and increased risk of losing the target to its competitor.

Do-It-Yourself
Some Chinese companies tend to overlook M&A as a high-knowledge-demanding process and try to accomplish a transaction without professional assistance. However, the M&A market in western countries uses a very different approach from that in China. Failing to follow such approach may result in an adverse effect on the prospective buyer. One example is valuation. Lack of expertise in valuation may cost the prospective buyer either excessive capital when offering too much, or the whole transaction when offering too little.

“I have a friend”
Chinese people are inclined to trust their own friends rather than complete strangers, regardless of their professionalism. Many western companies have had experience with people whose occupations have nothing to do with M&A, yet claim that they are searching for acquisition targets for “a Chinese friend”. This may work out in other cases. When it comes to M&A, if the process is handled by someone who has no knowledge nor experience, it may be perceived by the counterparty as a sign of “not being serious”.
As became apparent from our last event about M&A, M&A is generally a complex process that requires a clear plan, proactive approach, sufficient expertise and effective communication. Above only lists a few common pitfalls in Chinese companies tend to make, yet there are many more factors that can determine the success or failure of a transaction. The chances for success increase when the M&A is executed by a professional party. This can be done either internally by recruiting experienced employees, or externally by using M&A consultants.

By: May Wu
May Wu is a consultant in an international M&A advisory firm.

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