Overseas M&A of Chinese Enterprises Essay Example for Free

Overseas MA of Chinese Enterprises EssayThe purpose of this bind is to tot up the problems related to the foreign MA of Chinese firms and to propose suggestions on its corresponding improvements. It firstly describes the plan history of Chinas overseas MA in ternion mannikins and its current status including the issue trend, the location preference and the sector distri exception iand illustrates one succesussfulrvived subject area of Lenovo and two failed show windows of Chinalco and SAIC. consequently Seondly it analyzes the factors contributing to the conquest economy growth, ex kind rate, hostile currency reserve and proper commission points out the reasons of failure policy-making resistance, outline error, consolidation difficulty and ethnical difference. After that it refers to the practice of Japanese enterprises on image making, schema selection, commission topical anestheticization and relation maintaining.Finally it provideoffers recommendations to improvebetter the execution of Chinas overseas MA including regarding human beings relationship, strategic thinking, management promotement and cultural converse and hales a conclusion that whether the overseas MA is coat or trap depends on what we choose to do. Overseas MA of Chinese Companies Cake or limit? Introduction On 26th February 2013, China National Offshore Oil Company (CNOOC) announced in Beijing that it conquestfully completed the 15. 1 trillion US$ learning of a Canadian oil color and gas company Nexen Inc NXY.TO, which was Chinas largest-ever foreign takeover. This was exactly the epitome of the Great Leap Forward of overseas MA of Chinese companies. Along with the economic boom in more thanof 30 years, encouraged by the go-out strategy of the government activity, Chinese companies turn out madeseen robust strides in inter study investment marketplaces. However, wereas some MA cases closed as successfully as the case of CNOOCs learning of Nexon? Th e answer must be negative should you invent attention to umteen failures such as Chinalco1s acquisition of Rio Tinto2.Did every successful starting arena a happy ending? Neveror the answer would be affirmative since the bloody costs Chinese companies bear salaried in overseasabroad m markets. The aim of this article is to raise a critical question to the overheat enthusiasm on international acquisitions of Chinese enterprises would it bring a worthy return or kinda a bottomless pit? Serving this purpose, the article will firstly draw a legal brief portrait of the history and the present situation of Chinas overseas MA and summarize its characters, experiences and lessons.Then it will analyze the reasons for the successes and failures and compare Chinas performance with the practice of its international peers. FinallyIn the end, t, he authorit would equal to propose some recommendation on the improvement of the MA procedure of Chinese enterprises. Status quo The overseas MA o f Chinese enterprises started in the 1990s and could be roughly divided into three phases. The first phase was from the 1990s to the year 2001, when Chinese enterprises hardly entered the international market and tried to cross the river by sprightliness the stones and to discover acquisition opportunities.The annual mensuration figure of transactions at that time was below 0. 1 billion US$. The second stage was after China joined the World Trade judicature in 2001 when the volume of overseas purchase takeovers reached 1 billion for the first time and till 2005 when the amount climbed to about 5 billions. The third period was fromafter 2006 till now especially after 2009 afterwards when spherical fiscal crisis seriously grilled struck the worlds major economies.During this period, the scale of Chinas abroad overseas acquisitions exploded and each year it saw a agree muckle of tens of billions of dollars. In 2010, it was up to the height of 38 billion dollars, occupying 11% o f the worlds transactions amount of that year3. in that respect were some trends underlying the wavesis of overseas acquisitions waves. In terms of the quantity of deals, it was climbing climbed constantly with a sum of 27 in 2003, 45 in 2005, 61 in 2007, 97 in 2009 and arrived at the record-breaking 147 in 20104.Meanwhile, the size of one transaction increased unco and the significant causa was the abovementioned takeover of NEXON by CNOOC in 2013, a single deal of 15. 1 billion US$, overpassing exceeding the annual total of many previous years. With regard to the areas where Chinas enterprises invested, American,USA Europe and Asia were their top 3 priorities, making up 27%, 21% and 15%5 respectively of the abroad acquisition volumes in 2010. About the sectors where they were raise in, the might and mining fields were undoubtedly their first choice since 65%6 of the transactions occurred in this industry in 2010.Nonetheless, compared with the general traits, the individual c ases are worth researching more carefully. A staring(a) example is the caseTake the story of Chinas giant PC producer Lenovo7 as example, i. In December 2004 Lenovo acquired the PC department sector of IBM at the price of 1. 75 billion US dollars. After almost 10 years development, it was impressive that IBM became a super brand of business laptops and PCs and Lenovo had successfully enhanced its brand judge and market share during the integration of two firms. It was this deal that made Lenovo a world PC giant.Conversely, the absolute bulk of Chinese emptors tasted the bitter flavor of defeats. gibe to the statistics of Mckinsey8 published in 2010, in the past 20 years, the success rate of international MA was less than 50% while the failure rate of Chinas overseas acquisitions was more that 67%9. In 2008, the total loss of Chinas multi-national deals was nearly 35 billion US$10. For instance, in June 2009, Rio Tinto Group unexpectedly announced to breach the acquisition agree ment with Chinalco and although Rio Tinto paying(a) 0.195 billion US$ break-up fee to Chinalco, the latter had to must pay multifold btimes of breaching compensation to Chinas state-owned mercenary banks and assume tremendous losings resulted from the dropping share price of Rio Tinto. A nonher perfect example is the case SAIC Motor11 took over SsangYong Motor12 which illustrated a failing integration after a triumphant acquisition. SAIC invested 0. 5 billion US$ to buy 48. 92% shares of SsangYong Motor in 2004 and increased its to 51. 33% in 2005.However, a smooth deal did not forecast a disaster of cultural integration. Neither SAIC achieved the aim of technology importation nor the sensitive management team solved the annoying strikes and salary disputes so that the new enterprise staggered till 2009 when the local court approved the bankruptcy protection of SSangYong Motor, indicating the death of this acquisition. Analysis Based on the facts and cases revealed in previous ch apter, we could can not help wondering that what was inside the box?In other words, what experiencepoints we can summarizecould summarize from the successful cases and what lessons we should learn from the failed ones? On one hand, the significant development of Chinas overseas MA might be generated by the spare-time activity contributing factors. Firstly, the rapid economy growth drove unharmed requests forof the raw materials such as oil, gas or mining but subject to the limited house servant resources, Chinese enterprises turned their attention to global markets by active merging and acquiring.Secondly, since the exchange rate revitalize starting from 2005, the Chinese Currency RMB was appreciating gradually, for example the rate of US$ to RMB was 1 8. 2 in 2005 but is 1 6. 1 in 2014. In addition, the global financial crisis resulted from the subordinated debts storm in the USA remarkably dropped the share prices of listed companies in global capital markets. Both factorsThis change considerably lowered the costs of international acquisitions in recent years and created realistic opportunities for Chinese companies.Thirdly, holding the massive foreign currency reserve, for instance, 3820 billion US$ in the end of 201313, the central government of China broadened the control of foreign exchange and launched a go-out policy to stimulate the internationalization of domestic enterprises, creating a relatively loose macro surroundings for Chinese companies. Fourthly, some Chinese companies were playing games in global markets more and more expertly.They guideed correct strategy to obtain global assets and products, penalize it in accordance with international conventions, gained the advanced technology and sales networks, spread out the market share, set up competitive edge and moved forward to the aim of multi-nationalization. On the other hand, it is and then essential to figure find out what caused the noticeable failure of Chinese acquirers. From my point of view, the reasons could be explained in four aspects. Political resistancePolitical factors bear the brunt of the failure of Chinas overseas acquisitions. closely Chinese enterprises engaging in international MA were state-owned enterprises, which in the westerners eyes were regarded as the representatives of Chinese government. Although they emphasised the independence status and commercial orientation when doing business in other countries, the host governments were as given up to link them to the Communist Party of ChinaChinese government. Even if they were not state-owned, the public media often mislabeled them as Chinese SOEs because it was hard for the foreigners to distinguish the nature of one Chinese firm from the other.This was truly an extra risk of Chinese firms and constituted one fundamental obstacle toof Chinas overseas acquisitions. Unfortunately, in most cases, Chinese firms had no say and did not know how to communicate with the local government or the p ublic, only to have a bun in the oven the destiny of defeat. For example, the government of USA denied the 18. 5-billion-dollars acquisition of UNOCAL14 by CNOOC for the reason of state security. The failure of Chinalco acquisition of Rio Tinto was excessively attributed to the concern of economic safety of Australia.Strategic errorThe core value of enterprise MA probably is increasing the critical competitive advantage and sustainable development capacity everlasting(a) obtaining the essential resources of acquired firms, which requires thorough and appropriate strategies. Nevertheless, most Chinese enterprises, when operating international MA, did not have a complete and lick strategiesy or did have a strategiesy but lost control of the operation and could not break through the changing global markets.Some of them failed to properly evaluate their overall strengths and to completely understand the rules of international acquisitions therefore executed rush transactions blin dly just catering for the individual preference of the boss or following the going-out fashion of going-out. TheA lack of strategiesy must not realize an anticipated results. After a series of losses in international acquisitions, TCL15 admitted that the insufficient strategic preparation was the major reason contributed to its failure16.Another relevant case is the bidding for Hummer17 by Tengzhong18. Although had published an official industrial planning aiming at development new nothing vehicles in 2009, Tengzhong announced a bid for Hummer, the producer of large displacement vehicles, which completely contradicted its strategy of energy saving and emission reduction. Integration difficultyAfter applause, flowers, champagnes and wines in the signature ceremony, the real challenge just starts because of the integration or management difficulties of Chinese firms.Though more and more Chinese enterprises enlarged hugely in recent years, for example, 100 Chinese firms were listed on the Fortune Global 500 Rankings 201419, taking up one fifth of the worlds biggest companies. But compared with international giants such as Exxon Mobile, BP or Shell, Chinese firms are weak on management issues such as corporate governance, business operations, management communication skills, international reputation and marketing channels and internal integration etc.Multi-national acquisition and integration is so complicated that Chinese companies are short of not only managers who could communicate professionally with their counter-parts and standardize the operation with global horizon but likewise experts who are familiar with international market operations from legal, financial or managerial background20. Take TCLs acquisition of Thomson21 for instance, after the deal was done, in less than three years, all the former executives of Thomson left the new company22 and it fell into a crisis of management resulting in huge dough losses in the following fiscal years.It was truly a failure of team integration due to managerial incompetence. Even worse, Chinese firms were used to manage the integration after acquisitions with domestic management styles and most of them were caught in serious internal frictions, causing which caused productivity declining and earn dropping. Moreover, Chinese firms were merely accustomed to apply Chinese workers no matter where they were doing business, which exerted extensive concerns in the host country.For example, when Chinese firms acquired a local mining, a railway or harbor construction project in Africa, thousands of Chinese workers were hired to work there. It maybe impressive for many when we watched TV that more than 30,000 Chinese workers retreated from Libya after the civil war following the collapse of the Gaddafi regime in 2010. In the countries with tight policies on foreign labors, the employment patterns of Chinese acquisitions were controversial. assimilation differenceCultural is an indispensible i nfluential factor in international MA yet ignoring its significance is a common failing of Chinese acquirers. Many host countries complained that Chinese firms were mining robots or money machines, developing business simply on their own without incorporating themselves into the local communities and respecting the unique cultural backgrounds. The failure of SAICs acquisition of SsangYong, discussed mentioned in previous episode, could cast light on how the culture conflict ruined a takeover.It seems that the firsthand reason was SAICs insufficient acknowledgement of culture difference. Korea is an island country and its people have tremendous national pride therefore when SsangYong was acquired by SCIA which is from an undeveloped country of China, its employees were reluctant to accept the reality of control change and to co-operate strong with the new boss. That was why they behaved negatively in the integration and apparently SAIC failed to figure out a proper strategy to deal with this issue.Moreover, SAIC underestimated the power of Labor Union and the complexity of labor disputes while paid more attention to enhance the relationship with the governmental authorities, which is anan exact reflection of Chinese culture, not worthy in Korea. The result of ignoring it was remarkable. Comparison After the analysis of what caused Chinese firms sad performance, before giving advice on how to improve it, it seems necessary to catch a glance at how the international peers did their MA deals. Japan, one populate of China, is a perfect model we could refer to.Similar as todays China, Japan is a country short of natural resources, from the 1960s when Japanese economy began to soar, Japanese enterprises invested massively in overseas markets to pursue a steady resource supplies. In the 1970s and 1980s, they also encountered various barriers and obstacles but Japanese firms gradually diminished the hostility and cautiousness and successfully took initiatives in g lobal investment sectors23. Image-makingJapanese firms put emphasis on image-polishing via the think tank and the word of honor media.In the 1980s, in response to the increasing hostility, Japanese firms implemented diverse strategies to turn them acceptable to the American society. Since most official critics were from the Congress, major Japanese companies established or enlarged the representative offices in Washington, DC. They tried to create the mainstream opinion via the cooperation with the think tanks, journalists orand former governmental officials and in return the think tanks held periodically forums on Japanese investments and published reports arguing that Japanese investments were secure to the USA economy.In most cases, Japanese firms sponsored or funded the researches or cooperated with the scholars in this field. Sustainable strategy Japanese firms focused on a long-term effect of investments, pursued a resource-preferred acquisition strategy and did not deviate from the aim easily even if confronting temporary losses or missing profitable opportunities. As a result, the investment terms of Japanese firms were longer than those of Chinese firms. In addition, Japanese companies coordinated well with each other and avoided internal malicious competitions (which often happened among their Chinese peers) to maximize their coalition strength.Differing from Chinese acquirers in Australian market, Japanese companies were used to form an acquisition group of 3-4 firms to optimize the bargaining potential and profit margin. Local management Unlike Chinese companies which preferred to appoint Chinese executives in overseas subordinates, Japanese investors trusted localAmerican managers and appointed them as executives. Besides, they tried to localize material supplies as much as possible. According to the report published in 2002 by the Bureau of Economics Analysis24, USA, from 1982 to 2002, the number of American suppliers of Honda25had climbed fro m 40 to 55026.Likewise, when negotiating with partners for acquisition deals, Japanese companies seldom requested to participated in the business operation so that they could avoid the employment, salary or land disputes, which considerably reduced the management risk and integration failure. Community relation When investing in overseas countries, Japanese firms endeavored to integrate themselves to local culture and contribute to the construction of local communities.For example, sponsoring a baseball game team or funding a cancer research center, Japanese firm had donated millions of dollars for local charity. exclusively of these merits of goodness conveyed the information that Japanese firms respected local culture and put high value on local development. This is a sharp contrast to Chinese firms behavior in that they were only keen on making money but were indifferent to the lives of local residents. Recommendation Corresponding to the problems figured out discussed and the comparisons analyze above, I would like to share my view on how to improve the overseas MA operations of Chinese enterprises.Firstly, we should reduce the role the state plays in international acquisitions and create effective communications with stakeholders. To be honest, many overseas MA cases illustrated the economic objects of Chinese government, which is the most controversial issue and the biggest concern in foreign markets. As the government, it must be aware of its duty and the boundary of public power, decrease the interference to small economic operation and liberate the creativities of Chinese enterprises in overseas markets.On the other hand, Chinese government should provide necessary supervision and guidance of overseas acquisitions, reform improper and complicated formalities of abroad transaction and facilitate the currency flow by loosing strict exchange control. However, to eliminate political obstacles, the majority of the tasks are at the shoulder of Chinese e nterprises themselves. It shouldmay be necessary for them to put public relationship management top of their agenda.For example, learn to communicate with the public media and the local communities in the language and style they could understand, find spokesmen in think tanks and sponsor local research academies or educational institutions are all constructive measures to enhance the soft powerimage of Chinese enterprises. In principle, we must try to let the host country, the local public, the local stave and other stakeholders believe that Chinese acquisitions are not only a business but also a kindness, not a threatens but an opportunitiesy, to all of them.Secondly, it is essential to break the spell of speculation and to adopt strategic thinking. Acquisition is not gambling but rather implementation of strategy, hence before initiating offers Chinese buyers must set up definite targets and strategies. In short, what do we exactly want? Every overseas acquisition case must have a clear strategic demand to enhance the buyers weight in the value chain to extend the brand reputation to expand the toil line or to extend the market share? We should not launch an acquisition merely because the target company is cheap or the acquisition is an eye-catching advertisement.Nothing would be more surprising than the news that a Chinese Millionaire Chen Guangbiao, whose business is recycle resourcing, announced a plan to buy upstart York Times. After the aim is set up, Chinese enterprise should establish and hold a firm strategy, draw an feasible plan in details to implement the strategy step by step and unless the market surroundings changes fundamentally, do not give up the fixed strategy easily. Thirdly, it could be urgent for Chinese firms to substantially enhance their management strength to survive the integration difficulties after takeovers.It is desirable for the acquirer to time lag the previous management team of the acquired firm as much as possible and to pursue a win-win target by satisfying both the requirements of the buyer and the demands of the seller as well asand its employees. Plus, they also should figure of speech a thorough management systems in accordance with international convention, enhance overall managerial strengthability, perfect internal corporate governance and establish rational incentive mechanism, to achieve a smooth integration and a sustainable development.Fourthly, it is not exaggerating to say that the failure of an overseas acquisition is actually the failure of cultural communication, which reminds Chinese buyers to take care of the cultural difference. Currently, most of the targeted firms are matured western enterprises which have build their own tradition and culture and hope to maintain rather than change it. In the contrary, Chinese firms have not developed a systematic and matured cultures.That is, China buyers have to absorb the advanced elements of the quick cultures and mix them in the forma tion of a new culture. Under some unique circumstances it is necessary to give up or reform the unreasonable parts in our own cultures that iare s insufferable to the host country. Conclusion To summarize, overseas MA is an effective way for Chinese enterprises to realize the hyper-normal development in global markets. But every opportunity could also be seen as a crisis and vice versa. It is a cake or a trap merely depends on what areis our choices.Friendly market, clear strategy, efficient management and proper communication may bring you a bright perspectives while hostile surrounding, blind expansion, poor administration and cultural conflict could catch usyou in a deep traps. For the better preparation to survive international MA competitions, it is high time for Chinese enterprises to sum up the successful experiences and to learn from the high-priced lessons. If this article could provide some advisable suggestions on this topic, it would be my greatest pleasure.