Transparency key to successful overseas M&As

Chinese companies should be more sensitive to foreign corporate cultures and be more open and transparent in its business practices if they want to be successful in overseas expansion through mergers and acquisitions, according to government officials and corporate executives.

Chinese firms are at a crossroads at which they must embrace the process of "looking outward" through M&As. When more Chinese companies succeed in overseas expansion, the Chinese economy can also be transformed from the current low-cost manufacturing model into a high-value, innovative and environmentally friendly model.

"Chinese private enterprises have the talent and capital to go out at a time when they can explore more cheap acquisition targets" in Europe and the United States, said Huang Mengfu, vice-chairman of the National Committee of the Chinese People's Political Consultative Conference.

"The central government's economic strategic vision is to foster more overseas investment by Chinese companies so that these companies can be transformed into multinationals," he said at the Second China Overseas Investment Summit held in Hong Kong last week.

China has the resources and foreign exchange reserves for overseas endeavors, Huang added.

Hainan Airline Group Chairman Chen Feng, who is also a member of the CPPCC National Committee, backed Huang's views, saying that "Chinese private enterprises are flexible enough to respond to different market needs".

The central government, in its 12th Five-Year Plan (2011-15), said that the country's top economic strategy is to encourage more mainland firms to expand overseas.

The State Council issued recommendations in July on boosting and guiding mainland private enterprises' overseas investments.

According to the M&A Index compiled by the international law firm Allen & Overy, China was ranked in early 2012 as the sixth most active cross-border outbound acquirer, up from 18th place in 2007. China's growth represents a 195 percent increase in the number of outbound acquisitions since 2007.

China National Offshore Oil Corporation said in July that it intended to buy Canadian oil and gas group Nexen Inc for $15.1 billion. If the deal goes ahead, it will be the largest cross-border acquisition by a Chinese company to date.

According to statistics from the Ministry of Commerce, China's outbound direct investment in the non-financial sector hit $35.42 billion in the first half of 2012, up 48.2 percent year-on-year. Around 33 percent of Chinese ODI in the first half, worth $11.8 billion, went into M&As.

Total ODI in the non-financial sector amounted to $357.5 billion by the end of June.

Although Chinese companies have recently become more active in overseas M&As, a bumpy road still lies ahead.

According to international consulting agency McKinsey & Company, about 67 percent of Chinese companies conducting overseas M&As have failed over the past 20 years.

Failure in M&As is measured as the inability to execute the planned M&As or the inability to realize strategic goals as laid down in the M&A initiatives.

Financial burdens, potential political resistance, cultural differences, failure in conducting integration and an uncertain market environment are the main reasons for the high failure rate, McKinsey & Company said.

"Chinese firms remain on the sidelines regarding overseas investment because they know that the business risks and investment costs will be high," said Feng Jun, chairman and president of Aigo Digital Technology Co.

"They prefer to go outside alone, and hence can encounter a very dangerous business situation."

Richard Peng, vice-president of corporate development at Tencent Inc, said that it is particularly difficult for Chinese Internet firms to acquire their overseas counterparts because of the cultural differences in the Internet industry.

"You must fully understand the foreign corporate culture and the acquired companies' expectations to ensure the success of an overseas acquisition," Peng said.

"There is no formula that can ensure overseas M&A success," said Chen Ganya, Alcoa Asia-Pacific general manager.

If Chinese firms better understand the attitudes of foreign governments toward their acquisition deals, they would find a more suitable situation in which to pursue their M&A deals, said Chen.

Ni Xiangyu, director of Tianjin Binhai Hi-Tech Industrial Development Area, said that understanding foreign cultures is very important in ensuring the success of overseas investment.

Chinese firms must elicit more effective business training activities that can enhance mutual understanding between Chinese and overseas firms, said Ni.

"Chinese firms should also rely on the services offered by the third-party intermediary professional services firms in making overseas investment ventures a success," Ni added.