Businesses need skills to match M&A ambitions

News came at the end of last week that China's Sanpower Group has agreed to take control of Britain's House of Fraser in the biggest ever overseas acquisition by a Chinese company in the retail industry.

As agreed upon in the deal inked late last week in London, Nanjing Xinjiekou Department Store Co Ltd, a mainland-listed company controlled by Sanpower, will pay 200 million pounds ($331.44 million) for an 89 percent stake in the 165-year-old British department store chain, according to business news portal yicai.com. Yuan Yafei, the founder and controller of Sanpower Group, said that his group will not only inject capital into House of Fraser after the completion of the deal to support its future development, but also help it enter the China market using local channels and networks. In the meantime, the acquisition is also seen as an opportunity for Nanjing Xinjiekou to enhance its global brand image and study mature overseas business practices.

But despite Sanpower's ambitions, it's too early to say whether the deal will achieve its desired aims. At present, the British retailer's financial liabilities are perhaps the most immediate cause for concern. House of Fraser has 61 stores in Britain and Ireland and posts annual sales of about 1.2 billion pounds, yet the department store chain finished its last fiscal year ending January 2013 with a net debt of 157.2 million pounds and a pension deficit of 46.9 million pounds, according to Reuters. Meanwhile, company records also reportedly show a loss before taxes and exceptional items of 6.9 million pounds during the period. These results came around the same time that talks to sell House of Fraser to French peer Galeries Lafayette were said to have fallen apart.

The deal could also be challenging on Sanpower's side considering that the Chinese conglomerate has already become involved in a long string of acquisitions over the past several months. At the end of last year, the group acquired Nanjing IFC for more than 2 billion yuan from ARA Asset Management Ltd, a subsidiary of tycoon Li Ka-shing's Cheung Kong (Holdings) Ltd. In January, Sanpower's Cnshangquan E-Commerce Co Ltd agreed to buy approximately 63.7 percent of NASDAQ-listed Mecox Lan Limited's outstanding shares. And last month, Jinpeng Group, a subsidiary of Sanpower, was reportedly set to acquire Natali Healthcare Solutions, Israel's largest private healthcare and home-care service provider, the China Business News reported. So many acquisitions in vastly different sectors over such a short period of time have left many wondering whether Sanpower is setting itself up for a serious bout of post-merger integration problems.

As more and more Chinese companies expand across the global value chain through overseas mergers and acquisitions (M&A), Sanpower is not the only domestic company facing possible overextension troubles. Last year alone witnessed two mega deals by Chinese companies - China National Offshore Oil Corporation's takeover of Canadian energy giant Nexen for $15.1 billion and Shuanghui's purchase of leading US pork product maker Smithfield for $4.7 billion - pushing spending on overseas assets by Chinese buyers to just over $60 billion during the period.

So far, this year has seen the continuation of the overseas buying trend as domestic policies continue encouraging Chinese companies to go abroad through M&A. In January, Chinese private equity company Fosun International bought 80 percent of Portugal's Caixa Seguros e Saúde, the country's largest insurance group. During the same month, Chinese PC maker Lenovo Group Ltd agreed to buy International Business Machine Corp's low-end server business for $2.3 billion and was reportedly nearing a deal to buy Motorola's handset business from Google for $2.9 billion; while Industrial and Commercial Bank of China agreed to pay $770 million for a 60 percent stake in Standard Bank, Africa's largest lender.

Many fear though that cashed-up Chinese firms have not developed the know-how needed to run established foreign businesses. As Christian Neuner, a principal at Roland Berger, put it recently: "Chinese companies only have a short history of going global. Their unfamiliarity with the business environments in the US and Europe, coupled with their lack of M&A and post-merger integration experience, makes for a particularly challenging situation." Of the 21 manufacturers who made overseas acquisitions worth more than $100 million between 2008 and 2013, 33 percent had no previous M&A experience at all, while 80 percent had no overseas M&A track record, according to Yi Ping, a partner of Roland Berger.

In the rush to go global, Chinese companies need to temper their enthusiasm for high-profile M&A activity with the ability to maximize the value of foreign assets. Without the proper management skills, M&A deals can easily backfire, creating new headaches for their Chinese backers.