Chinese deal making is on the upswing: in 2014 alone, Chinese companies made 154 outbound M&A deals, with a total value of $26.1 billion. But Chinese acquirers complete just 67 percent of their outbound deals, on average, far less than developed-world acquirers.
To improve that record, Chinese acquirers must invest heavily in the skills, capabilities, and international talent needed to succeed on the global stage, according to a new report from The Boston Consulting Group (BCG), titled "Gearing Up for the New Era of China’s Outbound M&A."
Why do so many deals fall through? The main culprits are unclear M&A strategies and ineffective due diligence, according to the report. Even deals that are completed often fall short of their goals because of poorly planned and executed postmerger integration.
These failed deals represent enormous missed opportunities. Chinese acquirers have never been better positioned to take their place among the top ranks of global deal makers. But they must professionalize their M&A functions, and they must act fast, while the macroeconomic currents worldwide continue to trend in their favor.
A New Set of Targets for Chinese Acquirers
A host of internal and external developments have converged to produce the growth in outbound M&A. Within China, looser economic policies and a rising private sector have spurred companies to seek overseas expansion via outbound M&A.
In addition, the Eurozone debt crisis has presented Chinese acquirers with a prime opportunity to snap up European companies at bargain prices.
The slowing of the European economy in the wake of the global financial crisis, meanwhile, has produced a favorable external-investment environment of renewed economic growth and relatively low asset valuations.
“Historically, China’s outbound M&A activity has targeted mostly energy and resources companies, with the aims of ensuring the smooth operation of the national economy and Chinese enterprises and of hedging against big swings in commodity prices,” says Ying Luo, a BCG partner and a coauthor of the report.
“But as China continues to internationalize, a growing number of Chinese companies are looking to gain market share and enhance their core capabilities. They are engaging in outbound M&A to access new profit pools, capture new markets, and tap the skills of globally competitive leaders."
Acquirers also view outbound M&A as a way to obtain cutting-edge technology, gain brand and management experience in overseas markets, and hedge against fluctuations in the Chinese economy.
During the past few years, Europe and North America have surpassed Asia as the most sought-after targets for outbound M&A, accounting for roughly 60 percent of outbound M&A deals by Chinese companies in 2014, while the number of deals targeting traditional destinations, such as East Asia, has plummeted.
But though the geographic focus has changed, many companies lack a clear M&A roadmap, have only a vague idea of the purpose of any given deal, and know little about the value of possible synergies or how to capture them.
In addition, many Chinese companies’ due-diligence teams lack experience with internationalization, have insufficient knowledge of overseas commercial and legal environments, and cannot accurately identify risk points in the due diligence process.
After the deal has closed, some acquirers impede their own PMI efforts because they fail to think through the integration process in adequate detail. As a result, the acquirer and the target are unable to align on cost and revenue synergies or to share best practices on topics such as promotions, product mix, and supply chains.
How Successful Acquirers Do It
How can Chinese companies overcome the obstacles they so often encounter when pursuing outbound M&A?
The report reveals that successful outbound deal making rests on three pillars: a clear M&A strategy, effective implementation, and building relevant capabilities. Corporate leaders should take full advantage of both internal resources and external tools for handling data.
They should also map out high-priority areas for outbound M&A on the basis of corporate vision, strategy, and a thorough analysis of industry developments—the building blocks of a clearly defined outbound M&A strategy.
Corporate China’s globalization drive is still in its infancy, and it’s no surprise that acquirers are experiencing growing pains as they make their move onto the world stage. But competition for the most desirable assets is fierce, so it is incumbent upon Chinese acquirers to study their failures as well as their successes and learn from the experience of other acquirers—especially those in the developing world.
It will be neither easy nor inexpensive for Chinese companies to professionalize their M&A functions and attract top talent with experience in overseas deal making. But the prize is well worth the effort. There has never been a better time for Chinese companies to claim their place among the world’s leading corporations.