Chinese companies evolve at negotiations

Updated: 2016-01-22 08:37

By Bruce Delteil, Aga Guzewska-Radzka and Gerald Lee(China Daily Europe)

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Abandoning a hardline stance and working to understand target companies has paid big dividends for acquirers

The value of China's overseas mergers and acquisitions reached $63 billion during the first three quarters of 2015 - up 27 percent from the previous year, and is expected to continue growing at similar levels in the coming years. Having come a long way in the last decade (China's 2005 outbound M&A deal value was a mere $12 billion), Chinese companies seem to have learned some valuable lessons on cross-border M&As, not least in the art of cross-cultural negotiations. Among other factors, the success of China's next wave of outbound M&As will depend on the extent to which Chinese companies can leverage experience to better equip themselves at negotiation tables.

Negotiation styles adopted by Chinese buyers overseas seem to exhibit a maturation process that falls into three phases: the hardline stance phase (pre-2010), the recalibration phase (2010-2014), and the business minded negotiation phase (from 2014).

Pre-2010, the hardline stance phase saw Chinese firms typically focus on the hard aspects of a deal, with emphasis on price and terms. An "all-or-nothing" approach translated into the imposition of conditions and culture on targets with little consideration for noneconomic aspects. For example, from the onset of SAIC's acquisition of Ssangyong Motors, cultural differences led to disagreement on how to improve performance of the ailing carmaker. South Korean unions repeatedly opposed SAIC's restructuring plans. Consequently, Ssangyong filed for bankruptcy protection in January 2009 and SAIC earned virtually nothing on its $618 million investment.

Between 2010 and 2014, Chinese outbound buyers recalibrated their approach to M&A negotiations, adopting a collaborative mindset. Instead of imposing their management and culture on the target, Chinese companies largely retained incumbent management and culture. This is demonstrated in the acquisition of AMC by Dalian Wanda, completed in 2013. The conglomerate worked closely with private equity firms to make sure that government officials in the United States understood this. Wanda also made a firm commitment to retain the AMC management, and reassured Hollywood that it would continue to buy its films.

Chinese companies evolve at negotiations

More recently, Chinese companies have adopted a win-win approach to M&As, balancing the interests of both acquirer and target. Top objectives shifted from short-term economic gains to longer-term acquisition of capabilities that could be transferred back home to grow the domestic market and serve customers better. While price is still a crucial element, successful Chinese acquirers overseas now apply a broader approach to negotiating, where other nonprice elements, such as corporate culture and target customer profile become important, and a win-win outcome is the target. Lenovo, for example, moved its headquarters to the US to be closer to its acquired company, Motorola. Both Haitong and Fosun, which acquired Portuguese financial services institutions, have been carefully observing and working with the incumbent management team in Portugal.

Driven by rising sophistication, favorable government policy, and a volatile local stock market, China's insatiable appetite for overseas acquisitions will see Chinese companies participate in M&A deals that are increasingly complex. The success of this next wave of deals will depend on their ability to apply three lessons that emerge from their colorful trajectory thus far.

First, being able to identify and solve the right problem. Clarity on the purpose of the acquisition will provide a better understanding of the potential value that will be created, and the execution capability and constraints over a longer period. This will enable Chinese acquirers to focus on the important aspects of a negotiation to maximize value for both parties. Accordingly, willingness to understand the underlying interests of the other side, not just their position, is also paramount.

Second is increasing cultural awareness. Unresolved cultural issues can cause an acquisition to implode, as shown in the Ssangyong example. Hence, it is critical to learn what makes the target "tick", focus on understanding the other side's working styles, decision-making dynamics, and regulatory issues. Chinese acquirers seem to be well-informed on this front, as demonstrated by the increasing use of professional advisers and consultants in cross-border acquisitions.

Finally, there is adopting a long-term view. The ultimate strategic goals of the company should be the primary criteria, as opposed to short-term objectives. This will enable Chinese acquirers to establish the right governance for the deal and the combined entity that is in line with local practices and regulatory expectations. Also it lets them strike a better balance between what to control and what to let go of: prioritization of the "must-haves" vs the "nice-to haves".

The last decade has taught Chinese outbound acquirers valuable lessons in the art of cross-cultural M&A negotiations, and how that contributes toward long-term value creation.

Bruce Delteil is APAC lead, Accenture Strategy M&A; Aga Guzewska-Radzka is Greater China lead, Accenture Strategy M&A; and Gerald Lee is consultant, Accenture Strategy M&A. The views do not necessarily reflect those of China Daily.

( China Daily European Weekly 01/22/2016 page9)