Chinese-German M&A: A Guide for Chinese Business People

China's home appliance manufacturer Midea offered to take a 95 percent holding in German robotics maker Kuka in August, and the German government said it would not block the acquisition as it would not endanger German security. When it comes to industry sectors, automotive suppliers and industrial companies have traditionally been the focus areas for Chinese investment in Europe.

Meanwhile the real estate industry in Germany has showed steady performance in recent years, both in residential and commercial property, and caught the attention of Chinese investors. In fact, foreign investment creates jobs and promotes growth and that is why they are economically important to Germany," said Dirk Hallmayr, leader of Chinese Services Group, Deloitte Germany.

Many Chinese investors have taken over financial distressed automotive suppliers in Germany, which have subsequently undergone successful restructuring and regained competiveness, Hallmayr added. Related Stories China's economic transformation opportunity for China, Germany: BDI chief Economic agenda gets full support Germany's Mannheim city considers express rail connection with China's Qingdao Germany should follow China's lead for G20 presidency China seeks more cooperation with Germany under G20 framework: More China News Shenzhen plans China's tallest skyscraper Steel ladder installed in 'cliff village' Chongqing turns trash cans into Wi-Fi hotspot JD's driverless vehicle expected to hit roads soon Xi urges linkup on development Beijing calls for family leave to show filial piety.

Photo Commemorative G20 stamps a hit at media center Ten photos from around China: Aug Sept 1 Hangzhou: Editor's Picks Anti-graft campaign targets poverty relief Cherry blossom signal arrival of spring In pictures: Destroying fake and shoddy products China's southernmost city to plant , trees Cavers make rare finds in Guangxi expedition Cutting hair for Longtaitou Festival. Today's Top News Trump outlines anti-terror plan, proposing extreme vetting for immigrants Phelps puts spotlight on cupping US launches airstrikes against IS targets in Libya's Sirte Ministry slams US-Korean THAAD deployment Two police officers shot at protest in Dallas Abe's blame game reveals his policies failing to get results Ending wildlife trafficking must be policy priority in Asia Effects of supply-side reform take time to be seen.

US Weekly Geared to go The place to be. Shenyang's 50 gas-electric hybrid buses to hit the road Victims of terrorist attacks in Paris commemorated worldwide. Whirlpool also succeeded in acquiring majority ownership of a listed Chinese company in one step. Industry associations are influential in China and another important target for timely outreach. They can play persuasive roles and acquirers can prevent them from being co-opted by competitors to oppose a transaction if they are brought onboard early. The target company itself can also have valuable connections that help move the process forward.

The media are another potentially instrumental factor.

Creating More Value for Chinas M&A - Mergers & Acquisitions Article - A.T. Kearney | Germany

This includes closely monitoring consumer sentiments on online bulletin boards and in chat rooms. Local public-relations advisors who can help both anticipate and manage media and public reaction can be an important addition to the team. They can have contingency plans ready to go should negative reactions surface, for example.

Managing public opinion is especially important if the target is in a high-profile business or has one or more well-known Chinese brands. Following the Fourth Plenary Session of the 18th Communist Party of China Central Committee in , China has been looking to streamline investment approvals and delegate more reviews to the local level. A draft update of the foreign-investment guide released by the NDRC in November would reduce the number of sectors that limit foreign investment from 79 to Some industries do have limitations on the percentage of ownership that foreign companies are permitted to acquire.

Foreign ownership is limited to 49 percent in telecom infrastructure, for example, and 50 percent in telecom value-added services. Foreign ownership of commercial banks is held to 25 percent; in life insurance, the limit is 50 percent. The draft update of the foreign-investment guide lists some sectors that encourage foreign investment.

A pocket guide to doing business in China

Valuations in China are high, and in many cases they can be justified only if the buyer achieves significant synergies. China is a growth market, so these synergies often entail increasing revenues rather than cutting costs.

Many multinationals are more experienced at cutting costs—and are therefore more confident about their ability to do so, since cost savings are typically based on concrete onetime actions such as head count reductions or procurement savings. Revenue synergies can be more uncertain and cannot be achieved by simply allowing the acquired company to run as a stand-alone entity.

These synergies put a premium on effective PMI. Indeed, many foreign acquisitions in China fail to realize their potential—and plenty just flat out fail—because of unsuccessful PMI, which can result not only in lost synergies but also in damaging misunderstandings between the acquiring company and the target.

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In our experience, there are four primary causes of unsuccessful PMIs between multinational buyers and Chinese companies:. Multinational and Chinese companies almost always have very different cultures, philosophies, management practices, and ways of doing business. Failure to address these differences early on leads to lost opportunities, misunderstandings, and, too often, loss of trust. One area of potential misunderstanding, for example—on which many mergers founder—is personalities versus process.

Chinese companies are often driven by strong personalities rather than management processes. In fact, Western processes can initially appear unnecessary or impractical to Chinese managers, who rarely have experience being embedded in multinational matrix organizations. When new owners unilaterally impose new processes from above, confusion and mistrust frequently result. Too often, both sides underestimate the extent of the differences until they start working closely together—but by then deep chasms have formed.

There are other differences as well. Chinese companies often emphasize top-line growth, especially in fast-growing sectors, while multinationals are equally focused on the bottom line.

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Chinese companies tend to have more hierarchy in their management structures; Western companies are flatter at the top. Deference to the leader is a principal dynamic in Chinese management: Chinese companies also tend to follow a more adaptive management philosophy: This approach, which eschews long-term planning, often frustrates Western owners.

Decoding these differences takes a systematic effort, and the burden falls more heavily on the acquirer to invest the necessary time to gain a working-level understanding of how the acquired company functions on a day-to-day basis. There are often intricate connections among the sales team, distributors, and retailers that are not immediately apparent to foreign eyes.

They should look for early opportunities to show how they can add value to the local business—for example, by bringing capabilities and know-how that are needed by Chinese companies. Too often, foreign acquirers fail to recognize that the processes they consider basic are anything but basic to Chinese companies.

They will develop a detailed integration plan for the first year that clearly communicates the future direction internally and to business partners.

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They will understand that integration can take longer in China: The second major mistake that many multinationals make is leaving critical decisions until late in the acquisition process. By this time, the acquiring company has already missed important opportunities to work with the target to build consensus on such questions as company vision, achieving synergies, and the approach to merging operations.

Failure to reach consensus on the vision for the combined company early on, including a high-level growth plan, almost inevitably results in wasted time down the road—if not more serious rifts—as the two managements try to work out misunderstandings from positions of confusion and mistrust. This can often complicate the already tricky task of extracting the value of the transaction through realizing synergies.

Synergy is a new concept to many Chinese executives; they are used to looking at the overall top and bottom lines. Effective acquirers both compel agreement on vision and budget time to reach concurrence on the synergies the combined operations can achieve. Some acquirers focus on specific actions necessary to realize the synergies, starting with easy-to-implement steps, before tackling more complex issues; this is often the best way to engage Chinese partners in the process.

Others design a case-specific approach that helps demonstrate synergies to their local partners, translating them into operational metrics that managers can understand and act on. In our experience, it generally makes sense to integrate when either party has a strong platform for growth and capabilities that can immediately add value for the other, or when there is a strong leadership team on one side that can push the integration forward and manage the combined business. As a result, sales almost doubled to reach RMB 4. Some multinationals believe it is better to leave the newly acquired company as a stand-alone operation if the business is on a good growth trajectory with a strong and stable senior management team and the two companies share the same vision for the future.

The earlier there is clear understanding on how the integration will proceed, including critical staffing issues, the smoother the PMI is likely to be. Removing these uncertainties can also clarify other PMI decisions. A common misconception among multinational buyers is that majority-share ownership confers control. This is not always the case in China. The managing director and the general manager often have the authority to dictate operations, and they can act—and usually do—with little or no supervision from the board.

Some acquirers, including those that have made a number of successful acquisitions in China, use a well-defined and experience-tested approach. They have clear criteria for gaining management control of acquired companies and make those criteria clear during negotiations. These acquirers make a practice of articulating a clear value proposition, and they build a track record of helping acquired companies grow.

Other companies choose to gain control over time by demonstrating their ability to add value and by building trust.

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Both approaches require addressing the issue of control up front. Experienced acquirers have learned that adapting the standard PMI approach to Chinese realities is essential to achieving any level of successful integration. Program management requires disciplines and metrics, but there is a risk of overwhelming the target company with too many meetings and interactions. Some standard PMI rules and procedures should always be followed:. Dealing with such factors as differences in culture and management approach can be structured in a systematic manner, and a customized integration plan can be developed.

In general, multinational buyers should apply PMI principles with care and remember that a light and flexible program-management approach is usually most effective. The focus should be on value creation instead of process management. And even in a fast-growing market such as China, organic growth often has its own challenges, such as customizing products to local needs or building distribution networks.

Indeed, a company may well need to devote more resources and attention to a small deal in China than to a larger transaction in another market. However, the two big hurdles—capturing synergies to justify high valuations and clearing the regulatory approval process—can both be successfully managed. Companies should start by asking themselves some basic questions at the beginning of the process. Smart buyers will approach China with eyes wide open and develop plans to address these issues as soon as it appears that negotiations may lead to a deal.

When the team working on the transaction gets close to finalizing the deal, other teams should start working out plans for gaining the requisite approvals and moving forward with PMI. On the day the deal is signed, both companies can hit the ground running, ready to take on the challenges ahead. BCG uses cookies to improve the functionality, performance, and effectiveness of our communications.

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