But Chinese companies are discovering that expanding into
foreign markets is tricky. And they aren't alone. Worldwide, we've
found that M&A efforts often fail to deliver the intended
value-and the stakes are even higher for companies that lack
experience in M&A. A Bain & Company global survey of 750
companies showed that 55 percent-more than half-of the acquiring
companies' stock failed to outperform the market one year after
deals were announced.
When Shanghai Automotive Industry Corporation (SAIC) won a
heated takeover battle in 2004 for a nearly 50 percent stake of
Ssangyong, it was the first acquisition by a mainland company of a
foreign car manufacturer, with the potential of SAIC and Ssangyong
complementing each other's businesses. But SAIC encountered a
number of challenges, including an inability to get control of
Ssangyong's operations and labor unions.
However, some seasoned acquirers are getting it right. We've
found that they start slow and small, gaining experience and
confidence with domestic acquisitions before expanding globally.
Winners often monitor the growth of acquisition targets for years
before making an offer. They focus on how the deal could take full
advantage of synergies for both parties. Winning acquirers
understand that to excel, they have to attract and retain top
ChemChina (China National Chemical Corp.) became the mainland's
No. 1 chemical conglomerate by following that path. After more than
100 domestic acquisitions, ChemChina, on its own or through its
Blue Star subsidiary, then targeted three major foreign
firms-Adisseo and Rhodia in France and Qenos in Australia. The
deals helped catapult ChemChina onto the global stage, giving it
the technology, management skills, capital and market access
required to become a multinational player.
As the pace of global expansion by mainland firms accelerates,
Chinese businesses need to learn quickly several important lessons
to replicate the success of companies like ChemChina.
Rule #1: Know which approach works best for
Don't assume conventional M&As are your only options.
While M&As are the major growth strategy, companies often
learn the ropes by forming partnerships and joint ventures in
foreign markets. That approach gives them insights into the
difficulties of foreign expansion and crucial experience without as
large a financial commitment. Advantages include using a partner's
manufacturing facilities, piggy-backing off their already
well-established brands, sales and distribution networks and
talent. While joint ventures are less risky than acquisitions, they
involve their own special hurdles.
The challenge is to know why you want a partner, what the
"win-wins" are for both companies and how to tackle the
cross-cultural challenges. Take Haier, now a leading global
white-goods manufacturer. It is learning how to use partnerships
with US players such as General Electric for joint product
development and reciprocating by providing regional access in the
Chinese market through Haier's distribution partners.
Since 2008, Alibaba.com, the global leader in e-commerce for
small business, has used a joint venture with Japan's
telecommunications giant, Softbank, to open up new opportunities in
the Japanese marketplace. It gave Alibaba.com access to Softbank's
talent and sophisticated knowledge of the Japanese market. Now the
two companies are in talks to form a partnership that would jointly
promote e-commerce between China and Japan.
Rule #2: Know why you're acquiring
Understand the basis of competition, then create an investment
One of the best ways to avoid disastrous acquisitions is to
articulate clearly why buying a business will make your company
more valuable. Even in good times, many companies don't understand
the importance of an investment thesis. When we surveyed successful
acquirers, we found that about 80 percent of successful
transactions were based on a clear investment thesis. For failed
deals, it was about 40 percent. Too often, companies haven't
pinpointed the best opportunities for value creation as well as
assessed the risks.
In good times and bad, a winning acquisition strengthens a
company's basis of competition such as its cost position, brand
strength or customer access and loyalty. All were goals of the IBM
acquisition, which helped Lenovo achieve global scale, build a
global brand and gain access to leading-edge technology in what was
the fastest growth segment of the time.
Amid economic turbulence outside of China, it's especially
important to keep updating the valuations of potential targets.
Many companies are relatively cheap in a downturn because their
shares have plunged. But some companies are cheap for good reason,
and the adage that you get what you pay for often applies.
And update the target list based on changing market variables.
The future business climate is likely to be more tightly regulated,
less leveraged and more risk averse. Once-successful business
models may no longer work. Onetime market leaders may be
permanently compromised. Yet you may want to add businesses that
you think are likely to thrive in a different environment.
Rule #3: Know which deals you should close
Ask and answer the few questions that test your investment
Identifying potential acquisition targets and winnowing them to
one or two best choices requires discipline. Instead of hastily
reacting to acquisition targets as they come on the market,
seasoned deal makers know their basis of competition and are
constantly thinking about the types of deals they should pursue.
Their M&A teams create a pipeline of priority targets, each
with a customized investment thesis and then cultivate a
relationship with each one. As a result, they can quickly close a
Because they know what they want to achieve with the
acquisition, they're often willing to pay a premium or act faster
than rivals. China's three major commercial banks, the Industrial
and Commercial Bank of China, Bank of China and China Construction
Bank, all have developed lists of potential acquisition targets.
The targets are linked to the government's strategic priorities in
specific markets like Southeast Asia, Africa and Australia, where
Chinese companies are significantly enhancing their trade
activities or even acquiring assets, like natural resources.
But before closing a deal, winners overinvest in due diligence. In
cross-border deals, rigorous due diligence is even more critical to
head off problems before a purchase is completed and requires extra
attention. The process should start by zeroing in on potential
roadblocks such as regulatory or political issues. To develop an
insider's point of view, companies can tap their existing networks
or customers and dispatch an advance team to review the target firm
Rule # 4: Know where you need to integrate
Prioritize getting at the key sources of value quickly.
Our research shows that cross-border deals carry a similar rate
of success as domestic deals, but integration typically is more
complex. The unique challenges include tailoring the integration
thesis to each region's circumstances, tackling actual and
perceived cultural differences, considering geographically
dispersed operations and stakeholders as well as complex legal and
regulatory requirements that can derail the integration.
To boost the odds of success, acquirers need to:
- Identify the best sources of synergies and prioritize them
- Ensure that the integration process isn't overly complex
- Be able to make decisions quickly so that critical milestones
- Provide strong leadership of the integration process
Understanding whether deals are to boost "scope" or "scale" is
vital. Chinese apparel maker Youngor Group Ltd.'s acquisition of US
based Kellwood Co.'s Smart Shirts business is largely a scale deal
designed to expand a core business, as opposed to a scope deal
aimed at expanding into adjacent lines of business. Scope deals
require a different approach to integration than scale deals, with
the goal of fostering some of the capabilities of the acquired
company and integrating where it matters most, rather than
combining two similar companies for maximum efficiency.
Meanwhile, when it comes to people issues, many companies wait
too long on organizational and leadership decisions. Poor
performance in the base business frequently occurs when integration
soaks up too much energy or drags on, distracting managers from the
core business. As a rule of thumb, at least 90 percent of the
organization should be focused on the base business, and these
people should have clear targets and incentives to keep those
Rule #5: Know what to do if the deal goes off
Set up an early warning system and act quickly. No deal goes
exactly as planned. The best deal makers expect to hit a few
potholes. They install early-warning systems to detect problems and
tackle them as soon as they emerge. They distinguish between the
inevitable glitches and those that signal something far more
serious. Here, the need for unsentimental discipline reaches its
peak: Acquirers must let go of the past, admit errors and take
decisive action to put their deals back on track-or not.
Ultimately, to improve the odds of a successful global
expansion, knowing when to pull out of a deal is just as critical
as the other four guiding principles: knowing the best approach for
your situation, knowing why you're acquiring, knowing the best
deals to go after and knowing where to integrate. The more Chinese
companies look for growth overseas, the more they need to be guided
by these principles.
Phil Leung is a partner with Bain & Company's Shanghai office
and leads the firm's Greater China Mergers & Acquisitions
practice. Larry Zhu is a partner with Bain & Company's Shanghai