Practices and Challenges of Chinese Listed Companies Outbound Mergers and Acquisitions

Deloitte is delighted to release its joint report with CIC Research — "Practices and Challenges of Chinese Listed Companies Outbound Mergers and Acquisitions".

The report is co-produced by Deloitte China and CIC Research, a research institute of China Investment Corporate, based on 379 survey results and study of 109 M&A cases concerning one-year stock price change with 8 in-depth interviews to identify key success factors.

Since China "11th Five-Year Plan" and the "Go Global" strategy, the number of outbound M&A cases has grown rapidly. The challenges the Chinese companies face including culture, communication, management system, etc. across various countries or regions. With the dramatic changes of global trade, regulation and financial environment, as well as increased experience and enhanced capabilities of Chinese company, the outbound M&A practices evolves and the challenges are shifted. The report can help readers to understand the dynamics based on surveys to management team of Chinese listed companies and empirical study, and provide our point of view to support our client to be successful in outbound M&A.

Below are key points discussed in detail within the report:

• M&A strategy: lack of clearly defined outbound M&A strategy with investment concerns in the Belt and Road. 63% of the survey participants have plans of outbound M&A, but nearly 40% of them does not have a clearly defined strategy. In addition, 88.3% have or plan to invest in the Belt and Road. However, high uncertainties of political environment and environment of foreign investment are major concerns of Chinese investors. We suggest developing a clear outbound M&A strategy under corporate strategy, with new technology to study and track investment environment in the Belt and Road.
• Target search and screening: small and medium-sized, mature or fast growing companies preferred but hard to find a perfect target. 44.3% of survey participants prefer mature companies while 50% for fast growing ones. In addition, 76% prefer small and medium-sized targets. Family business and divested assets from global companies are key target sources. However, 70% consider lack of right targets is one of the biggest challenges for outbound M&A. We suggest to defining right search and screening criteria by focusing on meet the corporate strategy, but avoid perfection.
• Deal execution: acquisition by listed entity to become sole controlling shareholder preferred, but with high risks. 70% of companies prefer to become majority shareholders in acquisition, of which 74% as sole controlling shareholder. On the other hand, 84% of survey participants treat transferring targets into listed entity as major exit approach. However, the risk is high. 54% fails in negotiation process, 39% in due diligence due to high risks to control identified and regulatory as common obstacles. We suggest to conducting due diligence from various perspectives and performing thorough synergy analysis to improve enterprise value.
• Post-deal integration: high complexity leads to failure to integrate to realize deal value. Corporate governance is undoubtedly the focus of most post-deal integration (76%), while revenue and cost synergies also considered critical (66% for revenue and 50% for cost). Failure to realize deal value commonly caused by synergy not properly identified and tracked, as well as integration plan poorly developed and executed. The culture conflict considered as a main reason of poor integration. We suggest to paying more attention to identify, quantify and track synergies and proactively resolve cultural issues.
• Special topic: capital market performance can be positively impacted by proactive integration initiatives. In order to better understand the impact of integration on capital market performance, we study the correlation of one year stock price change and depth of integration. We find the average annualized return rate (excluding industry specific fluctuation) of heavy integration cases is 11%, significantly higher than negative 8% of light integrations. In the in-depth interview, three key factors emerged including a clearly defined M&A strategy with quantified goal, proactive post-deal integration and balance between long-term goal and short term financial performance.

The report is beneficial to executives of China companies, especially listed companies, who is or plan to leverage outbound M&A as key component of globalization strategy. Deloitte M&A practice across various service lines including Strategy & Operation, Financial advisory, Technology, Human Capital, etc. It helps our Chinese clients to solve most challenging issues during outbound merger and acquisition.