M&A in China – Why Deals Fail: Part I




Technomic Asia show

Summary: Qi Tang M&A in China – Why Deals Fail: Part I     Interviewer: Steve Ganster   My name is Steve Ganster; Managing Director of Technomic Asia, a market strategy and growth consultancy based in Shanghai. I am pleased to kick off our series on M&A in China with our first segment on why deals fail.   It is well acknowledged that it is tough to culminate an equity partnership in China, even after a good candidate has been identified and taken through LOI. In Part I, in a conversation with Qi Tang, Technomic’s M&A practice leader, we’ll begin to unpack this very interesting and complex topic. I think you’ll find some very practical insights that you can apply to your China acquisition initiatives.   Steve:​I’m here with Qi Tang, senior member of our team who has done many projects in the world of acquisitions in China and I think brings a very unique perspective on this topic.   ​Qi, welcome.   Qi:​Thank you.   Steve:​M&A in China is a big topic.  What I wanted to talk about today is one troubling area regarding why deals fail or don’t get done. As we’ve talked in other podcasts--It’s very difficult to find a qualified target who’s interested, but even when that happens and we have some good dialogue going, even an LOI in place, they tend more often than not to fall apart and never get culminated.   ​Just as a starting point, Qi, what would you say some of the main reasons are? What’s different about China that makes this failure rate so high?   Qi:​China is a very different place versus the United States. Its political system, economic system and legal system, so you’ve got to pay attention to all of these differences when you are trying to find an acquisition target [or] when you’re trying to do your investigation into an attractive target. It’s just a challenging market in which we need first of all to think through whether we even want to do an acquisition in this environment or not.   Steve:​Do you think it’s appropriate to change the process in how we do deals?   Qi:​Definitely. While I think the western way or western process to makingacquisitions in China makes sense on a general basis, you’ve got to adjust this process considering the Chinese environment. You’ve got to be both objective and somewhat subjective when you are looking at a target.   Steve:​Where do you see many of the negotiations falling apart? Often it can seem we’re on track and then either the western company or the Chinese company starts to go in another direction, sometimes without any logic or apparent logic.  They change their mind [and] the deals end up falling apart. What’s going on?   Qi:​A major problem often is that objectives eventually turn out to be divergent, which in many cases were not realized to some degree because of language barrier, culturedifference or other factor.   Steve:​So often we’ve seen, I know in our cases, that we’re negotiating, we have a value on the table, and then a week later that value changes. I think the sense that western companies get is that they’re being manipulated or played with. And maybe sometimes they are, but what else might be going on?   Qi:​This change should never be treated as odd, particularly in China. I think Westerners change their mind too, so--.   Steve:​That’s true. While we’re on the topic of valuations, how do the Chinese sellers often approach valuation? We know in the West, it’s often EBITDA based and the multiple thereof, but in China, what are some of the typical perspectives on how youvalue your own company?   Qi:​I would say that the Westerners first need to be prepared that Chinese typicallywould view the value to be tied to their asset value as a benchmark. And on top of that, it would be subject to the expectation of the seller, subject to the stock market, PE ratio at that particular time, and also it would be subject to the industry sector that company is in.