Mainland China's emergence as a global economic superpower has brought thousands of foreign companies wishing to buy into profitable enterprises everywhere from Beijing in the Republic's north to sunny Haikou in the far south. But many pitfalls await the unwary, and rather than attempt such a challenging task themselves, savvy overseas investors turn to professionals in the field of mergers and acquisitions (M&A) to find a clear path through the red tape and wrangles. As a result, and to no great surprise, M&A has become a growth industry on the mainland.
While M&A today smooths the way to multi-million dollar deals in all parts of China, the ramifications of every deal are complex and each deal has unique features. Challenges range from the daunting maze of government regulations involved to integrating an enterprise's management system. Few companies can match the specialised knowledge and skills of Deloitte Touche Tohmatsu, which opened its first office in Shanghai in 1917 and is now a key player in M&A consultancy services across China.
Lawrence Chia, managing partner, financial advisory services (Asia Pacific and Greater China), Deloitte Touche Tohmatsu, explains that the firm now has over 6,000 staff in 10 offices across the mainland, Hong Kong and Macau, among them 400 are dedicated to financial advisory services, and expects to employ at least 1,000 more staff each year for the next few years.
"We have gained considerable experience in China and are one of the country's leading professional services organisations," he says. "We have been a significant contributor to the development of China's accounting standards, taxation system and higher standards among professional accountants. Coupled with our global network, we have supplied M&A services to many foreign enterprises to help them enter the China market. We solve problems and simplify issues for foreign companies seeking to gain a foothold in China."
Pointing to the complexities involved in M&A activities in China, he rates local knowledge in problem-solving as being on the same plane as capital investment. Recent research studies by Deloitte show that prospective foreign acquirers should be prepared to cope with a series of important factors including compliance, corporate structure and local regulations.
Moreover, says Mr Chia, M&A in China is overshadowed by various uncertainties. "Issues that foreign companies find particularly difficult to handle include the lack of transparency in the working culture, inconsistencies in the interpretations of rules and regulations, and cultural differences," he says. "Many expatriates don't know how to manage business relationships, or 'guanxi', on the mainland. Another very necessary quality is patience. International investors flock to China to make the most of the opportunities available but may become frustrated by the length of time it takes for the M&A transactions to deliver returns."
Fairer playing ground
However, as Mr Chia explains, the Chinese government is taking ongoing steps to improve its legal and financial systems. "For example, the China Securities Regulatory Commission (CSRC) will soon standardise M&A regulations regarding listed companies while the 10th National People's Congress introduced a new Enterprise Income Tax Law, which unifies the income tax levied on domestic and foreign enterprises. These measures are attempts to create a fairer and clearer playing ground for all," he says.
An important point about M&A activities in China is that by far the greater number of these transactions involve only mainland companies. "There are a tremendous number of such deals involving solely mainland enterprises," Mr Chia points out. "Only a minority of such deals involve foreign businesses merging with or acquiring mainland enterprises."
Elaborating on the benefits for both sides involved in M&A deals, Mr Chia says, "It is definitely a 'win-win' situation for both sides. We categorise investors into two types: financial investors and strategic investors. Financial investors inject money into a target business for potential monetary return, and their primary concern is rates of return. Despite this motive, they can help the target business consolidate its position with the money they invest. As for the strategic investors, they are interested in gaining access to the China market and helping develop the target business. Knowledge transfer is attached to this type of deal, which also serves the purpose of enhancing the value of the target company."
In this way, M&A can create synergies and economies of scale, expanding operations and cutting costs for the parties involved.
There is another aspect to M&A that has so far gone relatively unnoticed: not only are foreign investors flocking to the China market, cashed-up Chinese companies are themselves eyeing acquisitions beyond the PRC's border. Confirming this development, Mr Chia says, "We are seeing an upward trend among Chinese companies looking to acquire companies in other parts of the world to increase their global presence."