With strong headline figures, China remains an exciting possibility for daring foreign companies. James Harris reports
With strong headline figures, China remains an exciting possibility for daring foreign companies. James Harris reports
As deal volumes crashed globally, domestic M&A activity in China has remained robust. In the first nine months of the year, China was second only to the US as the most acquisitive country in the world, reporting a combined deal value of $137.2 billion (£83.8 billion), a three per cent increase on the previous year, according to research by Dealogic.
With buoyant deal activity and economic growth at a brisk nine per cent, Chinese companies are on the up. However, there is still a long way to go before these businesses will fall prey to deal-hungry foreign concerns.
Historically, the rules on foreign ownership put the kibosh on many transactions. Melanie Wadsworth, a partner at US-based law firm Faegre & Benson, explains: ‘The Chinese government was happy to allow foreign companies to set up a factory in the country and export products, but it was very reluctant to allow companies to sell into China.’
James Wilkinson, a partner at law firm Reed Smith, says: ‘The procedural rules for approving foreign ownership have changed, but it is still very complicated,’ says Wilkinson.
In fact, staying on top of the regulatory environment is a challenge in itself: ‘There is a fair amount of regional fragmentation and local agencies respond differently. The regulatory framework changes a reasonable amount on a regular basis.’
Cultural differences can also make transactions difficult. Wilkinson says: ‘Contractual agreements are not necessarily followed. The business relationship still underlies a lot of dealings in China.’
Attitudes to compensation packages are also different: ‘A lot of Chinese companies are not familiar with management incentive schemes and bonus arrangements, so it can be difficult to persuade them to adopt them,’ says Wilkinson.
It takes two
For intrepid dealmakers, Wadsworth suggests a joint venture to alleviate teething problems: ‘It is the safest way to enter the market. It takes a long time to build relationships.’
A joint venture may also help funding. Undoubtedly the main driver behind the strong levels of deal activity in China has been the government’s colossal fiscal stimulus in late 2008, worth 4 trillion yuan (£360 billion). While state funding has been denied to foreign enterprises, Wadsworth notes that ‘where there is a joint venture, the local partner may be able to take advantage of state financing’.
For the majority of foreign companies, finance remains a problem. Wilkinson admits: ‘It has been a struggle to raise money, that’s why we have seen a lot of cash purchases.’ However there is a growing private equity sector in China. Wilkinson recently advised UK-based EIS Optics, backed by FF&P Private Equity and Nova Capital, on its acquisition of Shanghai-based Oerlikon Optics for an undisclosed sum.
‘Private equity has not been active until recently. It’s something that the government is encouraging,’ comments Wilkinson, who adds that ‘more private equity means more exits’.
For Wilkinson, the opportunities outweigh the difficulties: ‘People used to look at doing business in China because it was a cheap place to manufacture products, now a lot of Chinese companies are good businesses in their own right, with professional managers that are attuned to changing events.
