Deal Cultivation – Key to Success in MakingAcquisitions in China
Steven H. Ganster, Managing DirectorTechnomic Asia
A Subsidiary of Tompkins [email protected]
www.technomicasia.com www.tompkinsinc.com
Presented at the…2009 & 6th Annual Mergers & Acquisitions in China Summit
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Topics
China’s M & A Landscape
Evolution of M & A as a growth strategy in China
Unique complexities in China’s M & A process
Strategy vs. Structure
Cultivating the deal
Key principles of success
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China is in a “late adolescent” phase in terms of market maturity...
Infant
Toddler
Young Teen
Late Adolescent
The M&A Landscape
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Opaque financial systems
Corruption
Rule of man versus rule of law
Unpredictable regulations
Huge cultural differences
Expensive and time consuming to get things done
Lacking enough local talent
Defining your addressable market
Dealing with high level of uncertainty
Access to local markets
Being cost competitive
Dealing with counterfeits and IP infringement
Understanding Chinese business culture
Successfully China-fying your business model
A number of planning and operating challenges color the backdrop of making acquisitions in China…
The M&A Landscape
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The M&A Landscape
Business is getting tougher– No “low-hanging fruit”—obvious ones gone or unavailable– Margins being squeezed--Increased competition– Companies are suffering financially
Motivations for buyers to buy are solidifying– Control supply chain– Accelerate penetration of local market– Obtain cheaper assets
Motivations for sellers to sell are poorly defined but clarifying– SOEs privatizing– Cash out– Thirst for technology (hard and soft)– Lock in big ticket customer– Access to global distribution and customer list– Possible alternative to listing (though still a motivation for many)
Given this environment, several key issues are shaping M&A in China today…
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The problems in the “early days” of the JV are leading to altered strategies today…
What went wrong…?
JV-structure before strategy
WOFE-reactionary response
Acquisition-using a hybrid approach via M&A
Evolution of M&A as a Strategy
80s – 90s 2000 2010
50/50 JV
WOFE
Acquisition
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There are many complex issues surrounding acquisitions or joint ventures in Asia.
Opaque management structures
Complex state and township - owned conglomerates
Added political risks
Transaction sizes small
Regional fragmentation
Market environment more fluid
Government/regulatory impasses
Reliable information scarce
Legal system ambiguity
Lack of professional management
Thin historical data
Dynamic competitive landscape new entrants
Unique Complexities in China M&A
Unsophisticated sellers
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Market/CompetitorAssessment
Develop StrategicIntent
PartnerQualification
DealCultivation
LOI
DueDiligence
DealClose
Integration / Start up
WOFE, Other
Alliance
Unique Complexities in China M&A
Fluid market environment Reliable information scarce Dynamic competitive
environment with new entrants
Deal flow – identify appropriate targets Finding right deal size (often too small) Unsophisticated sellers Lack of professional management Understanding motivations of all players Satisfying multiple wants/needs Not enough focus
Less meaning in China – no “teeth”
30% close rate
Opaque management structures Multiple books Regulatory impasses Gov’t obstruction / intervention High cost/deal ratio
Keeping deal together until final agreement signed
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Non linear
Time consuming
Expensive
Frustrating
A discovery process
…a lot like a ride on Disney’s Space Mountain!
Unique Complexities in China M&A
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Strategy vs. Structure
China’s tough market environment necessitates doing “strategy before structure”
In the past…
Structure(JV)
China Strategy
Today…
ChinaStrategy
Force-fit the strategy to the structure Find the structure to fit the strategy
Structure(any)
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Foreign Investor Chinese
Company LTD
FIE (JV, WFOE) Non-China offshore company (NCOC)
FIE (JV, WFOE)
China border
FIE (JV, WFOE)
Buy shares or the whole NCOC to own the FIE in China*
Convert the Chinese Company to an FIE in case of equity deals or concurrently set up an FIE to hold acquired assets
The Foreign Investor owns or intends to set up an FIE first
Direct acquisition
Buy and run acquired assets
The NCOC owns the FIE
Strategy vs. Structure
*It is also popular when establishing a JV, to set up the partnership outside of China which entity then wholly own the China WFOE
FIE (JV, WFOE)
Convert JV to WFOE in case of buying equity form Chinese owner(s) or concurrently set up an FIE to hold acquired assets
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China sellers often have a different deal paradigm that is critical to appreciate…
“The West”
1. Financial due diligence
2. Commercial (calculated)
3. Structure
…..
10.Relationship
China
1. Commercial (intuitive)
2. Relationship
……
9. Structure
10. Financial due diligence
Everything flows from financials…
Everything flows from relationships…
vs.
Cultivating the Deal – Buyer and Seller Motivations
Types of Sellers
Unsuspecting
Inexperienced
Resistant
Desperate
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The Acquisition Process…
Transaction Transaction Structure &Structure &ExecutionExecution
Transaction Transaction Structure &Structure &ExecutionExecution
CandidateCandidateIdentificationIdentification
& Qualification& Qualification
CandidateCandidateIdentificationIdentification
& Qualification& Qualification
Acquisition Acquisition Strategy Strategy
Acquisition Acquisition Strategy Strategy
Legal, Financial Legal, Financial & Commercial& CommercialDue DiligenceDue Diligence
Legal, Financial Legal, Financial & Commercial& CommercialDue DiligenceDue Diligence
LOI LOI SignedSignedLOI LOI
SignedSigned
Deal Cultivation & Deal Cultivation & Pre Due DiligencePre Due Diligence
Deal Cultivation & Deal Cultivation & Pre Due DiligencePre Due Diligence
Market Assessment Market Assessment & Business case& Business case
Market Assessment Market Assessment & Business case& Business case
These areas often short changed
In China, acquisitions require more upfront target cultivation and pre-due diligence than is typically needed in the West.
Cultivating the Deal – Doing the Work!
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At the Discovery Stage, “Level of insight per dollar” is very high!
Approach to target companies
Negotiation of Framework Agreement
Discovery StageFormal DD Stage and
ValuationDefinitive Agreement
Signing of LOI
Transaction costs can be quite high in China, compared to the deal sizes available, so effective “discovery” is important before spending substantive dollars in due diligence.
Tra
nsac
tion
co
sts
The Acquisition Process…Cultivating the Deal –Discovery Stage
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• Strategy before structure!!
• Start with a clean company whenever possible—asset purchase
• Know what assets you really need to own
• Be creative—don’t just transplant your western business model
• Controlling the operation is paramount (key management functions)
– …but you don’t have to own everything to control it
• Consider “strange bedfellows” as targets/alliances
• Work closely with local government from the beginning
• Invest in RELATIONSHIP building
• Observe the 6 Ds
Some Key Principles for Deal Success
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Thank You!
Introduction to Technomic AsiaIntroduction to Technomic AsiaA Division of Tompkins Associates
Summer 2009
For more information, contact:
Steve GansterManaging [email protected]
Technomic AsiaChina Office
Room 502, Jin Tai Building58 Mao Ming Road (South),
Shanghai 200020, ChinaTel: +86-21-6473-2588Fax: +86-21-6390-6659
www.technomicasia.com www.tompkinsinc.com
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Background
Technomic Asia recently became the Asian arm of Tompkins Associates, a renowned global business and supply chain consultancy.
As of January 2008, Technomic merged into Tompkins Associates.
Technomic Asia has over 25 years of consulting experience in Asia having assisted over 200 multinational clients with their Asia business strategy, sourcing and supply chain strategies.
Technomic Asia and Tompkins have deep experience in the acquisition process from candidate identification/qualification through due diligence.
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Technomic Asia provides the following solutions for multinational firms to support their Asian strategy needs for both new investments and existing operations:
Asian entry and growth planning and support including market assessment, business case development and entry strategy.
Acquisition support from candidate identification, qualification, deal structure and negotiation and commercial due diligence.
Asian sourcing and supply chain assessments including supplier relationship and improvement programs.
Assessment of Asia “readiness” for portfolio companies based on our proprietary methodologies.
Technomic Asia Core Services
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We have been on-the-ground in China since 1985 (JV) and have assisted over 200 MNCs in their China strategy and operational initiatives.
Legal status comprises WOFE and Representative offices
We have broad experience in multiple industrial areas, including commercial, residential, industrial and infrastructure segments.
China Capabilities
Through its subsidiary in Shanghai, Technomic has extensive operational experience in China (as well as the Asian region in total).
Our China consulting services are supported by a set of effective tools at the corporate level to assist companies in the benchmarking process.
Our China operation is well integrated with Tompkins worldwide to enable the seamless implementation and rollout of global programs.
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China Capabilities (cont’d)
~20 professional staff with varied backgrounds All but one are mainland Chinese citizens
Most have masters degrees both from China and overseas business schools
Multilingual Chinese, English and other
All with industry experience
Priority characteristics of our China operation include… Longer Time Based Experience in China, Ahead of Any Other Major Firms
Innovative, Pragmatic, “Street Smart” Approach
Client Centered Solution
Possessing In-depth China know-how and Cultural Sensitivities
Deep experience working with MNC management on their China initiatives
Direct involvement of senior management in program engagement
Broad industry experience, including capital equipment
Trust and Integrity
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• Basic data • Limited
analysis • Minimal
strategic direction
• Low cost
• On-the-ground, “street-smart” approach.
• Deeper, more mature market understanding
• Ability to filter, sort and process insight to determine implications
• Extensive experience to recommend how client can respond to “win”
• Can take client all the way to an actionable business plan
• Moderate cost
• High level market view “35,000 feet”
• Often “valuation” focused
• Limited tactics • High cost
• Technomic Asia was one of the first foreign consulting firms licensed to practice in China
• We have completed over 650 programs in China alone across a wide range of industries
Technomic Asia provides a unique value proposition which differs from other consulting and firms in Asia.
Our Value Proposition
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We provide capabilities in candidate identification, qualification and due diligence, as well as underlying alliance/acquisition strategy and deal support.
CandidateQualificationand Screening
MarketBased
Due Diligence
Negotiation and Close
Core Services Include...
Acquisition Strategy
Development
• Core Objectives of Deal• Target Products & Technologies• Geographic Focus• Critical success factors• Candidate Criteria• Develop long-list of candidates
• Screen on first level criteria• Qualify and focus on primary
candidates• Profiling of short-listed candidates
and attractiveness level• Determine candidate interest
• Develop & Sign LOI• Deeper assessment of target candidates from
perspective of customers, suppliers and the supply chain
• Validate viability of business case.
• Deal Structure• Negotiation Support• Optimize Government subsidies• Legal & Financial due diligence• Integration Planning• Closure
Acquisition Services