M&A (Misery & Anger?)

The Top 3 Reasons for Misery & Anger in Dealing with Chinese Investors

It is public knowledge that large Chinese companies like Wanda, Hainan Airlines Group, China Media Capital and Fosun are making regular investments overseas worth hundreds of millions of dollars. These Chinese companies are driven by the need to diversify their assets, to expand internationally, and to continue to build their brands both at home and abroad.

Investment banks and others have been lining up for some time to facilitate these mergers and acquisitions, recognizing that buyers’ cash is increasingly coming from China. And yet the volume of transactions they have successfully completed is surprisingly low, and the number of frustrated and angry brokers is shockingly high. Why is that? Here are the top 3 reasons.

The first reason is a mismatch in scale. Let’s take a well-known example: the acquisition of AMC Entertainment Holdings by Dalian Wanda.

AMC has the second largest share of the North American cinema market: that’s pretty big, right? Huge. Except when they face up to Wanda to do a deal. In the blue corner: 2,000 employees of a $2.5 billion corporation; in the red corner: 110,000 employees of a $30 billion mega-corporation. How is a minnow supposed to negotiate with a whale (or, indeed, vice versa)? It is to the Chinese’s credit that they don’t simply swallow their targets whole – which, unlike their Western counterparts, they do not tend to do. They are looking for guard-dogs not dinner.

The second reason is a difference of culture. It’s almost a cliché to say that the Western side thinks individualistically, while the Chinese side thinks corporately. But it makes a critical difference to the M&A process.

The directors of a Western company will generally appoint a representative to act on their behalf to secure a deal with “the man” in the investing company. That mandate is protected by non-disclosure and non-circumvention agreements to create a single channel for negotiation between the two parties – like tin can walkie-talkies connected by a piece of string.

The owners of the Chinese company, by contrast, may use “middle-men” but they will not entrust the overall process to them: they will not issue mandates. They will take decisions collectively, only if and when they are confident of winning. You simply cannot negotiate one-to-one. A multitude of people have to be convinced, until the school of fish “magically” changes direction.

The third reason is approach. If you have ever been into a Chinese post office, you will know that people do not queue up at the counter in a neat line to be served one-by-one. Instead, people crowd round each clerk, who serves several customers at a time. To use this as an analogy, if you are a large Chinese corporation wanting to collect something from the post office, you don’t send one person but a hundred. You don’t care who brings the parcel back, so long as somebody does. And the more people you send, the better your chances of getting what you want.

If a Chinese corporation has identified a target they really want, they will go after it through as many channels as they can in order to (a) secure the deal – like buying multiple raffle tickets instead of just one – and (b) ensure they get the best deal – figuring that competition drives value.

Even a single CEO of an acquisition target does not have one exclusive contact to the outside world but a network of contacts. Knowing this, the Chinese corporation will not settle on one contact to interface with the CEO but will try as many different contacts as possible. And if you are a mega-corporation with 11,000 people in your M&A team, the number of channels you will try to open up with an acquistion target cannot be counted.

So who wins? Too often, nobody – because the Western side misreads the Chinese approach and withdraws in frustration and acrimony. Where there is a winner, it is not the one with “the golden ticket” but the one that runs fastest. In other words, not the one with the mandate or the contacts in their address book but the one who has the insight, agility and energy to add the most value to the Chinese whole.