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Huanping Zhang: from “wishful thinking” to “indispensable”
The following content is reproduced from Nanfang Daily
October 12, 2016 07:45 Southern Daily Gao Qihua
"If a major merger and acquisition case does not include a Chinese buyer, foreign sellers will question or even criticize the intermediaries for not doing their job properly," Huanping Zhang, Executive Director of Eurasian Consulting GmbH, told the Southern Daily in a cross-border interview on the 11th. He stated that Chinese companies' ability to conduct overseas mergers and acquisitions is growing stronger and has become an indispensable force in the M&A market.
Huanping Zhang has long resided in Germany and has served as an advisor on overseas mergers and acquisitions for Chinese enterprises for many years. He will soon fly to Foshan to attend the inaugural Sino-German Enterprise Investment and Merger and Acquisition Forum, which will be held on the 19th of this month. He believes that Germany is currently the best country in Europe for investment, with its stable political environment, good economic conditions, and high-quality small and medium-sized enterprise resources, all of which make it an excellent choice for Chinese enterprises seeking to engage in overseas mergers and acquisitions.
However, mergers and acquisitions are a marathon. To successfully achieve a merger, Chinese enterprises also need to develop a sustainable development strategy, provide continuous funding and talent support for overseas mergers and acquisitions, and learn to leverage excellent intermediary institutions such as merger and acquisition advisors and lawyers to make the best acquisition plans.
Germany Becomes the Best Destination for Chinese Overseas Investment
Southern Daily: According to the "2015 Annual Report on China's Outward Foreign Direct Investment" released by the Ministry of Commerce last month, China's outward foreign direct investment last year was second only to the United States, ranking second in the world for the first time. Many of these enterprises chose to conduct overseas investments through mergers and acquisitions. In your view, when did Chinese enterprises begin to accelerate their pace of overseas mergers and acquisitions, and what are the reasons behind this?
Huanping Zhang: Eurasian Consulting GmbH began to engage with cases of Chinese overseas mergers and acquisitions in 2007, when both the number and amount were relatively small. However, there has been a rapid increase since last year. This change is due to the fact that previously, the profit margins from domestic production were higher than those from abroad, and the domestic market could absorb the products produced, thus reducing the motivation for outward development. However, with the slowdown in China's economic growth, excellent enterprises have already completed their occupation of the domestic market segment, and to achieve further growth, they need to adopt a global layout.
On the other hand, China is facing pressures from rising labor costs and the need for industrial structure upgrades. The accelerated application of automated production is also driving domestic companies to pay more attention to efficient production methods and strong R&D capabilities abroad. Additionally, expectations of the renminbi's depreciation are making Chinese companies more optimistic about overseas targets, fueling this wave of overseas mergers and acquisitions.
Southern Daily: In this wave, Chinese enterprises seem to be more inclined to make acquisition investments in Germany, with 36 acquisition investment transactions last year alone, including Beijing Holdings' acquisition of a German waste energy company in April and Midea's announcement of acquiring Kuka in June. In your view, why has Germany stood out, and what are its advantages?
Huanping Zhang: The "China Overseas Investment Country Risk Rating Report (2016)" released at the Boao Forum for Asia Annual Conference in March this year shows that among more than 190 overseas investment destinations of China, Germany is the best destination in terms of the environment.
Generally, when we talk about the investment environment, it mainly includes the political environment and the economic environment. On one hand, Germany's economic policies have strong continuity, creating a stable political environment for investors; on the other hand, economically, Germany is the largest economy in the EU, with strong competitiveness. Additionally, due to the increasing hollowing out of the real economy in other European countries, it has led to even stronger growth in Germany's real economy.
From a business perspective, Germany is dominated by small and medium-sized enterprises (SMEs) with annual revenues ranging from tens of millions to several hundred million euros, providing over 90% of all jobs in the country and virtually supporting the entire national economy. Many of these SMEs are hidden champions in their industries, boasting excellent operational and production efficiency, and their employees and management have high standards. Since 2008, mergers and acquisitions initiated by China into Germany have been largely successful cases, with a very low probability of severe losses. These factors have given Chinese buyers a great deal of confidence in mergers and acquisitions.
Southern Daily: Then, in the M&A cases you have observed involving Germany, which sectors of German companies are Chinese enterprises more inclined to favor?
Huanping Zhang: Generally, they are dominated by traditional manufacturing sectors, such as automotive components, automated equipment, and industrial robots, with many projects also in the environmental and medical fields. We believe that electric vehicles will become a new market for mergers and acquisitions in the next phase. Additionally, based on our observations, approximately 25% to 30% of companies are engaging in cross-sector mergers. However, as merger advisors, we believe that the integration risks of cross-border and cross-industry projects are significant and should be carefully considered.
The number of Chinese companies acquiring German enterprises is high.
Southern Daily: We have observed that as the willingness to enter the Chinese market increases, German companies have shifted from looking down on Chinese investment to increasingly welcoming it. Today, mergers and acquisitions are no longer a one-sided desire of Chinese companies but are gradually becoming a mutual agreement between Chinese and German enterprises. What is your take on this change?
Huanping Zhang: Indeed, I will use the example of Joyson Electronics' acquisition of Preh in Germany, which I handled, to illustrate the changes in how Chinese and German companies have approached merger and acquisition projects over the years. Joyson Electronics began making joint venture offers to Preh as early as 2007, but Preh quickly rejected the proposal, citing Joyson's small enterprise scale. However, both parties visited each other's companies, leaving a good impression on one another.
Subsequently, affected by the European financial crisis, Preh placed increasing emphasis on the Chinese market and began to engage with various Chinese buyers. Meanwhile, Joyson Electronics, after three years of development, had expanded its business scale significantly and had experience with overseas mergers and acquisitions, while also preparing for an IPO, which strengthened Preh's confidence in cooperation. After multiple contacts, the two parties quickly reached a cooperation agreement.
Another relatively successful acquisition case is XCMG's acquisition of German concrete giant Schwing. Schwing is a traditional family-owned enterprise in Germany that entered the Chinese market in the 1990s but failed to penetrate due to its high product prices. At the same time, it was highly wary of Chinese companies, and despite multiple contacts with XCMG, it was never considered as a potential acquisition target.
Through continuous interactions, Schwing gradually recognized the synergy of collaborating with XCMG to develop the Chinese market and expressed an attitude of "not selling to anyone but XCMG."
From this, we can see that as a world-renowned manufacturing powerhouse, Germany's companies have always been quite proud, and initially, they were not very friendly, or even somewhat exclusionary, towards Chinese enterprises. However, as the importance of the Chinese market continues to increase, and with the strengthening of their own capabilities, the maturation of international operations, and ample funding, German companies' attitudes have shifted from "looking down" to recognition.
Southern Daily: On the other hand, what was the mindset of Chinese enterprises during this process?
Huanping Zhang: The strengthening of Chinese enterprises' technological capabilities and product quality has greatly boosted their confidence in going global. During the acquisition process, they pay more attention to the market environment abroad and usually behave very modestly and humbly. It is as if they are saying, "We are 'new students,' and the operations of the other companies are indeed better than ours, but working together has a brighter future."
Southern Daily: Given this, what is the success rate of Chinese companies initiating mergers and acquisitions in Germany?
Huanping Zhang: Based on the cases Eurasian Consulting GmbH has handled, the success rate is over 50%, and it has been even higher from last year to this year. However, overall, there are many cases of Chinese enterprises initiating mergers and acquisitions with German small and medium-sized enterprises, but the success rate needs to be improved.
This is because, on one hand, China is not very familiar with the German market and enterprises, lacks a good grasp of overseas markets, and reacts slowly to market changes. On the other hand, differences in valuation methods between domestic and international markets can also easily lead to failed mergers and acquisitions. For example, domestically, net profit and net assets are used for calculations, whereas internationally, cash flow and other metrics are used.
In terms of negotiation offers, domestic companies generally do not immediately quote the highest price but keep some room, gradually increasing it. In contrast, foreign companies tend to start with the highest price and then gradually adjust downwards. The difference in their operating methods makes Chinese companies somewhat disadvantaged in merger and acquisition offers. However, Chinese companies are learning quickly how to control risks in overseas mergers and acquisitions, and their success rate is improving.
Mergers and acquisitions are a marathon that requires sustained investment.
Southern Daily: As an overseas M&A intermediary, what do you think Chinese companies should pay attention to when completing M&A projects abroad?
Huanping Zhang: First, Chinese enterprises need to be clear about one thing: Mergers and acquisitions are a marathon, not something that can be started today and reaped tomorrow. It is like calculus, requiring a certain amount of change to achieve qualitative transformation. A successful merger and acquisition project is not just about raising the company's profile through capital operations; it is about absorbing the acquired company and turning it into one's own "muscle." Only by starting from this perspective can mergers and acquisitions be healthy and sustainable.
At the same time, companies participating in overseas mergers and acquisitions must develop a sustained development strategy from the management level to the entire company, with continuous financial and talent support for overseas mergers and acquisitions. Among the most important aspects is the cultivation of international talent. Companies should seek talent with relevant overseas experience based on their own overseas development strategy, use talent cultivation to develop internal talent, and ultimately form an international talent team. Only the internationalization of talent can support a company's ultimate move towards internationalization.
Moreover, successful overseas mergers and acquisitions also require leveraging the expertise of M&A advisors, lawyers, and other excellent intermediaries, forming long-term strategic partnerships with them. Companies with a large number of overseas M&A needs can also establish their own M&A teams. The reason for learning to leverage these resources is that the negotiation paths and corporate cultures vary from country to country. It is necessary to utilize local teams to understand the intentions of the negotiation counterparts and to propose the best M&A plans.
Southern Daily: As you said, a successful merger and acquisition project should leverage synergies and make good use of each other's resources. In this regard, what resources do you think China and Germany can respectively gain?
Huanping Zhang: In simple terms, a merger and acquisition is like buying food; the most important thing is how to cook it to make it delicious. This requires both parties to leverage synergies and work together in division of labor to grow big and strong.
Among them, Chinese enterprises have a capital advantage, enabling them to support overseas companies in research and development and market expansion. Additionally, an increasing number of German companies are purchasing components in China and then assembling them at home. If Chinese buyers acquire German companies, it could reduce the procurement costs for German enterprises.
So, what can German companies offer to Chinese enterprises? With China's excess production capacity, many products are seeking to enter international markets but require efforts to comply with local regulations, which takes a considerable amount of time. During this period, overseas companies can provide their sales platforms to Chinese enterprises, which also helps Chinese products gain higher market recognition.
Southern Daily: Indeed, it is so. Then, what do you think about the future development space for mergers and acquisitions between China and Germany?
Huanping Zhang: Ten years ago, capital flowed into China, but today it is largely flowing from China to overseas markets such as Europe. One detail is that Chinese companies were often questioned by foreign sellers in the past. Now, if a major merger and acquisition deal does not include a Chinese buyer, foreign sellers will question or even criticize the intermediaries for not doing their job properly. This also shows that Chinese companies have become an indispensable force in the M&A market.
Although the current wave of mergers and acquisitions between China and Germany has begun, it has not yet reached its peak. Eurasian Consulting GmbH received inquiries from more than 100 Chinese companies this year, hoping to acquire German companies with high-quality assets. This growth in investment interest can be clearly seen from the current data. According to Dealogic, by mid-2016, Chinese companies had invested 10,600,000,000 USD in Germany. This is unprecedented in the past 10 years.
In addition to quantity and scale, the speed of mergers and acquisitions can also reflect the intensity of Chinese M&A activities. In 2008, Chinese enterprises often took over a year, or even a year and a half, to negotiate overseas M&A projects. However, the time it takes to operate these projects is getting shorter and shorter, with the fastest taking just one month to complete. This indicates that Chinese enterprises are becoming increasingly capable in overseas M&A, and it is believed that the speed of future overseas M&A will be even faster, with higher accuracy and success rates.
We predict that there will be more cases of Chinese companies making overseas acquisitions in fields such as automation, electric vehicles, and healthcare in the coming period.
Editor: Wang Hongdan
