(Yicai Global) March 21 -- As the world's largest exporter and second largest importer, China has a pressing need to upgrade its industrial structure and capacity, address trading partners' concerns about imbalances and accusations of dumping, and tackle homegrown environmental problems that have resulted from years of being the world's factory. In recent years, mergers and acquisitions have been one of the tools heavily relied upon to accomplish these goals. But with the increasingly loud voices – in some key markets – of those in favor of investment protectionism, Chinese companies may find that overseas mergers and acquisitions (M&As) are not as easy to pull off as they were a few years ago.
Before joining the faculty of CEIBS, I spent 16 years as Chairman of the Industrial and Commercial Bank of China (ICBC). During that time, I played a leading role in closing 16 deals related to overseas M&As of banks and financial institutions, and turned down more than 40 projects.
Chinese companies have two unique advantages in going abroad, and actively using global and domestic resources to expand their international and local markets. First, with such huge production capacity, China is able to engage in global collaborations. China has considerable excess capacity, which could be harnessed by places in the world that have a shortfall. The key problem is how to transfer the capacity to where it is most needed. Second, China has extremely strong competence in infrastructure construction, an area in which there is great potential for future development.
M&A as a Practical Science
Deals made in the general financial sector account for 10-20% of the M&As done globally. The growth of the world's big banks is the result of their M&As. For example, the Spanish bank BBVA has been involved in 150 M&As in its 150 years of history; HSBC had 365 M&As from 1980 to 2008, 138 of which were abandoned or remain unfinished. And in the last decade, M&As generated 70-75% of ICBC's profits and assets.
From my years of experience, I have learned that there is a science to successfully doing an overseas M&A and there are a few principles one needs to bear in mind throughout the process.
First, keep up to date with the times and remain in line with the globalization process. Second, find a suitable path and stick to it. Third, remain prudent and cautious, and make sure you have a clear understanding of the risks. Fourth, focus on science and technology. Large-scale enterprises are like banyan trees. They have a lot of roots. If some roots don't have enough water, the others will send water to them. This should be the same approach used after every M&A deal closes: capitalize on science and technology to work out a system that makes the entire "banyan tree" stronger. After the system is standardized and procedures are clear-cut, everyone will obey the instructions given.
Fifth, synergize business development, cultural norms, and social responsibility. At the end of the last century, ICBC's first M&A attempt was its acquisition of Union Bank of Hong Kong. Later, we set our sights on the largest mainstream African bank – The Standard Bank of South Africa. Its branches were scattered across 20 countries. In March 2008, we purchased 20% of its shares for US$4.7 billion and became its biggest shareholder. Now annual dividends bring in more than US$200 million. What's more important, we set up a strategic partnership with the bank via the share acquisition and have collaborated on completing more than 100 projects in Africa.
During the M&A process we took a close look at the bank's strategy and found that it actually had branches around the world, but we believed that its most valuable market was the African continent. That is why we suggested that it focus its efforts on Africa in order to improve its performance. The bank took our suggestion and sold its businesses outside Africa. In fact, we acquired its branch in Argentina, which was performing relatively well at the time, for US$640 million.
My years of experience have taught me four key elements for a successful overseas M&A: engage in strategic collaboration, control risks, seek a reasonable price, and once the deal is done work towards smooth integration.
The best companies in the world always do M&As that are aligned with their core businesses, and only act when the deal conforms with their own strategy. The key reason behind M&A failures usually lies in companies' focus on mere speculation while neglecting issues such as capital, technology, product, the soundness of the client base and technological strength.
At ICBC, we started our M&A journey from Hong Kong and Macau to emerging market economies, and eventually made our way to the US, Canada and Europe. We went from acquiring small banks to mainstream ones; from acquiring banking businesses, to non-banking businesses and other product lines. The difficulty of our challenges increased in line with the growth of our competences.
When doing an overseas M&A deal one should never be a bargain hunter because "cheapness" is a relative concept. We acquired Seng Heng Bank in Macau on a price-book value ratio of 3.2:1 because the license was extremely scarce. We spent more than US$500 million, but the cost was recovered within the next 2 years. Therefore, whether the purchasing price is high or low depends on the reward afterwards.
Of course, there are also real bargains. In 2010, during the global financial crisis, Belgium's Fortis Bank wanted to sell a securities clearing house and needed millions of dollars to dismiss a team of employees. We bought the clearing house for US$1, and took over all the staff, businesses, and machines. Everyone was happy with the result. Though the board of directors had a fierce argument over the acquisition, it was still approved.
The moment an acquisition is announced only represents 1% of what goes into making the deal a success; the other 99% has to do with integration. As a rule of thumb, the first priority is to reassure employees in order to improve work efficiency. The next step is boosting confidence. Everyone will be a lot more confident after a merger when strategic collaboration brings in vast resources which quickly generate a profit; and they see that management, strategies, products and technology are all integrated. The third step is to gradually realize the globalization of management, procedures, products, services, talent, and information. And last but not least, cultural integration: the acquiring company needs to respect other countries' culture, customs and religions, but at the same time it should also promote its own vision, so everyone can become proud of the new organization.
In addition, two issues must be handled with care: one is the relationship with stakeholders such as regulators, governments, managers and staff, and the company should try its best to fulfill its corporate social responsibility. The other issue is the construction of an international team. Without cultivating excellent international talents, a company can never truly be a multinational enterprise. The key for Chinese companies to succeed abroad is having talented employees; CEIBS will cultivate more and more of these individuals as needed in the future.
Jiang Jianqing is Adjunct Professor of Finance at China Europe International Business School (CEIBS) and Director of CEIBS Lujiazui Institute of International Finance (CLIIF). He will give a keynote speech on Financial Innovation in the Context of globalization during CEIBS 2nd Hong Kong Forum on April 21.