China's M&A: Not Always Smooth Sailing

In recent years, Chinese names have been hogging the M&A spotlight, with mainland companies rushing in to scoop up assets from abroad.

Deal, Handshake
Deal, Handshake

Just last year alone, Chinese firms shelled out over $50 billion on non-financial outbound investments. The figure could well swell to $100 billion over the next five years, according to China's Ministry of Commerce.

Not surprisingly, resource acquisitions dominated the biggest deals of 2010, with Sinopec's $7 billion investment in Spanish oil giant Repsol and Petrochina's joint agreement with Shell to buy out Australian coal seam gas producer Arrow Energy for $3 billion topping the list.

While China's insatiable appetite for resources has been a major factor behind the acquisitions, the deals are also getting plenty of support from the government.

In a bid to balance trade and sharpen the companies' global competitiveness, Beijing has rolled out a slew of measures to bolster M&A activity.

They include a program launched by the central bank to allow firms to use the Chinese currency to invest offshore. The Ministry of Commerce will also soon launch formal regulations on cross-border investments that spell out requirements more clearly, which are expected to improve transparency for overseas deals.

Still, Beijing's acquisition push has not been without setbacks. David Xu, partner of transaction services at KPMG China says large state firms generally fork out a premium of around 10 percent to ease sellers' concerns about government intervention.

He also warns about the risk of failure, like in the case of the Chinalco-Rio Tinto , where the proposed merger was eventually scrapped due to regulatory scrutiny and a public outcry against the deal.

China's track record in manufacturing deals has also been spotty. SAIC Motor lost 3 billion yuan on its investment in automaker Ssangyong back in 2004, while TCL took years to recover from losses after its Thomson acquisition in 2003. Experts blame Chinese companies' lack of formalized systems, which can be critical to post-deal integration. Professor Arthur Yeung, associate dean at the China Europe International Business School, advises firms to focus on manageable sized deals and establish their own systems and processes.

While state-owned heavyweights grapple with problems related to their size, private firms, with a simpler ownership structure, seem to be having an easier time.

Case in point is Shanshan, a suitmaker turned investment conglomerate, which has bought stakes in mines from Australia and Argentina, to secure supply for its lithium battery operations. Chairman of Shanshan Group Zheng Yonggang admits that there are cultural challenges in cross-border deals; which is why the company prefers joint investments. The firm also prefers to sticking to resources deals, which Zheng says, are easier to manage

Xu says acquisitions by private companies may be smaller due to more modest coffers, but they nonetheless play a growing role in china's outbound investments.

"As newcomers to international dealmaking," Xu says Chinese firms need to "elevate themselves in their negotiation tactics."