Deloitte Warns Irish Firms Over Chinese Merger And Acquisition Activity

by Mary Swire, for LawAndTax-News.com, Hong Kong

23 March 2007

Professional services and accounting firm Deloitte on Wednesday warned Irish companies looking to acquire businesses in China that only 20% of such deals will deliver significant value.

The findings of Deloitte research into the success of international M&A investment in China highlighted the need for the nearly 300 Irish companies trading in China to be fully aware of the potential pitfalls in such transactions if they are to successfully solidify their base there.

David Carson, M&A Transactions Services Partner at Deloitte, explained that:

“This year is a special year for China as the country celebrates the year of the golden pig, which only takes place once every 60 years. The business community throughout China is heralding the New Year as a particularly auspicious year and hopes it will bring economic fortune. A key driver of China’s success so far has been the huge interest shown by international investors. Our research has shown, however, that only 20 per cent of transactions deliver significant value. The first two China Hands’ ‘Golden rules’ certainly hold true: ‘anything is possible’ but ‘nothing is easy’."

He continued:

“In recent years, there has been a considerable increase in the number of Irish firms that actually have a presence in China. In fact, nearly 300 firms have been attracted by the low manufacturing costs and this is expected to treble over the next three years. This in turn will lead to Irish firms becoming acquisitive in China as they increasingly look to solidify their base there. The lesson from international experience is very clear – a lot of patience and preparation are required for a successful transaction.”

The research identified a series of important factors which can hinder the prospective Chinese business acquirer:

• Compliance: the requirements of an average Western company will come as a shock to most private companies in China;
• Corporate structure: many acquirers find that a chart of the structure and the ‘real’ structure do not tally;
• Meeting expectations: the acquirer can often have high expectations of how quickly the project can deliver value but often the deal process can take three times as long in China;
• Local regulations, laws and stakeholders: these stakeholders have considerable influence even after the deal is done, and are ignored at the acquirer’s peril;
• Tax and integration: a hugely complex task which can often be ignored; and
• Communication and training: language and soft-skills training are of huge importance to both sides and can require significantly more effort than in the West.

Carson concluded:

“The success rate of M&A in China is very similar to that of the West, however, while competition and sophistication are the key challenges in the West, the hurdles in China are more complicated. Time can be the theme that ties these issues together. While international acquirers flock to China to make the most of the opportunities available, they can become hugely frustrated by the length of time it takes for the acquisition to deliver value."

"Those companies that are taking a more professional approach to integration and are addressing key issues of culture and meeting the needs of the local regulations and stakeholders are finding that it might just be an auspicious golden year after all!"

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