Chinese companies need to capitalize on overseas mergers and acquisitions (M&A), according to a recent report from the Boston Consulting Group (BCG), a world-leading consultancy firm.

"Acquiring an overseas competitor can be a fast track to capture overseas markets and important technical know-how, but it's by no means a low-hanging fruit," said the Shanghai-based head of BCG's China practice Jim Hemerling. "They need to develop the necessary skill set, especially integration capabilities which will be a decisive success factor for Chinese companies on the way to global competitiveness."

Although value has been created by Chinese outbound M&A, Chinese companies often lack the capabilities to integrate the acquired company and realize synergies, the report said.

"In those transactions that required integration of operations of the two merging companies, value has often been destroyed," said Holger Michaelis, a Beijing-based manager at BCG.

"This is because the investors appreciate when high performing Chinese companies capture opportunities outside China," he said. "But they do not believe that the management has the capability to successfully integrate the operations of the Chinese company with the entity acquired overseas."

Therefore, transactions that leave some or all of the original management of the target in place create more value, Michaelis concluded.

"Striking a win-win deal with the seller is one of the key success factors for Chinese companies to successfully acquire and integrate an overseas company," he added.

China completed 103 deals of outbound M&A for the purpose of overseas expansion from 2001 to the July of 2005, led by minerals, natural resources and communications industries.

"China's national interest, the increase in deal opportunities, and the emergence of Chinese 'challengers' have all contributed to this strong momentum of M&A deals," said Hemerling.

However, compared to the size of its economy, China is much less active in overseas acquisitions than other rapidly developing economies such as India, Hemerling said.

"Also, if we look at the factors driving outbound M&A, they are bound to intensify rather than diminish," he added.

"For Chinese companies to capitalize on these opportunities, they will need a clear globalisation strategy, professional M&A and integration capabilities, as well as management expertise in the overseas markets - very few Chinese companies have the necessary skills to successfully integrate an acquired business," he said.

Despite the withdrawal of Haier's bidding to take over Maytag and China National Offshore Oil Corp's (CNOOC) failure to buy Unocal Corp, BCG believe big Chinese players will come back on the scene. As proof, CNOOC is going to pay US$2.3 billion for a stake in a Nigerian oil and gas field.

Moreover, deal activity will increase on a much broader industry base, and private equity, such as New Bridge and Carlyle, will play an increasingly important role.

Newbridge Capita bought 18 percent of Shenzhen Development Bank (SDB) last December, becoming the first foreign investor to get a controlling share in a domestic lender.

Carlyle Group, one of the world's largest private equity firms, signed an agreement to buy a 3.3 billion yuan (US$408.7 million) stake in China Pacific Life Insurance Co (CPIC) last year. It acquired an 85 percent stake in Xugong Group Construction Machinery Co Ltd for US$375 million last October.

(China Daily January 13, 2006)