White Paper: Acquisitios by Chinese companies in US

By Andrew M. Ross: 0 Comment(s)Print E-mail China.org.cn, February 20, 2012

Adjust font size:

Finding the Right U.S. Company

In considering whether to go global, a Chinese company, together generally with its advisors, should first determine its primary objectives – that is what are the hierarchy of goals it hopes to achieve from anytransaction, and, based on appropriate assumptions, what is the potential value to it of the "right" deal.

There are of course numerous ways to source, in other words identify, appropriate companies for acquisitions, investment or other corporate transactions. For example, pre-existing relationships can be one basis, although this is much more difficult in cross-border deals.Moreover, in the U.S.this is a much less common approach. This paper focuses on what many consider to be the most appropriate and common means.

It first must be recognized that in considering possible deals many factors must be considered. These include for example, the possible target's business sector (for example, a target company engaged in the same or a very similar line of business as the Chinese buying company, or one with add on skills or products, i.e., a horizontal deal, or alternatively, one that would make the Chinese buyer a more vertically integrated company, for instance, a target which is a supplier or customer), possibly the geographic region, in light of the Chinese buyer's other capital requirements and borrowing capacity how much it could afford to pay, and on a risk basis how much of its available capital (including capacity to borrow) it would commit to a deal.

In considering acquisitions within China, it is certainly easier for executives of a Chinese company to evaluate all these factors, as Chinese executives will know their domestic market competitors, suppliers and customers. This is likely more often not the case as Chinese companies explore opportunities in the U.S., although, because of some Chinese company's participation in international trade, industry events and due diligence, it may in fact already have such knowledge. If so, it can pursue companies based on this knowledge.

However, generally the best way to find a good opportunity and to understand a particular segment of the U.S. market, the various companies in it and what they each have to offer, which ones may be available for sale and valuation metrics in any given industry, potentially ultimately the most cost-effective and clearly the most prudent and careful way to approach this, and thus the best way to enhance the prospects for a prospective Chinese buyer to achieve its strategic objectives, is for the Chinese company to work with a U.S. consultant or investment banker knowledgeable in its field.In some instances and industries U.S. lawyers can also be helpful in this regards. The right business advisor can provide significant value, especially in a deal of meaningful size. If nothing else, they can best help a Chinese company identify targets which might otherwise be unknown to them.In many if not the majority of cases this need not involve the largest or even the larger advisory firms. Rather one of the the keysto selecting an investment banker (together with trust) is their specialization and knowledge base. This proactive approach of obtaining the services of a U.S. advisor is generally perceived to be the most effective basis to carry out most U.S. deals, especially including deals involving foreign buyers, including Chinese advisors.Other U.S. and Chinese advisers can assist a Chinese company in finding appropriate advisers for this purpose.

Notwithstanding the foregoing, it appears that some Chinese businesses are taking a more reactive approach – waiting for potential U.S. deal opportunities to be presented to them.However, in such instances, if this even happens at all, the interested Chinese company will undoubtedly see only a small percentage of deals that are in the market or could be brought about, and absent a fuller understanding of the U.S. market and companies, offers less certainly as to whether the deal is optimal.