Cross-border M&A in Technology Industry: Challenges and Solutions for Chinese Enterprises
The global M&A market remains at downturns in 2019, as business investments have been depressed by global economic slowdown and the ongoing trade war between China and the U.S. Besides, many countries have introduced restrict regulations on foreign investments, which hits the global M&A activities in another way.
Since last year, Chinese FDI outflows had been decreased significantly with influences of restrict outbound investment regulations including the updated List of Sensitive Sectors for Overseas Investment and Administrative Measures for Overseas Investments by Enterprises. However, Chinese government is not trying to avoid outflows investments, but encourages investments in advanced technologies and high value-added industries as stated in Guidelines on Further Guiding and Regulating Overseas Investments.
In the first three quarters of 2019, the number of Chinese cross-border M&A deals in TMT was listed at top cross-border M&A sectors, with 8.51 billion dollars transaction amount. It is expected that rapid development of Chinese technology industry as well as transformation and upgrades of Chinese enterprises will continue to push outbound M&A activities in technology industry.
Top 5 M&A Sectors in the First Three Quarters of 2019 in China
(by transaction amount and by number of deals)
Source: EY report
In this report, we analysis challenges that Chinese enterprises would face at each stage of cross-border M&A in technology industry and come up with solutions regarding each challenge.
Stage 1: Developing M&A Strategy
Development strategies with specific and measurable targets are essential to a successful business， while nearly 40% of Chinese enterprises do not have clear cross-border M&A strategies. Besides, it often includes some complex and hard-to-measure targets in cross-border technology M&A strategies, which increases the difficulty for Chinese enterprises to develop effective M&A strategies.
On the one hand, results and influences of the acquired technology on buyer’s R&D and innovation capacity are hard to identify and measure. On the other hand, if companies expect to improve the efficiency of their business through acquiring supportive technologies such as EIM and cloud computing, companies would have to conduct comprehensive and even subversive evaluation of their businesses.
To solve the first challenge of developing detailed technology M&A strategies, we suggest Chinese companies could follow a top-down process to set up strategic targets of market position, product strategy and R&D capacity step by step. As for the other challenge, companies can learn from the experiences of other companies involving technology to support their businesses.
Challenges and Solutions on Stage 1
Source: EY report
Stage 2: Searching M&A Targets
While searching for M&A targets, enterprises should establish multi-dimensional screening criteria their M&A strategies. However, the uncertainty of the international trade and the lack of understanding of the local market make it difficult for enterprises to effectively evaluate potential market.
In addition, the special difficulty for Chinese enterprises in finding appropriate M&A target in field of technology lies in the fact that the scale of foreign science and technology enterprises is diverse, and Chinese enterprises always fail to discover small and medium-sized science and technology enterprises who have good technology and innovation potential.
To better identify and evaluate influences of changing macroeconomy and regulatory policies, Deloitte suggests that technical tools such as semantic analysis and big data analysis could be used to automatically search, analyze and predict information, so as to help enterprises to screen target market. While screening target enterprises, we suggest that Chinese enterprises can seek the advice of professionals in the local industry, in order to determine the appropriate screening range of the targets and avoid missing good potential targets.
Challenges and Solutions on Stage 2
Stage 3: Deal Executive
Negotiations and due diligence are the main challenges Chinese enterprises face in deal executive stage of overseas M&A deals. Firstly, different negotiation modes of Chinese enterprises and foreign enterprises are prone to lead to the breakdown of negotiation. Secondly, transparency of negotiation is greatly reduced in field of technology because of the secrecy of the M&A purpose by Chinese enterprises and the protection of the core technology by the acquired enterprises. Thirdly, Chinese enterprises may have significant deviations in understanding of corporate and financial information while acquiring and converting information, which results in failure of due diligence.
In order to get the deal done, we suggest that Chinese enterprises should actively cooperate with professional consultants. Professional consultants can help Chinese companies understand working patterns of foreign companies and avoid making demands that do not conform to M&A practices. With support of professional consultants, buyers should actively communicate with target company to build the trust between both parties.
Moreover, professional consultants with international experiences can help Chinese companies better understand information, thus reducing the risk of due diligence failure caused by information misunderstanding.
Challenges and Solutions on Stage 3
Stage 4: Post-Merger Integration
The business and talent integration after merger are the last and also the most important stage for enterprises to achieve their M&A goals. However, Chinese enterprises find the post-merger integration very difficult in cross-border M&A due to the conflict of company culture and the lack of management talents.
Solutions to solve culture conflicts depend on the purposes of Chinese companies making the merger. If Chinese enterprises aim at acquiring the core technologies to improve their R&D capacity, then it is suggested to remain the culture of acquired company in order to remain the productivity and creativity of the company. If Chinese enterprises aim at acquiring supportive technologies to improve efficiency of operations, then it is suggested to set up a specific team which helps the acquired company understands culture and requirements of the Chinese company.
With regard to the problem of lacking talents, Chinese enterprises are supposed to start cultivating international talents once determining the international development strategy. Enterprises can cultivate employees who have full understanding of the company’s business to have qualities of international business management. Enterprises can also attract talents from all over the world by improving human resource management and building an inclusive culture.
Challenges and Solutions on Stage 4
Conclusion
With the rapid development of technology industry in China, many Chinese technology companies have planned to improve their R&D as well as innovation capacities through outbound M&A. In the meanwhile, more and more Chinese enterprises in traditional industries are planning to make technological upgrading to enhance their competitiveness. It is expected that technology would continue to be the focus area of Chinese cross-border M&A activities. Chinese enterprises need to clearly recognize the risks and challenges of stepping into cross-border M&A in the field of technology and formulate solutions in advance so that they could achieve the strategic goals of enterprises.