Counsel to Counsel - January 2008 - (Page 14) global perspectives DEALMAKING IN CHINA: Getting In on the Action By John M. Toth James Hardy/PhotoAlto H aving a meaningful footprint in China has become a strategic imperative for multinational companies from around the world. The attraction is China’s seemingly insatiable demand for products, services, capital and technology. George D. Martin, partner and chair of the Faegre & Benson China Practice, sees the current acquisition boom in China as the logical culmination of foreign investment trends that he first observed when practicing in Shanghai in the mid-1990s. Martin expects this M&A trend to continue. But in the years to come, he advises, it won’t be just foreign companies on the buy-side of cross-border M&A deals involving China. China’s accession to the World Trade Organization (WTO) in 2001 opened new sectors to foreign investment and eliminated many restrictions on structuring those investments. As a result, joint ventures that were in vogue among early China investors waned. Multinationals acknowledged the cross-cultural integration and operational problems with their partners. Initially, this realization, coupled with China’s market liberalization, led to the establishment of more wholly foreign-owned enterprises as foreign businesses were convinced that such problems could be avoided with their own “greenfield” start-up operations. While this proved true, many companies found organic growth to be a frustrating—and unacceptably slow—process. More comfortable with market risk, facing aggressive plans for business in China by their competitors and determined to make this market a more significant component of their global operations, U.S. multinationals embraced M&A in China. While not free of risk, M&A has proved to be the best means by which to achieve strategic growth in China. Martin cites statistics indicating nearly 300 cross-border acquisitions of Chinese companies in 2006, up 16 percent from the year before; and M&A volume is up even more in 2007. Yet, achieving critical mass is not simple. Most acquisitions are small by developed market standards—a systemic challenge in China resulting from local companies operating in highly segmented and regional markets. Because of this, “foreign investors need to complete more deals for significant market penetration,” Martin says. “That means having a greater deal flow. The challenge is that buyers are largely on their own in finding targets. Investment bankers in Greater China tend to be focused on capital markets and only the very largest M&A deals.” Thinking Holistically “Acquisition targets in any emerging market usually have poor financial controls, inadequate record keeping, spotty regulatory compliance and a history of questionable business practices,” Martin cautions. “Buyers can also face very real cultural hurdles in obtaining full disclosure during 14 LexisNexis® Martindale-Hubbell®
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