Feb 03, 2012 07:24 PM

The Basics on Chinese Inbound Investment Deals

An accelerating number of Chinese companies are engaging in acquisitions and joint ventures in the United States and while it's generally understood that a large number of other Chinese companies are also considering doing so, many still hesitate.

The first point to note is that the rate of deals is increasing, and is doing so dramatically. A second point is that as a percentage of the total number of deals, small to medium size deals make up the majority, although there are a few larger ones, and the buyers are generally not SOEs. Third, the industries of the acquired companies cover a broad range, from technology, apparel, consulting services, auto parts, hotels and many more.

In 2011, several Chinese companies announced their intentions to enter into deals in the U.S., including Shanghai Pharmaceuticals, with its publicly stated reasons being to seek new drugs to expand its product line and noting declining overseas prices and a strong Yuan, Bright Food Group, China National Materials Co. (Sinoma) and Fosun Group, which stated it is looking at consumer brands. Many Chinese companies are going global in the U.S., more and more will be doing so, and for those Chinese companies for which this makes sense and which proceed to do so, they will be in very good company.

So what are some of the strategies, procedures and lessons on pitfalls that can be garnered from recent deals?

Perhaps one of the most important points regarding engaging in transactions in the United States is to recall the reaction of many Chinese businesses when foreign companies came to China and sought to dictate that deals in China be done in the same manner as in those companies' respective homelands. This generated ill feelings and often did and can easily result in failure in a deal. The same is true in the United States. Companies from many different countries make acquisitions in the U.S. all the time, and one of the accepted norms is that the deal will be done in "U.S. style."

While not successful on occasion, the advisor for the U.S. company looking to be sold (especially a "hot" company) may seek to create an auction for the company, thus seeking to maximize the price and otherwise obtain the most favorable terms. Even if they do not succeed in doing this, they will generally seek to have the process move as rapidly as possible. Prospective buyers who are unwilling to follow an auction process when established or move too slowly are simply left behind. An important aspect in dealing with this is to be prepared. This means having done industry and market analysis in advance so as to be able to readily determine one's interest and willingness to devote the necessary resources to explore the deal, and have ready or be able to quickly assemble a team of qualified Chinese and U.S. advisors.

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