Chinese buyers must revamp overseas deal approach

Investment experts suggest Chinese companies and private equity investors need to work on image building but also be more aggressive.

Chinese companies and private equity investors need to swap their conservative investment style for a more active approach when they invest overseas, according to a panel at the China Private Equity Summit in Hong Kong.

The panel, which discussed challenges facing Chinese buyers when making overseas investments, included private equity managers, M&A advisors as well as investment managers working with Chinese investors.

Their view differs from the general impression of China’s outbound investments, which have been developing rapidly.

On average, 200 large outbound M&A deals worth of more than $50 billion from China are made each year during the past three years, according to data provided by Morgan Stanley.

However, Chinese buyers should be more active in seeking opportunities, work more on image-building and pay more for deals, according to foreign PE managers at Friday’s summit.  

Despite the size of its economy, China is still a relatively small player in overseas investments.

Last year, US companies spent $390 billion overseas and European investors $560 billion, respectively, while China overseas investments amounted to $90 billion, according to André Loesekrug-Pietri, founder and managing partner with A Capital, a European mid-cap growth fund focused on Euro-Asia PE transactions.

“It’s still early days [for Chinese investors to conduct outbound purchases],” said Loesekrug-Pietri, suggesting that Chinese outbound investments could be a much bigger market than it is.

Also, analysts like to compare Chinese investors with Japanese investors since they both were known for overpaying.

Japanese investors used to be active in overseas M&A transactions but paid hefty valuations in the 1980s and ended up losing money in many investments — especially in pursuing high-tech companies. Chinese investors until a few years ago paid a 25% to 30% “China premium” for assets.

But the panel said the situation is changing as the premium Chinese investors pay is decreasing.

In many unsuccessful overseas deals, Chinese investors were not overpaying now but generally underpaying, according to Paul DiGiacomo, managing director with BDA, an investment banking firm that advises on cross-border M&A deals. 

“Maybe Japanese went too far and too high [in valuation] but I personally feel Chinese are too shy and too late [in going out],” said Loesekrug-Pietri.

The panelists offered up examples of why Chinese investors need to pay attention to their image. Chinese investors may lose opportunities because most of them are completely unknown by foreign sellers.

In some western countries, if a company can choose an acquiring company and the price offered is exactly the same from a Chinese buyer and a US buyer, in 99% of the cases the US investor will win the deal, according to A Capital’s Loesekrug-Pietri.

“Everybody wants to be bought by Google but not everybody wants to be bought by Alibaba, yet,” said Loesekrug-Pietri. “Nowadays, deals are not just about money; it’s about media, public opinion and image.”

The foreign PE managers encouraged Chinese companies to engage more with the western world, talk to global media and have more exposure.

The panel also included China-based investors James Cen Bonsor, a director at China’s largest privately owned investment company Fosun Group, and Martin Tornberg, executive director in charge of Ping An Group’s overseas private equity business.

They mentioned several challenges that prevented Chinese investors from becoming more involved in overseas investments.

One major challenge is China’s regulation in terms of financing and business development. It remains difficult for Chinese investors to use leverage in financing overseas investments, because foreign banks are not familiar with the investors’ names and the country’s banking regulators strictly control domestic banks’ lending for such investments.

The other challenge is the cultural integration issue — overseas companies have concerns about being controlled by Beijing.

To tackle the problem, Chinese companies need to find a good local partner, respect the original management, as well as take a minority stake to cooperate with the acquired companies rather than control them, the panel said.

¬ Haymarket Media Limited. All rights reserved.
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