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Beware expensive mistakes in acquiring companies

Who would you go to for advice if you were
preparing to do a big business deal? Many Westerners, even with
bread-and-butter issues such as buying houses and planning their retirement,
would engage a financial adviser.
But for many Chinese, it seems, the go-to
person, even with multimillion dollar transactions, is not a professional adviser
but their spouse, their parents or some other relative, or friends.
That is the experience of Jochum Haakma,
global director of business development at Dutch consultancy TMF Group. With
company acquisitions, he says, he has seen many Chinese companies wanting to
obtain advice from overseas friends and family instead of professionals.
“Say they have an uncle in Ludwigshafen
who works in a Chinese restaurant. They trust this guy because it is his uncle,
it’s family. So they go with quite a complicated investment through this
guy.”
More often than not, the business decisions
made under such circumstances are not the best. More money is spent on
correcting mistakes, he says.
Receiving good advice has become a central
issue as China has undergone a dramatic shift from being a receiver of foreign
direct investment to a keen investor overseas over the past decade.
Haakma, who is also chairman of the China
Chamber at Netherlands Council for Trade Promotion, says such a shift reflects
China’s attempt to move up the production value chain.
“Since China joined the World Trade
Organization, it has become more open to the world and become a very
interesting investment destination. And now you see the wave coming the other
way.”
A recent phenomenon in Europe is a surge of
Chinese acquisitions, attracted by technology and know-how of the European
targets, particularly in the manufacturing sector, he says.
In these cases it is common for the Chinese
companies to take either full or part control of the target companies and
retain the previous management to run the European operations, he says.
“The next step for these companies is to
build factories in China, leveraging on the new technologies acquired.”
For example, SAIC Motor Corp bought the
British carmaker MG Motor UK in 2006 and then the Shanghai company resumed
making MG cars in China for both its domestic and UK markets. Similarly,
Zhejiang Geely bought the Swedish carmaker Volvo and Sany Heavy Industry bought
Putzmeister, a German company that makes high-tech concrete pumps.
Chinese acquisitions in Europe last year were
worth US$10.566 billion compared with $259 million 10 years earlier. There were
78 Chinese multimillion-dollar deals in Europe last year compared with just 11
in 2010, investment platform Dealogic says. But Haakma believes there is a long
way to go before Chinese companies become totally competent in choosing and
securing the best acquisition deals abroad. One common mistake is being
reluctant to hire local advisers.
“Most Chinese companies are not used to
paying up front for consultancies,” he says.
While he says he cannot stress enough the
importance of obtaining good advice from the beginning, he understands why
Chinese companies tend to make this mistake.
“I’ve seen in China that if you are an
adviser, you don’t get money. You get money in the tail of the deal, whenever
successful. But in Europe and the US, sometimes the advisers won’t talk to you
unless you pay them first.”
Haakma believes European advisers may have
been too rigid sometimes and perhaps it would be good for them to take into
account cultural differences, so to “talk more, wine and dine and maybe
drink some Moutai (famed Chinese liquor) to get some trust first”.
He is also noticing an increasing number of
Chinese companies becoming more accustomed to the Western model of partnerships
with advisers, perhaps as a result of an increasing number of employees having
an overseas education.
Europe has become a particularly good location
for Chinese acquisitions since the financial crisis and the eurozone crisis,
when many well-performing companies suddenly experienced a shortfall of
capital, he says.
“It is very difficult for them to get
money from the banks. Some of them are willing to be taken over so long as the
management is good. As for some second- or third-generation family
businesses,” he says, pointing to his neck, “the water is up to
here”.
It is often difficult to seek out such
opportunities because the pride and dignity of family businesses make them
reluctant to speak about financial difficulties.
To succeed, investors must demonstrate that
they share the owners’ vision for expanding the businesses, he says.
“It is not that you can publicise a list
(of potential targets) because companies will not cry out loud that ‘I’m almost
bankrupt’.”
He says such opportunities are best secured by
Chinese companies conversing with European companies one-to-one at conferences.
Additionally, Haakma believes Chinese
acquisitions can help European companies expand into China, particularly for
industries that can take advantage of the country’s growing number of
middle-class consumers.
“It is a win-win situation without
doubt,” he says, explaining that many European companies would put part of
their production into China to service the Asian markets after merging with
their Chinese partners.
“It is very one-sided to say that we
should protect these companies (from Chinese acquisitions), because many of
them will go bankrupt if they do not change their mindset and think more
internationally.”
Haakma, 64, a Swede, graduated in law from the
University of Utrecht in the Netherlands and, after a short time working at the
university, started working for the Netherlands government.
From 1997 to 2002 he was the country’s consul
general in Hong Kong and Macao, during which time he also worked as chairman of
the advisory board of the Dutch Business Association in Hong Kong.
In 2002 he was appointed consul general of the
Netherlands in Shanghai and was also responsible for Jiangsu, Zhejiang and
Anhui provinces.
He is well aware of China’s economic reform,
especially the speed at which Western businesses set up operations, initially
in Hong Kong and Shanghai, but gradually more so in inland Chinese cities.
“A lot of second- and third-tier cities
have set up economic zones and industrial zones, such as Wuhan, Chengdu,
Qingdao, Dalian, Tianjin and Shenyang, which are very attractive for foreign
companies,” he says.
The competition between Chinese cities to give
foreign investors support is one important reason for China to have so much
foreign investment, he says. At the same time, the growth of the consumer
market means investors can access their target customers in a more direct way
by operating in China.
“When I was in Hong Kong, I was pleading
with Dutch businesses to go to China and get familiarised with China. I told
them to go and have a look at least.”
Having seen the growth of Chinese outbound
acquisitions, he says he would advise many European businesses to merge with an
incoming Chinese company and put production in China through this company.
In 2007, Haakma joined TMF Group, which has
eight offices in China, providing accounting, corporate secretarial and human
resources, and payroll services to Western companies expanding into China.
Meanwhile, he has continued to help Chinese
companies come to Europe and Dutch companies to go to China through the
Netherlands Council for Trade Promotion.
Haakma is optimistic about Chinese investment
in Europe, believing the Chinese will learn very quickly.
“It’s happening. It’s happening through
failures, problems, failed deals and disappointments. Thirty years ago when
Western companies went to China, they encountered the same failures, but I
think the Chinese will accelerate faster, and their learning curve will be
shorter.”

Wang Mengzhen contributed to the story
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