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Therefore, it is hoped that detailed implementation and stricter enforcement of these general provisions in the Foreign Investment Law will lead to changes in the actual procurement practices of local governments and state-owned entities. The Foreign Investment Law also sets out various protection principles for foreign investments, including the following. The Foreign Investment Law provides that the state will establish a foreign investment information reporting system, and a foreign investor or FIE must submit investment information to MOFCOM through the enterprise registration system and the enterprise credit information publicity system.

The Foreign Investment Law does not specify what information will be required, and how this system will differ from the reporting system currently in place for foreign investors and FIEs. The Foreign Investment Law states that a foreign investment security review system will be established Article It is not clear how this system will differ from the current national security review system in place since under relevant MOFCOM notices, and more particularly, whether it will expand national security reviews to sectors other than those currently specified under relevant rules.

However, this provision of the Foreign Investment Law does represent a new development which may not be welcomed by foreign investors in so far as it specifies that decisions made about National Security Review cases are final and immune from challenge through administrative review or litigation.

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Under the Foreign Investment Law, existing FIEs would be granted a transitional period of five years to maintain their organizational structures, but what other changes need to be made by existing FIEs during the transitional period requires further clarification. It also means that Chinese and foreign joint venture partners may need to reorganize, and likely renegotiate, their corporate and governance structures to comply with the relevant laws at the end of the five-year transition period.

For example, under the EJV Law, the board of directors was the highest decision making authority of the joint venture, and there was no shareholder meeting. Under the Company Law however, a shareholders meeting is required. We expect that during the transitional period, the local bureau of the State Administration for Market Regulation essentially the business registry in practice may require an FIE to update its articles of association and joint venture agreements to be in line with the Company Law before they will process any corporate changes.

See Exhibit 1. But the impressive growth numbers mask some less impressive statistics. Chinese acquirers complete just 67 percent of their outbound deals, on average, far fewer than those completed by European, Japanese, and U. Even deals that are completed often fail to achieve their goals because of poorly planned and executed postmerger integration and synergy capture. Failed deals represent enormous missed opportunities. Chinese acquirers have never been better positioned to take their place among the top ranks of global deal makers. And they must act now, while the macroeconomic currents worldwide continue to flow strongly in their favor.

We examine the dynamics that are changing the game for Chinese acquirers and analyze why so many outbound deals fall through—and why so many of those that are completed yield disappointing results. Globally, as China has emerged as a leading international economic power, an increasing number of foreign sellers in developed markets have come to see the advantages of working with Chinese companies.

In addition, the Eurozone debt crisis has presented Chinese acquirers with a prime opportunity to snap up European companies at bargain prices. The slowing of the European economy in the wake of the global financial crisis, meanwhile, has produced an attractive external-investment environment of renewed economic growth and relatively low asset valuations. They have accounted for 65 percent of outbound deal value and 30 percent of the deals completed in the past five years. Moreover, 60 percent of respondents felt that they had gained expertise in postmerger integration PMI.

China issues a new consolidated law on foreign investment

However, the continuing challenges that many Chinese acquirers have encountered in the international deal-making marketplace suggest that many companies may have overestimated their readiness to compete on equal terms against seasoned developed-world players. This policy is part of what the government envisions as a new era of overseas investment.

Today, however, a growing number of private-sector deal makers are looking to gain market share and enhance their core capabilities. The relatively low completion rate, however, has remained more or less constant. They need to raise their games in due diligence and PMI and apply the lessons learned from previous deals. See Exhibit 2. By contrast, the number of deals targeting traditional destinations, such as East Asia, has plummeted. Given the wide disparities in language, management style, and corporate culture between European and U.

As a result, these companies are unable to define how a combined entity would operate or identify opportunities to capture revenue and cost synergies. Due diligence is often incomplete and fails to quantify risks. These shortcomings often become apparent when a Chinese company finds itself bidding against a global rival to acquire a target operating in the developed world. The Chinese company may not recognize the urgency of putting together a detailed bid and PMI plan, putting it at a market disadvantage when preparing a timely, realistic bid.

Compounding the problem, lengthy and cumbersome internal-approvals processes may hamper the company in assembling a team of professional advisors to assist with the specifics of the bid. As a result, rapid changes in the deal environment can leave a Chinese company flat-footed at precisely the moment when it needs to act quickly.

Unable to pivot quickly to a new bidding strategy—a plan B—when the deal environment changes, the company may be unable to set priorities for accelerating its due-diligence process and thus may miss the deadline for submitting a second counteroffer. Problems may also arise when decision-making power is highly concentrated at headquarters.

In that case, the due diligence team in the field may be left without sufficient power to make necessary judgments and decisions in real time, rendering it all but impossible for the would-be Chinese acquirer to keep up with the fast pace of deal making in the developed world or to react quickly enough to changing deal conditions.

Highly centralized decision-making processes can also inhibit local teams from speaking up at crucial moments. Lacking a forum in which they can share their views of the deal with senior management, they can only look at one another and wonder who has the authority to act when an on-the-spot decision is required. A lack of clear and consistent processes explains why so many teams return to China empty-handed. Shortcomings in due diligence should not be overstated.


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After all, Chinese acquirers do complete more than two-thirds of the deals they pursue. We have observed that some Chinese buyers, especially those whose targets are leading players in developed countries, do not have a clear, detailed plan for integrating an acquisition, merging operations, and capturing cost synergies. Acquirers themselves confirm our observation: according to a recent survey by BCG, Chinese acquirers reported that only 32 percent of their outbound deals were trouble-free.

During our casework with Chinese clients, we have observed several common characteristics of suboptimal PMI. In , the companies considered were analysed in a follow-up survey to deepen the insights from the analysis of the initial post-merger process. The study design did not include interviews with the international investors themselves but rather with German managers. Although a cross-examination of how those involved in the takeover perceive each other would be interesting, the sophisticated procedure of structural hermeneutics is difficult to apply to translated material.

Major topic blocks of the interview included — inter alia — the pre-merger phase, cooperation and communication with the new investor and an evaluation and experiences of the takeover.

What to consider if you invest in China

Given the extremely elaborate procedure of structural hermeneutics, this places the study close to the limits of feasibility for this kind of exploration. This approach brings into greater focus the particularities of how German managers interpret their Chinese and Indian counterparts. For the most part, they were born in Germany and had lived there for a long time, although all had international experience.

Most of the companies investigated are geographically located in the manufacturing regions in the western part of Germany, especially in the metropolitan areas of Rhine-Ruhr and Rhine-Main. These locations are characterised by a long-standing manufacturing tradition in Germany. Structural hermeneutics is a sophisticated procedure; we therefore cannot give a detailed account of how to discover patterns of interpretation. The results presented summarise the essence of the extensive process of interpretation. Prominently and early in the interviews, all interviewees stressed that the investors were welcome because they brought fresh money and contributed to the further growth of the company.

Before, the companies were facing financial difficulties, or they needed money to drive further growth and make substantial investments. This initial welcome was expressed equally for Chinese and Indian and private equity investors. The early welcome can be explained by the voluntary merger situation, where the interviewees had consciously and actively chosen their new owners from various prospective acquirers, or had decided to take the post in the foreign-owned company.

Interestingly, such openness survived nearly unbroken during the entire post-merger stage in the case of the private equity investors; there, managers felt confirmed in their professional ethics. This differs from the case of Chinese and Indian acquisitions, where managers felt a discrepancy between their own normative expectations and how they perceived their international counterparts to behave.

China - M&A Statistics

Analysis of the underlying logics of argumentation shows that after extending an immediate welcome, managers began to distance themselves from their Chinese and Indian counterparts. With regard to legitimate leadership , the interviewees particularly in Chinese and Indian takeovers stated that their counterparts were following elusive bureaucratic hierarchies. Leadership was seen to be based on political power rather than legitimate competence, and it seemed difficult to find somebody who made decisions and then stood up for these.

In a few cases, interviewees described how the new owners occasionally ignored set rules.

Gearing Up for the New Era of China’s Outbound M&A

One interviewee reported that the Chinese investor attempted to introduce a weekly evaluation of staff performance and a corresponding fluctuating payment for highly skilled staff, which conflicts with labour regulation in Germany. Another interviewee described a considerable difference between his current situation and his self-perception as a responsible manager working within the German regulatory environment. Such cases of conflict with current law and other regulatory or institutional settings tended to be the exception.

In general, interviewees referred to minor but frequent disruptions of company organisation.