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Chinese companies set for acquisitions despite past flops

By Bi Xiaoning (China Daily)
Updated: 2009-03-30 07:54

Chinese businesses are stepping up their international mergers and acquisitions activity to take advantage of the fall in asset values amid the global financial crisis, despite a poor track record on such deals in the past.

Chinese companies recently surpassed Germany's to become the world's No 2 in terms of acquisitions, having spent $21.8 billion on such moves.

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But overseas mergers and acquisitions continue to pose challenges to Chinese businesses keen to explore overseas markets.

"Culture shock and staff integration are usually more troubling to a merger than financial and technical integration," said Peter Promnitz, CEO of Mercer in Asia-Pacific, one of the world's largest human resources consulting firms.

In a Mercer survey of 607 top executives around the world, more than half the respondents said they regard the disparity in corporate culture between the two businesses as the most serious problem in international mergers. About 35 percent surveyed said they consider staff integration the biggest challenge.

A seemingly unbridgeable cultural gulf in management style and work ethics soured Chinese company TCL Corp's acquisition of French consumer electronics company Thomson SA. Similar problems arose in the integration of BenQ and Germany's Siemens Mobile.

"Many acquisition cases, which seemed practicable on a strategic level became failures in the end. A number of companies didn't prepare well before the acquisition, especially on the human resource aspect," said Promnitz.

"The US and many European countries usually have a mature retirement welfare mechanism. Chinese companies should pay attention to pension-related financial risks when going global, since the potential liability could exceed the companies' assets," said Promnitz.

There are currently many companies with large pension liabilities looking to be involved in acquisition deals. Some companies, in extreme examples, are being sold for $1, since their pension liability already exceeds their assets.

The US auto giants, for example, are eager to sell parts of their business units to cope with the financial crisis and overseas media reported that Chinese automakers might be potential buyers. But no deals have been announced yet.

"The huge pension liability of the US auto giants, which could create a heavy burden for any buyers in the future, is a hot potato. Any company is willing to do such deals should settle this issue first," said Promnitz.

From 1993 to 2007, General Motors Corp (GM) spent $103 billion on its US staff's pension and retirement medical plan, about $7 billion per year. At the end of 2007, the liability of retirement welfare for GM was about $173 billion, while its market value was only $14 billion.

According to Mercer, combined pension expenses for the 1,500 companies on Standard & Poor's index (S&P1500) will reach $70 billion in 2009. In 2007, the combined net profit of the 1,500 companies was $727 billion. Even if the 1,500 companies' revenue is much higher in 2009 than 2007, pension expenses still eat considerably into profits.

"It is also critical to attract and retain top staff after mergers and acquisitions," said Promnitz.

According to a recent report from Russell Reynolds Associates, a leading global executive search and assessment firm, over half of senior executives from overseas leave their Chinese companies within the first year on the job.

"I have seen many reports on Chinese companies going overseas to hunt for high-end talent but few companies have recruited and then retained experts." said Promnitz.