Look before you leap into overseas M&A

Chinese companies must "understand what they are buying", said Alex Wittenberg, executive director of Global Risk Center at Marsh & McLennan Companies Inc. [Photo provided to China Daily]

The M&A season may be upon corporate China, but senior research fellows are cautioning local companies to be more selective and diligent before committing to major deals.

Overseas acquisitions should be preceded by careful risk evaluation and a clear plan to integrate new investments with long-term business strategies, they said.

Alex Wittenberg, executive director of Global Risk Center at Marsh & McLennan Companies Inc, a leading insurance broker and risk manager, said at a recent forum on overseas investment opportunities and risks on March 4, "Companies make mistakes when they set a foreign investment strategy to go do something. At that point of time, they don't address the risks in that strategy.

"What they do is they move forward with that strategy and address the risks after. It's hard to move off their initial statement when they already started making investments and announced it in the media."

The forum was jointly held by Marsh and the Center for China & Globalization, a Beijing-headquartered think tank. Wittenberg said that "becoming more sophisticated on how you select projects you want to do is going to become more and more important", especially in the Chinese context.

Ten years ago, Chinese companies used to say they want to do all the projects because they had a lot of cash and they were growing fast. Now, it is more important that Chinese companies take "a more disciplined approach" by "really evaluating the risks" and "understanding what they are buying".

"You have to be really honest with yourself, knowing what you are good at and what you aren't. What risks should you really not take on board because your company has no capability or experience? You can't just hope that risks are not going to happen," he said.

All countries have some risk inherent in doing business there, especially when Chinese companies start looking at some of the fragile states.

"What's really important is making sure that you have a consistent way of evaluating the host country where you are going to make these investments. That's something that often gets lost in the analysis," he said.

In a particular country, the return may look fantastic but when companies account for the risks doing business there, they actually adjust that downwards for the risks they are taking. For instance, a comparatively lower return in a stable country does not start off looking very attractive but when the companies take the risk into account, it really is.

"It's important that you look at an investment and say, 'Is it an opportunity under every version of the future that I can think of, or is it a great opportunity only under one?' If it's only an opportunity when a number of things happen perfectly, then you really have to consider it," he said.

The underlying reason for making investments, he emphasized, cannot just be that the short-term price looks good. The investment has to fit with the long-term business strategy.

"As Chinese companies move into other parts of the world, it is not as much sector-specific as it is to understand their own strategy and where they want to be," he said.

Huo Jianguo, a senior research fellow at the Center for China & Globalization, agreed. This is particularly true for Chinese companies launching huge projects and selecting partners overseas, especially in countries along the routes of the Belt and Road Initiative, he said.

Passing through more than 60 countries and regions with a population of about 4.4 billion, the initiative aims to improve cooperation with countries across Asia, Europe and Africa.

"Companies must do comprehensive business feasibility studies before participating in projects under the Belt and Road Initiative. They should be prepared for covering financial losses on their own when risks occur, instead of expecting the Chinese government to help them out of trouble," said Huo, former president of the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.

He urged large corporations to make greater efforts to have good risk management, for they are capable of mobilizing a huge amount of capital. The consequences would be devastating if something went wrong, he said.