Companies find leap overseas challenging

Many companies have sought to follow in the footsteps of Yanzhou Coal's $3.2 billion acquisition of Australia-based Felix Resources, but consultants are warning domestic firms to avoid rushing abroad head first.

China's largest acquisition in Australia, which was finally approved by the Australian government Friday, still needs consent from the Chinese regulator, said Yanzhou in a statement.

Overseas mergers and acquisitions (M&A) are very important for Chinese companies since it is the only way to acquire international brands and technology, Charles-Edouard Bouée, president of Asia, Roland Berger Strategy Consultants, told the Global Times Saturday.

He said the number of M&A cases initiated by Chinese companies was only 1 percent of all the M&A cases around the world in 2000, but last year that figure had jumped to 8 percent.

China's overseas investment in the form of M&A amounted to $20.5 billion in 2008.

State-owned enterprises (SOE) are the main force abroad, accounting for 64 percent of China's total outward direct investment in 2008, according to the Ministry of Commerce.

At a seminar held in Beijing over the weekend, Wang Wei, vice president of Phoenix New Media, expressed doubts on SOEs' competitiveness in the global market since they largely rely on monopoly status at home.

Bouée said Chinese companies need to be strong in their domestic market before they go abroad regardless of whether they have monopolies.

He cited examples of well-known multinational companies such as IBM, which used its market leader position in the US to generate cash and make acquisitions early on and then changed its business model.

Private companies should have strong business models in China, and small-sized companies should be more specialized. It will be a disaster if these companies go abroad without having a major share of the domestic market, he said.

Bouée reminded Chinese companies to be careful with overseas purchases. "Don't make acquisitions just because they are cheap," he said.

There have been studies all over the world that one acquisition out of two fails, he said, adding that the two main reasons for the failures – lack of understanding what are bought, and inexperienced in the integration process.

Chinese companies lost about 200 billion yuan ($29.4 billion) in overseas M&A last year, according to CCTV.

Bouée said companies should spend some time thinking before buying, and once they have made decisions, they should make their acquisitions quickly and then very actively integrate the company.

Companies need to make sure they integrate the culture and keep the brand, he added. 

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