- 2018-10-18
What should Chinese companies pay attention to in Swiss M&A?
As the global economy including China slows down and the consumer demand of China's middle class upgrades, China's manufacturing industry seeks to transform from being driven by foreign trade to being driven by technology. Continued loose monetary policy, increasing pressure for industrial upgrading, and a limited number of domestic investment targets have led to an increase in industrial globalization investment. According to CICC’s analysis, one of the main factors for the active overseas M&A is the difference in valuations at home and abroad: the valuations of different assets in the world are vastly different from those in the Chinese stock market. The average valuation of A-share main boards is now about 32 times. The board is about 66 times. The average international valuation is about 11 times, and it is difficult to exceed 20 times at most. In addition, the expected depreciation of the renminbi also increases the attractiveness of investment in Europe for Chinese companies.
According to data provided by CICC, the value of China's mergers and acquisitions in Europe in 2016 has exceeded US$90 billion, accounting for nearly half of the total value of mergers and acquisitions. According to the representative of the German Federal Investment Agency in China, Chinese investors reached 60 mergers and acquisitions of German companies in 2016, with a total value of approximately 10 billion euros. Adjacent to Germany and the country with the highest European innovation index-Switzerland, as the headquarters of many multinational companies and European R&D centers, and the location of industrial clusters such as chemical, pharmaceutical and biotechnology, mechatronics metal processing (MEM), and fine manufacturing, it is also receiving Favored by Chinese capital. And in the foreseeable future, a considerable number of manufacturing enterprises hope to realize industrial upgrading by investing in European manufacturing enterprises, and the enthusiasm for Chinese-funded mergers and acquisitions will continue.
Compared with Chinese cross-border mergers and acquisitions in the United States under scrutiny, from the perspective of investors, the Swiss economy is quite free. From a policy and regulatory perspective, the government has no special restrictions on foreign investors except in special fields such as national defense, finance, and real estate. In addition to legal freedom, Switzerland also offers attractive tax incentives. The strong Swiss franc makes the export-oriented manufacturing industry face cost disadvantages and pressure on profits. Swiss companies must stay ahead by investing in technology. At the same time, Swiss SMEs are also facing the difficult situation of financing. Therefore, Switzerland cannot exclude investment from abroad. The author has tracked 17 Chinese investment activities disclosed to Swiss companies from the beginning of 2015 to the present. According to the purpose of the transaction, they can be divided into the following categories:
(1) Acquire and integrate resources in the service areas of media, culture, entertainment, leisure travel and health, and use the "power" of China's huge population to upgrade consumption to achieve a win-win situation. Among them, it includes both large-scale acquisitions, such as Wanda Group’s acquisition of the world’s second largest sports marketing company-Infront Sports Media and Propaganda, an integrated entertainment marketing company; and the acquisition of hotels and spas by smaller companies or private investors. Centers, hospitals, educational institutions, etc. It is exactly the same as Fosun International's previous acquisition of French Club Med, which is to integrate the business of the target company with the Chinese market. Get "going overseas consumption" or "consumption upgrade" dividends.
(2) Technology acquisition: Essentially for technology acquisition, companies have enhanced their competitiveness both at home and abroad. This model includes the acquisition of Syngenta, a leading agricultural technology company, by Sinochem, China's largest basic chemical manufacturing company. Sinochem hopes to take advantage of the core technology of biological breeding and the research and development advantages of pesticide technical; Butterfly and Technology's acquisition of the Swiss rehabilitation robot company Hocoma. Currently, this company established in 2000 owns nearly one-third of the global rehabilitation robot market. For this type of acquisition, it involves the acquisition of industries that are highly related to the national economy and people's livelihood or breakthrough innovative technologies, or there is a risk of obstruction. After all, any country wants to avoid losing its competitiveness in the future world due to the loss of core technology due to strategic considerations.
(3) Brand acquisition. Hals, a manufacturer of thermos mugs in Zhejiang, acquired the well-known Swiss kettle trademark "SIGG" (SIGG). The acquisition of brand and design capabilities is also an option for small and medium export-oriented manufacturers to upgrade their industries. Hals used to be a foundry company with low profits. Without a brand, it will be difficult to make breakthroughs in the future.
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(4) Resource investment. Usually state-owned enterprises obtain certain resources through mergers and acquisitions to enhance their business influence. Including HNA's acquisition of three service companies spun off from old Swiss Airlines to enhance its international aviation service capabilities, and China Reserve Development's acquisition of a majority stake in Henry Bath to obtain the London Metal Exchange's warehousing network. The largest Chinese acquisition in 2009, Sinopec spent US$7.56 billion to acquire the Swiss ADDAX Petroleum Company, which is also a model.
Figure 1 Chinese companies' participation in Swiss M&A from 2015 to the first three quarters of 2016
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Source: KPMG report, swissinfo website, etc.
According to JPMorgan's research on China's M&A activities, compared with the M&A before 2010, the M&A activities since 2015 have shown that China's M&A activities have ranged from state-owned enterprises' energy and resource M&A to M&A in the technology and consumption fields. Figure 1 It also confirms the change in the development demands of Chinese enterprises.
Most of the current analysis articles interpret Chinese companies' cross-border mergers and acquisitions from the perspective of Chinese capital going overseas. However, how do current Swiss companies view the olive branch thrown by Chinese capital? Can Chinese industries really use overseas M&A as one of the options for transformation and upgrading? In response to the acquisition of Chinese companies in Switzerland, especially the recent increase in the acquisition of manufacturing and high-tech SMEs, I tried to learn from the seller’s Observe the rising phenomenon of Chinese enterprise acquisitions from a perspective.
Swiss cross-border mergers and acquisitions of Chinese companies are one of the viable ways to acquire technology
In the past few years, the most active industries for Swiss mergers and acquisitions were "finance", "industrial products and services" and "services." In these hot trading sectors, transactions in the financial sector are driven by regulation, the current currency environment and new technologies. These actions force companies in the industry to reshape and consolidate their businesses. The M&A activities of industrial products and services are driven by the trend of globalization. Under the trend of globalization, Swiss companies have increased their integration efforts to enter new markets and achieve economies of scale. At the same time, they believe that in the future, transactions in the high-tech and healthcare sectors will increase. At present, many Chinese investors come to Switzerland to find brands and technologies. For example, in the field of robotics, these companies hope to meet the needs of the Chinese market through mergers and acquisitions.
In Switzerland's MEM (mechanical, electronic, metal processing) industry, chemical industry, biotechnology, and medical and health industries, many small and medium-sized companies have very good technologies. For these companies, China is another major market besides the EU . Oaklins Switzerland believes that cross-border mergers and acquisitions are a very feasible way for Chinese companies to acquire Swiss technology. Currently, American and European companies are very active in this area, so Chinese companies also have such opportunities.
In terms of valuation, Oaklins Switzerland believes that the reasonable valuation of Swiss companies varies according to different industries and cases. Generally speaking, because cross-border transactions can achieve more synergies and prove higher value, the valuation will be higher. According to their current observations, the payment multiple of Chinese buyers is higher than that of European buyers.
Chinese enterprises should be more "co-produced" in the M&A process
The heads of the two Swiss institutions agree that Chinese investors should improve the M&A process to increase the success rate of investment. Oaklins Switzerland stated that from the seller's point of view, the Swiss company has no particular concerns about the Chinese company. The seller is more concerned about the integration method after the acquisition. The internal process of Chinese companies takes a long time and generally cannot participate in public auctions, but prefers one-to-one transactions. At present, a method used to deal with the slow response of Chinese buyers is to provide the seller with a price acceptable to the Chinese side, and then pay a certain deposit in advance (the money will be confiscated if you do not buy it). In this way, the Chinese buyer A certain amount of exclusive time can be obtained.
Swiss Ernst & Young believes that in cross-border mergers and acquisitions, in addition to the language and cultural differences between China and Switzerland, there are other challenges. In addition to the language barrier, the Chinese and Swiss sides have different understandings of the timing of mergers and acquisitions. Western investors will strictly implement the timetable and detailed steps before the end of the transaction, while the Chinese are more inclined to handle it flexibly. Ernst & Young recommends that Chinese investors understand the timing of the transaction and match their decision-making process with the timing, otherwise it will be difficult to win against European competitors when they encounter attractive target companies.
In addition, the West and China have different methods of negotiation. Western companies usually think that the terms that have been negotiated are determined, and Chinese investors may restart the discussion on the terms that have been agreed. In terms of ensuring the credibility and smoothness of the transaction, it recommends that Chinese investors clearly communicate and distinguish between the terms that have been negotiated and the terms that are still open for discussion.
Trends of Chinese companies' cross-border investment
Ernst & Young believes that China's foreign investment activities are becoming increasingly diversified because the company has shifted its investment focus from seeking natural resources to creating a global expansion strategy. Previously, investment activities were concentrated in the energy and mining sectors. Recently, Chinese investors have increasingly expanded into the technology, finance, service and healthcare industries.
Oaklins Switzerland believes that compared with a few years ago, Chinese companies have become more professional in the execution of M&A strategies. They not only want to buy technology and obtain technology transfer, but also consider how to further develop the acquisition after buying a Swiss company. Targets, produce synergies; how to use the "joint force" after the acquisition to apply this "know how" to the Chinese market.
How do you look at the recent acquisitions by Chinese companies?
In particular, I would like to ask the two companies to comment on two examples of technology acquisitions and brand acquisitions in recent Chinese enterprise mergers and acquisitions.
For the high-tech field, the 6-year-old Chinese smart health solution provider DIH Diehe Technology successfully merged with the Swiss smart rehabilitation robot company Hocoma after completing the A+ round of financing in the smart medical field. As a sell-side consultant, Oaklins Switzerland believes that there are clear company strategic considerations behind this transaction, and the speed of execution of the transaction is very unusual. The DIH has a clear acquisition purpose. The acquired company currently hopes to further develop the market related to rehabilitation technology, especially in China, because the Chinese government will focus on robotics in the next five years.
SIGG is a company with a long history. They initially expanded into the US market and achieved great success, but then suddenly faced a class action lawsuit, and it was difficult to reach the historical income level. Sieg slowly recovered from this adverse impact. Swiss Ernst & Young believes that in this case, Hals’s challenges are universal, not entirely due to its own Chinese identity. The biggest problem is how investors can extend SIGG’s strong brand value to other companies. Product category and market area.
Recommendations for Chinese investors
Oaklins Switzerland visited many comprehensive companies in Beijing and Shanghai at the beginning of 2016 and found that Chinese buyers have a good understanding of potential M&A targets and also have a clear understanding of the synergies produced by M&A. The Swiss investment bank believes that what the Chinese company lacks is the local contacts in Switzerland and the need to understand how to approach the Swiss company in order to succeed. For the future, the professionalism of Chinese buyers in cross-border mergers and acquisitions will increase. In the future, buyers and sellers will better understand how to deal with each other and establish a foundation for a win-win situation.
Swiss Ernst & Young believes that for Chinese investors, the acquisition of Swiss companies has many advantages: fast access to technology, rapid access to world-recognized Swiss brands, etc., and the acquisition of companies' extensive network in Switzerland. At the same time, for Swiss companies, Chinese investors provide them with readily available stable funds, giving Western companies a chance to go out of the local market, and investee companies can use the advantages of Chinese partners to enter the fast-growing large market of China. In order to create such a win-win situation, Chinese investors must be aware of the cultural differences before and after the merger. Investors and management negotiated a reasonable "medium-term goal" and found a suitable cooperation method for both parties. A major factor in the "medium-term success" is the relationship between the Chinese investor and the senior management of the Swiss target company. Ernst & Young believes that the work of local management is like translation, which requires a bridge between different perspectives, plans and cultures. Therefore, it is very important for Chinese investors to establish a trust relationship with the management of the company they invest in. The consultant may be helpful in the beginning, but in the end Chinese investors and local management need to build a joint team. For Chinese investors, due to cultural differences between the two parties and differences in the company’s growth expectations, the later integration stage is more challenging. Investors need to formulate long-term incentives to retain the core team and avoid brain drain. This is especially true for many Swiss SMEs. In technical processing enterprises, the experience of skilled workers is an important intangible asset that exists in addition to the existing intellectual property rights. To make these Swiss employees feel comfortable and keep in good condition, benefits and treatment are important, but the communication and decision-making methods of investors are equally important.
Under uncertain factors such as Brexit and the re-election of the US president, the Swiss franc is expected to continue to strengthen and the profits of export-oriented companies will be under pressure. It can be predicted that small and medium-sized enterprises in the industrial chain will be greatly affected. Among them, financial pressure may make some companies look for new capital or new buyers. Under the background of arbitrage opportunities arising from valuation differences and the Chinese manufacturing industry seeking breakthroughs, the acquisition of Swiss brands and technologies has become one of the choices of Chinese companies. There are 110 hidden champions and numerous export-oriented small and medium-sized enterprises in the Swiss manufacturing industry. They are located in the pharmaceutical and life sciences, mechanical and electronic and metal processing, and fine manufacturing industries. If Chinese industrial companies can adapt to the context of international mergers and acquisitions, this is the case. There are still many investment opportunities. At the same time, we should also pay attention to whether the differences in valuation and operational practices between buyers and sellers will lead to "expensive purchases." At the same time, acquisition is not the only option. For companies lacking Swiss investment experience, it is also a good option to become a minority shareholder and be familiar with investment strategies while using Chinese market resources to seek collaboration and further investment opportunities. Chinese companies can also consider taking this opportunity to establish R&D centers around Swiss industrial clusters or universities of science and technology to seek technology transfer or technical cooperation, so as to absorb Swiss innovation capabilities at a lower cost and promote industrial upgrading. Just like the beginning of the establishment of Samsung, it intervened in the semiconductor field by acquiring some shares of a US company and established a technology base in Silicon Valley, and finally obtained independent technical capabilities in the semiconductor and communications fields through the technological research and development results in Silicon Valley.