At Pacific Bridge Group, we get a lot of requests from Chinese buyers looking for specific targets. We greatly appreciate when a buyer comes to us with modest expectations for a target search and is willing to consider different kind of investment structures other than M&A alone. It is of course much easier to approach a company that is not actively for sale but a strategic partnership.
Often times, however, the buyer wants a company to buy with stable revenue, good profit margins, high growth, and leading technology. Good management that is willing to stay on in a long-term lockup arrangement would be great too. The sweet spot for enterprise value is US$100 million to US$300 million where the deal is large enough to be worth doing (for the larger buyers) and small enough to be less subject to potential regulatory scrutiny (especially in China but sometimes also in the target’s home country). We understand buyers want to aim high, we get it.
But the issues of course are:
(1) a company that could check all these boxes by and large does not exist, or
(2) if they do exist they are not readily for sale or
(3) if are potentially for sale, have no shortage of local buyers chasing them (strategic and even private equity).
Could a Chinese firm afford to pay more than other local buyers? Could it find a company off the market and make it an offer it can’t refuse?
We have seen data that suggests Chinese buyers historically have paid higher premiums on acquisitions because:
(1) the buyers themselves often trade at lofty P/E ratios on the home stock exchange,
(2) the china potential for bringing the company’s product and/or technology back to China creates synergies a western buyer can’t match, or
(3) deal closure uncertainty given cross-border challenges.
(Chinese truck maker Sany bought Putzmeister, a 59-year-old maker of pumps for concrete, for 360 million euros in 2012. Although there was some trepidation that Sany would reduce the company’s headcount, in fact sales at the company grew by over 1/3 since the acquisition.)
Modest buyers with prudent expectations should have a clearly defined strategy for pursuing an overseas acquisition grounded in a clear business motivation.
Historically, motivations to acquire overseas companies have included:
(1) Overseas market expansion (sales channel or brand) – think Haier buys GE Appliance Division
(2) Technology mostly for application in China - Midea pays a 60% premium to buy Kuka
(3) P/E ratio arbitrage - usually less glamourous deals where a target company’s income statement can be accrued to the new Chinese parent (which often trades locally at a higher P/E multiple).
We recommend focusing on reason 1 or 2 above. Reason number 3 is nice but should not be an end in of itself if the strategy is for the long-term. It’s also usually hard to find a leading technology company for an enterprise value in the US100 million to US$300 million range unless it’s really more of a startup than a mature company. Those types of companies are often best suited to corporate VC investments by a Chinese buyer, not pure M&A.
There are tremendous opportunities for Chinese overseas buyers out there today, even with the general slowdown in deal flow last year. A grounded setting of strategy and expectations can help make a target search and execution more successful. At Pacific Bridge Group, we have a strong cross-cultural and technical engineering background - with a focus on automotive and manufacturing - for buyers to help find targets with the right synergy matches for their long-term business success.
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