china’s global challengers

China’s Global Challengers

THE STRATEGIC IMPLICATIONS OF CHINESE OUTBOUND M&A

BCG REPORT

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THE STRATEGIC IMPLICATIONS OF CHINESE OUTBOUND M&A

JIM HEMERLING

DAVID C. MICHAEL

HOLGER MICHAELIS

M A Y 2 0 0 6

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© The Boston Consulting Group, Inc. 2006. All rights reserved.

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2 BCG REPORT

3

Table of Contents

About This Report 4

For Further Contact 5

Preface 6

The Growth in Chinese Outbound M&A 8

Four Waves of Investment 8

Chinese Global Challengers 11

Strong State Support 12

An Increasing Supply of Deals 12

The Performance of Chinese Outbound M&A 15

Superior Average Performance but Considerable Divergence 15

Obstacles to Success 15

Emergence of the Temporary Partnership Model 17

Strategic Implications for Western Companies 19

Understand the Impact of Chinese Global Players 19

Rethink Long-Term Strategy 19

Reassess Strategic Options 19


This research report is a joint product of the Corporate Finance and Strategy practice, the Energy practice,and the Technology and Communications practice of The Boston Consulting Group. Jim Hemerling is a sen-ior vice president and director in BCG’s Shanghai office. David C. Michael is a senior vice president anddirector in BCG’s Beijing office. Holger Michaelis is a manager in the firm’s Beijing office.

AcknowledgmentsThe authors would like to acknowledge the contributions of BCG’s global experts in corporate finance andstrategy and in the specific industries discussed in this report:

Kees Cools, an executive adviser in BCG’s Amsterdam office and the global leader of research and market-ing for the Corporate Finance and Strategy practice

David Dean, a senior vice president and director in BCG’s Munich office and the global leader of theTechnology and Communications practice

Gerry Hansell, a senior vice president and director in BCG’s Chicago office and the leader of the CorporateFinance and Strategy practice in the Americas

Heino Meerkatt, a vice president and director in BCG’s Munich office and the leader of the CorporateFinance and Strategy practice in Europe

Richard Peters, a senior vice president and director in BCG’s Houston office and the global leader of theEnergy practice

David Pitman, a vice president and director in BCG’s Sydney office and the leader of the Corporate Financeand Strategy practice in Asia-Pacific

Daniel Stelter, a senior vice president and director in BCG’s Berlin office and the global leader of theCorporate Finance and Strategy practice

The authors would also like to thank the members of the Chinese outbound M&A research team: Brian Han(Shanghai), Roy Kwan (Hong Kong), and Alfred Shang (Hong Kong); Robert Howard, for his contributionsto the writing of the report; and the following members of the BCG editorial and production staff: BarryAdler, Gary Callahan, Kim Friedman, Sean Hourihan, and Thomas Teal.

To Contact the AuthorsThe authors welcome your questions and feedback.

About This Report

4 BCG REPORT

Jim Hemerling The Boston Consulting (Shanghai)

Company Ltd.21/F, Central Plaza227 Huangpi Bei LuShanghai, 200003ChinaTelephone: +86 21 6375 8618E-mail: [email protected]

David C. MichaelThe Boston Consulting (Shanghai)

Company Ltd., BeSuite 902, The Exchange BeijingNo. 118 Jian Guo Lu YiChao Yang DistrictBeijing, 100022China Telephone: +86 10 6567 5755E-mail: [email protected]

Holger MichaelisThe Boston Consulting (Shanghai)

Company Ltd., BeSuite 902, The Exchange BeijingNo. 118 Jian Guo Lu YiChao Yang DistrictBeijing, 100022China Telephone: +86 10 6567 5755E-mail: [email protected]

5China’s Global Challengers

For Further Contact

The Corporate Finance and Strategy practice of The Boston Consulting Group is a global network of expertshelping clients design, implement, and maintain superior strategies for long-term value creation. The prac-tice works in close cooperation with BCG’s industry experts and employs a variety of state-of-the-art method-ologies in portfolio management, value management, mergers and acquisitions, and postmerger integration.For further information, please contact the individuals listed below.

The Americas

Jeff GellBCG Chicago+1 312 993 [email protected]

Gerry HansellBCG Chicago+1 312 993 [email protected]

Dan JansenBCG Los Angeles+1 213 621 [email protected]

Jeffrey KotzenBCG New York+1 212 446 [email protected]

Walter PiacsekBCG São Paulo+55 11 3046 [email protected]

J. PuckettBCG Dallas+1 214 849 [email protected]

Peter StangerBCG Toronto+1 416 955 [email protected]

Alan WiseBCG Atlanta+1 404 877 [email protected]

Europe

Jean-Michel CayeBCG Paris+33 1 40 17 10 [email protected]

Kees CoolsBCG Amsterdam+31 35 548 [email protected]

Stefan DabBCG Brussels+32 2 289 02 [email protected]

Peter DamischBCG Zürich+41 44 388 86 [email protected]

Stephan DertnigBCG Moscow+7 495 258 34 [email protected]

Lars FæsteBCG Copenhagen+45 77 32 34 [email protected]

Juan GonzálezBCG Madrid+34 91 520 61 [email protected]

Stuart KingBCG London+44 207 753 [email protected]

Tom LewisBCG Milan+39 0 2 65 59 [email protected]

Heino MeerkattBCG Munich+49 89 23 17 [email protected]

Alexander Roos BCG Berlin+49 30 28 87 [email protected]

Daniel StelterBCG Berlin+49 30 28 87 [email protected]

Peter StrüvenBCG Munich+49 89 23 17 [email protected]

Asia-Pacific

Andrew ClarkBCG Jakarta+62 21 526 [email protected]

Nicholas GlenningBCG Melbourne+61 3 9656 [email protected]

Hubert HsuBCG Hong Kong+852 2506 [email protected]

Hiroshi KannoBCG Tokyo+81 3 5211 [email protected]

David PitmanBCG Sydney+61 2 9323 [email protected]

Byung Nam RheeBCG Seoul+822 399 [email protected]

Harsh VardhanBCG Mumbai+91 22 2283 [email protected]

Preface

6 BCG REPORT

In recent years, Chinese companies have burstonto the global mergers-and-acquisitions (M&A)scene. High-profile deals such as the 2003 pur-chase of Thomson’s television business by Chinesetelevision manufacturer TCL, and the 2004 acqui-sition of IBM’s personal-computer business by theChinese computer company Lenovo, have intro-duced the world to a new generation of Chinesecompanies with aspira-tions to be global com-petitors. Even unsuccess-ful mergers such asHaier’s failed bid forMaytag (eventuallybought by Whirlpool)and the attempt by energy giant China NationalOffshore Oil Corporation (CNOOC) to buyUnocal (which foundered on political oppositionin the United States) reflect the increasing fre-quency with which Chinese companies are turningto M&A to penetrate global markets and acquireglobal scale.

So far, the value of these Chinese “outbound”acquisition deals remains relatively small. We esti-mate that since 1986, Chinese companies haveinvested some $30 billion in non-Chinese compa-nies, nearly a third of it in 2004 and 2005 alone.This amount is significantly less as a percentage ofGDP than the equivalent amounts for other rapidlydeveloping economies such as India and SouthAfrica. And it pales in comparison with the morethan $60 billion per year of foreign direct invest-ment currently flowing into China. Nevertheless, webelieve that the recent flurry of M&A activity on thepart of Chinese companies is only the beginning ofa powerful long-term trend.

A new generation of aggressive Chinese companieswants to break out of the Chinese home market.Financing is plentiful. The Chinese government isaggressively creating national champions that arestrong enough to compete globally. For at least someof these Chinese companies, often the most dynamic

and entrepreneurial, acquisition is becoming a pre-ferred strategy for reaching global scale quickly.What’s more, there is an increasing supply of deals asestablished global companies review their portfoliosand decide to divest from noncore sectors.

To understand the strategic implications and man-agerial challenges of Chinese outbound M&A, The

Boston Consulting Groupstudied some 500 dealsinvolving Chinese compa-nies that took place overthe past 20 years.1 We alsoanalyzed the perfor-mance of a cross-industry

sample of 16 transactions between Chinese andnon-Chinese companies that have taken place since2001. (To our knowledge, this analysis is the firstattempt to evaluate the stock market performanceof recent Chinese deals.) Our study produced fivekey findings:

The current wave of Chinese outbound M&A isintensifying—and there is plenty of room forgrowth. Despite the recent activity, China still lagssignificantly behind the rate of M&A in other rap-idly developing economies such as India and SouthAfrica. Relative to GDP and levels of foreign trade,Chinese outbound M&A would have to increasemore than tenfold to reach current levels of M&Ain the United States.

So far, Chinese companies have proven to be betterinvestors than acquirers. Roughly two-thirds of theChinese acquisitions in our sample created value inthe first year after the announcement of the deal.However, there are substantial differences betweenthe performance of strategic investments (wherethe Chinese acquirer buys only a minority stake)and the performance of outright acquisitions(where the Chinese acquirer buys 100 percent ofthe target and integration synergies are needed tocreate value). Some outright acquisitions have actu-ally destroyed value.

1. The initial results of our study were first published in Chinese in 2005. See Xiang shijie wutai maijin: zhongguo qiye de duiwai binggou( ), BCG report, December 2005.

The recent flurry of M&Aactivity by Chinese companies

is only the beginning of apowerful long-term trend.


Most Chinese acquirers lack world-class M&A capa-bilities. For Chinese companies with global aspira-tions, acquisition is an important way to becomemajor players in the world economy. But in order tosucceed, they must overcome a significant obsta-cle—their lack of managerial expertise in execut-ing large-scale cross-border mergers.

A new organizational model may be emerging. Inresponse to this weakness, a new type of deal maybe emerging: temporary partnerships, in whichacquisition by a Chinese partner is accompanied bya time-limited joint venture between acquirer and

target. These partnerships allow Western targets totransfer capabilities to their Chinese acquirers. Sofar, these partnership mergers have outperformedoutright acquisitions.

For Western incumbents, Chinese outbound M&Arepresents a potential threat—but also an opportu-nity. Established companies need to prepare for thepossibility that a low-cost Chinese player may upsetcompetitive dynamics in their industry. At the sametime, selling to a Chinese acquirer may be an effec-tive way for established companies to exit sectors oftheir business.

The Growth in Chinese Outbound M&A

8 BCG REPORT

• The Location of the Target. Was the target outsideChina or was it a subsidiary or joint ventureowned by a foreign company inside China?

These criteria define the two-by-two matrix inExhibit 1. By far the largest category, in both thenumber and the value of deals, is overseas expansion,in which a Chinese company has acquired opera-tions in order to expand its business beyond theChinese market. A classic example is Lenovo’srecent acquisition of IBM’s personal-computerbusiness. There have been 223 such deals since1986, with a total value of about $18 billion.

The second largest category is overseas investment,in which Chinese investment companies or pri-vate-equity firms invest primarily for the sake offinancial return—for example, the acquisition of a12 percent stake in Hong Kong Telecommu-nications by CITIC Pacific, a subsidiary of state-owned China International Trust and Investment

Although Chinese outbound M&A has only recentlycome to the business world’s attention, it is not anew phenomenon. Chinese companies have beeninvesting in foreign companies, both inside andoutside China, for 20 years. We have identified fourmajor waves of investment. The most recent wave isdriven by powerful forces that are likely to intensifyin years to come.

Four Waves of Investment

To get a sense of the patterns of investment byChinese companies in non-Chinese operations, wecategorized 515 transactions since 1986. We differ-entiated these transactions along two criticaldimensions:

• The Nature of the Chinese Acquirer. Was the acquirera corporation trying to expand its operations orwas it a financial-investment company primarilyseeking financial returns?

Domestic expansion Overseas expansion

Domestic investment Overseas investment

$1.6 billion

$0.6 billion

n = 76 n = 223

n = 30

Corporate

China OverseasLocation of target

$18 billion

$9.6 billion

n = 186

Type ofacquirer

Investmentcompany

= $1 billion in deal value, 1986–2005

E X H I B I T 1

CHINESE FOREIGN INVESTMENT FALLS INTO FOUR CATEGORIES

SOURCE: BCG analysis.


Corporation, in 1993. There have been 186 suchdeals since 1986, with a combined value of some$9.6 billion.

The two final categories in our matrix are consid-erably smaller. In domestic expansion deals, Chinesecompanies buy out their foreign joint-venturepartners or take over foreign assets in China. Forexample, in 2003, Shanghai Bright Dairy & Foodbought Guangzhou Danone Yogurt from GroupeDanone. The 76 deals in this category since 1986are valued at only $1.6 billion. Finally, in relativelyrare domestic investmentdeals, Chinese invest-ment companies makepassive investments in foreign assets in China.For instance, in 2002, theLiaoning DevelopmentGroup purchased a 10 percent stake in Jinbei GMAutomotive, a joint venture between GeneralMotors and Jinbei Auto. But there were only 30 such deals between 1986 and 2005, valued at$600 million.

Exhibits 2 and 3, on page 10, chart the growth ofChinese investment in foreign companies from1986 through 2005, first in terms of the number ofdeals and then in terms of deal value. The numberof deals grew at an average rate of 11 percent peryear, and deal value grew annually by 22 percent.

Exhibits 2 and 3 also show four major waves ofinvestment. The first wave, lasting roughly a decadefrom 1986 to 1996, focused on overseas investment,as Chinese investment firms began to search theworld for attractive financial returns. During thisperiod, there were relatively few deals of low value.A second wave, lasting from about 1996 to 1999, wastriggered by the return of Hong Kong to China, asmoney from mainland China flowed into HongKong and Chinese companies took control ofstrategically important assets in the city. The num-ber of deals per year grew during this period.What’s more, the highest annual deal value to datecame in 1997, the year of the Hong Kong handover.

Starting around 2000, a third wave characterized bydomestic expansion took shape as many joint-ven-ture contracts came to an end and Chinese compa-nies began to buy out their foreign partners.Almost simultaneously, a fourth wave began to

emerge when China joined the World TradeOrganization in late 2001. Deal activity in this latestwave has covered a far broader range of industriesand target countries. Deal sizes are also larger, withsome in excess of $1 billion. One sign of this recentgrowth in deal size: although the number of dealsin 2005 decreased from the 2004 peak, the value ofthose deals actually increased to the highest levelsince 1997. And while all deal types showed increas-ing activity during this fourth wave, overseas expan-sion has clearly been dominant, accounting forroughly 50 percent of the deals and 75 percent of

the value since 2001.

The vast majority of thedeals in this fourthwave—approximately 80percent of the top trans-actions since 2001—are

in two sectors of the economy: technology and com-munications, and natural resources. (See Exhibit 4,page 11.) Technology and communications is anintegral part of a modern industrial infrastructure,and the many deals in this sector reflect the rapidgrowth of the Chinese economy. In addition to themuch publicized Lenovo-IBM deal, Beijing-basedBOE Technology Group, a manufacturer of com-puter monitors, acquired a stake in TPV Tech-nology, a Taiwan-based monitor vendor, andbought the thin-film-transistor LCD business fromHyundai’s semiconductor unit in South Korea.Meanwhile, China Netcom Group, an $8 billionChinese telecommunications company, teamed upwith partners to buy Asia Global Crossing.

The natural-resource deals are driven by China’squest for sufficient supplies of energy and othernatural resources to fuel its rapid development. Forexample, in 2002, China’s state-owned energy com-pany CNOOC successfully acquired the Indonesianassets of Repsol Exploración, a Spanish energycompany. Similarly, PetroChina, a subsidiary of theChina National Petroleum Corporation (CNPC),bought the Indonesian oil and gas assets of U.S.-based Devon Energy Corporation. And in 2005,CNPC itself acquired the North Buzachi oilfield inKazakhstan through its purchase of the Canada-based PetroKazakhstan.

But the predominance of these two sectors does notmean that other industries have not becomeincreasingly active as well. In automobiles, for

The latest M&A wavebegan when China

joined the World TradeOrganization in late 2001.

10 BCG REPORT

Number of Deals by Type of Transaction, 1986–2005

0

10

20

30

40

50

60

70

’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05

Compound annualgrowth rate:

11%

Invest overseas Globalize

Buy Hong Kong

Buy out joint ventures

Domestic expansionDomestic investmentOverseas investmentOverseas expansion

Number ofdeals

1 2

3

4

E X H I B I T 2

THERE HAVE BEEN FOUR WAVES OF CHINESE OUTBOUND M&A ( I )

SOURCES: Thomson Financial; BCG analysis.

Compound annualgrowth rate:

22%

Domestic expansionDomestic investmentOverseas investmentOverseas expansion

Deal Value by Type of Transaction, 1986–2005

’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’050

1

2

3

4

5

6$billions

Invest overseas Globalize

Buy Hong Kong

Buy out joint ventures

1 2

3

4

E X H I B I T 3

THERE HAVE BEEN FOUR WAVES OF CHINESE OUTBOUND M&A ( I I )


NOTE: We have estimated the value of private deals, for which the value of the transaction has not been disclosed, by averaging the lower third of disclosed deals for the

equivalent transaction type in the relevant industry.


example, Shanghai Automotive Industry Corpo-ration (SAIC), one of China’s big three automak-ers, has purchased a controlling stake in SouthKorea’s SsangYong Motor Company; and NanjingAutomobile has bought the insolvent MG RoverGroup. In the utility sector, Huaneng PowerInternational has acquired a 50 percent stake inthe Australian power-generation company OzGen.

Chinese Global Challengers

Three major forces are driving the current wave ofChinese outbound M&A. Each is likely to intensify.

The first is the emergence of a new generation ofChinese companies determined to become playersin the global economy.2 These companies havebeen successful in the Chinese market and are rap-idly working to establish themselves globally as well.

For the moment, these Chinese global challengersbenefit from some distinctive competitive advan-tages. The enormous size of the domestic Chinese

Average industry deal value ($millions)

Technology and communicationsservices

Technology and communicationsequipment

Natural resources

Utilities

Automotive

Bankingand insurance

Consumerelectronics

Consumer goodsConstruction

Real estate

ChemicalsHealth care

Technology and communications software

Logistics and transportation

Industrial goods

Other1

0

50

100

150

200

250

300

Average = 6.4 deals

Number of deals, 2001–2005

Average = $90.3 million

= $1 billion Most active industries Moderately active industries Emerging industries

Total industry deal value

5 10 15 20 25 30 35

E X H I B I T 4

NATURAL RESOURCES AND TECHNOLOGY AND COMMUNICATIONS LEAD THE RECENT M&A WAVE


1Includes agriculture, services, and media and entertainment.

2. This trend is not limited to China. It can be found in all rapidly devel-oping economies. See The New Global Challengers: How 100 Top Companiesfrom Rapidly Developing Economies Are Going Global—and Changing theWorld, BCG report, May 2006.

12 BCG REPORT

market gives them significant scale advantages.For example, China is already the world’s largestmarket for television sets and mobile phones. AndChina’s low labor costs not only give Chinese com-panies a substantial cost advantage but also allow them to pursue a highly flexible productionmodel that is significantly less asset intensive than that found in most industrialized countries.The growing dynamism of the Chinese market has also put Chinese companies at the forefront of product innovation in some sectors—for instance, mobile phones. What’s more, many of these aspiringglobal players fromChina have gained in-valuable operating expe-rience by working withmultinational companiesin joint ventures thatwere originally intended to serve the domesticChinese market.

Of course, many of these local advantages will dis-appear in time. As Western investment continues toflow into China, global multinationals will eventu-ally create a platform for low-cost manufacturing inChina and gain the benefits of serving the fast-growing Chinese market.3 But in the meantime, theChinese global challengers have a significant strate-gic opportunity to leverage their strengths and usethem to break out of their home market andacquire the economies of scale, distribution chan-nels, marketing and sales capabilities, intellectualproperty, brand awareness, and other advantagesthat will allow them to compete globally over thelong term.

For at least some Chinese companies, acquisitionis rapidly emerging as the quickest and most effi-cient way to achieve this goal. The capital to fundacquisitions is readily available. Many Chinesecompanies have considerable cash reserves (espe-cially in heavy industries such as steel, which haverecently benefited from high prices due to soaringdemand from China’s own economic expansion).And with Chinese foreign reserves likely to reach$1 trillion by the end of 2006, cheap financing iseasily available from state-owned banks. What’smore, international private-equity firms are

becoming increasingly active in Chinese deals. Forexample, three major U.S. private-equity firms—Texas Pacific, General Atlantic, and NewbridgeCapital—played a central role in the Lenovo-IBMacquisition.

Strong State Support

The global ambitions of Chinese companies arereinforced by strong support for global expansionfrom the Chinese government. China has a clearnational interest in expanding its businesses

abroad. Since 2001, theChinese government hashad an explicit policy ofi n t e r n a t i o n a l i z i n gChinese businesses andcreating national cham-pions through industry

consolidation. And because China’s foreign-exchange reserves are heavily regulated by thestate, the government is a key enabler of cross-bor-der deals.

The fact that China’s biggest companies are, to alarge extent, state-owned companies greatly mag-nifies the state’s role. For example, the Chinesegovernment’s State-owned Assets Supervision andAdministration Commission (SASAC), chargedwith restructuring China’s most important state-owned companies, is the world’s largest portfoliomanager, overseeing some 170 companies withcombined revenues in excess of $500 billion.SASAC’s portfolio includes leading companies inmajor industries such as telecommunications,energy, automobiles, and steel. SASAC’s mission isto turn the companies under its shield into highlycompetitive industry leaders, in part by aggres-sively consolidating them. It has decisive authoritywhen it comes to overseas M&A, either driving orapproving transactions.

An Increasing Supply of Deals

Finally, China’s appetite for outbound M&A hasreceived a further boost from the simultaneous will-ingness of multinational companies to review theirportfolios and shed underperforming businessunits, making more acquisition targets available. As

3. See Organizing for Global Advantage in China, India, and Other Rapidly Developing Economies, BCG report, March 2006.

With Chinese foreign reserveslikely to reach $1 trillion bylate 2006, cheap financing

is easily available.


foreign companies restructure and consolidate,they are increasingly willing to sell divisions andunits outside of their core strength. Unattractivefinancials, second-in-class operations, lagging mar-ket position, or a generally challenging marketenvironment often make exit a sensible option. Inmany cases, these business units have assets—forexample, patents, strong brands, and establishedsales channels—that make them more valuable to aChinese acquirer.

All these trends will intensify the wave of Chineseoutbound M&A in the years ahead. How largemight it become? Macroeconomic data suggest thatthere is plenty of room for further growth. Despiterecent high-profile deals, China remains a relativelysmall player on the world M&A stage. For example,China represents roughly 30 percent of the totalGDP of the world’s rapidly developing economies,but it takes part in only 11 percent of the cross-bor-der M&A deals emanating from those economies.(See Exhibit 5.) China’s outbound M&A—in rela-tion to its GDP and foreign trade—would have to

increase tenfold to reach current levels in devel-oped countries such as the United States and theUnited Kingdom.

It is highly probable that within the next few years,deal activity will expand over a much broader base,including the full range of industries in whichChinese companies already have strong exports.What’s more, big players like Haier and CNOOC,whose first forays into major M&A have failed, are likely to reenter the acquisitions game. (See the sidebar “Six Predictions for Chinese M&A,”page 14.)

But even as the trend intensifies, Chinese compa-nies will have to overcome a major obstacle. Despitetheir growing experience overseas, most Chinesemanagement teams are still relatively weak when itcomes to effectively executing large cross-bordermergers. In order to succeed in their goal of achiev-ing global scale through acquisition, the Chineseglobal challengers must significantly improve theirM&A managerial capabilities.

Share of total outbound M&A(%)

Share of total GDP of RDE countries (%)

Relative Importance of Outbound M&A by Rapidly Developing Economies (RDEs), 2000–2004

= 50 outbound M&A transactions

South Africa

Malaysia

0

10

20

30

Brazil

Russia

China

India

More active acquirers

Less active acquirers

10 20 30

Mexico

Turkey

E X H I B I T 5

CHINA HAS HUGE POTENTIAL FOR MORE OUTBOUND M&A

SOURCE: Thomson Financial Worldwide Mergers & Acquisitions database.

NOTE: The analysis was based on 776 M&A transactions of targets in developed countries by acquirers in 13 rapidly developing economies, 2000–2004.

14 BCG REPORT

1. Big players will return to the global M&A stage.Despite some early failures, the appetite for globalexpansion on the part of major Chinese companiesremains strong. They see M&A as an increasinglyimportant tool for becoming global competitors,and they are actively looking for deals. In thefuture, however, they will avoid takeover battles infavor of deals with willing sellers.

2. Deals will take place on a much broader indus-try and ownership base. Look for more M&Aactivity in strong export sectors such as consumerelectronics, home appliances, automotive, andshipping, as well as from companies in China’sfast-growing private sector.

3. Private equity will play a leading role. Inter-national private-equity firms will actively bringnew deals to Chinese acquirers.

S I X P R E D I C T I O N S F O R C H I N E S E M & A

4. Developing world-class M&A and integrationcapabilities will be key. For Chinese companies,organic growth alone will not be sufficient. Tosucceed at M&A, they must address the chal-lenge of effective execution.

5. The most successful deals will be win-win. Tobridge the capability gap and increase the proba-bility of success, Chinese acquirers will increasinglyuse partnerships in which the acquirer benefitsfrom the management and integration capabilitiesof the divesting company and the seller realizessuperior value through ongoing revenue streamsand the potential for later capital gains.

6. Everyone will be looking to make a “China play.”The drive for global scale will require any companywith global aspirations to consider a possiblecross-border M&A transaction involving China.

The Performance of Chinese Outbound M&A


To evaluate the recent performance of Chinese out-bound M&A, we analyzed 16 transactions that havetaken place since 2001.4 We measured the relativetotal shareholder return of the acquiring compa-nies at five days before the announcement of thedeal and at five days, six months, and one year afterthe announcement.5 Given the small sample size,the brief time period studied, and the inefficienciesin the Chinese stock markets, the results of thisanalysis are in no way definitive. Still, they do sug-gest some intriguing potential trends that are wor-thy of additional research.

Superior Average Performance but Considerable Divergence

Nearly two-thirds of the deals in our sample createdvalue in the first year after announcement. (SeeExhibit 6.) Given the industry rule of thumb thatroughly two-thirds of mergers typically destroy value,this finding suggests that Chinese outbound M&Ashave, on average, delivered superior performance.

A closer look at the data, however, reveals consider-able divergence in performance, depending on thedegree to which the deal in question required the

integration of the two operations. We divided oursample into two groups. We looked at eight deals inwhich the need for integration was comparativelylow. These were either strategic investments, inwhich the Chinese company bought a minoritystake and the foreign owner remained in control ofoperations, or they were acquisitions to gain accessto natural resources or stand-alone assets. We alsolooked at eight deals in which value depended onrealizing synergies and the need for integration was high.

The low-integration deals performed considerablybetter than the high-integration deals. (See Exhibit7, page 16.) The deals requiring minimal integra-tion delivered approximately 15 percent in addi-tional value, whereas the deals requiring substantialintegration actually destroyed value. (The passivestrategic investments created even more value—nearly 30 percent. See Exhibit 8, page 16.) Thisfinding seems to suggest that while investors are infavor of international expansion, they are skepticalabout the capacity of Chinese acquirers to success-fully integrate foreign acquisitions.

Obstacles to Success

They are right to be skeptical. On the basis of ourexperience advising Chinese companies, we believethat the greatest weakness of many Chinese acquir-ers is their lack of a world-class M&A capability. Atthe strategic level, Chinese acquirers typically donot have a clearly defined view of the role of M&Ain their globalization strategy and, as a result, theytend to respond opportunistically to deals as theybecome available. They are relatively inexperi-enced at managing a portfolio of businesses acrossdiverse markets. They often lack a deep under-standing of customers, competitors, distributionstructures, and the regulatory environment in theirtarget markets. And their management informationsystems, governance structures, managerial skills,

4. All the acquirers are listed on the Hong Kong, Shanghai, or Shenzhenstock markets. None has completed any other transactions in the periodunder study.

5. Relative total shareholder return compares a company’s total share-holder return to the relevant market index.

n = 16At announcement1 One year after

announcement

Value created

Value destroyed 38%

56% 62%

44%

E X H I B I T 6

EARLY INDICATIONS SUGGEST THAT CHINESEOUTBOUND M&A HAS OFTEN CREATED VALUE

SOURCES: Datastream; Thomson Financial; BCG analysis.

NOTE: Value is created when the relative total shareholder return (RTSR) of

the acquiring company is greater than 0; value is destroyed when RTSR is less

than 0. RTSR measures the total shareholder return of the acquiring company

relative to the performance of the stock market index for the market where the

company is listed.

1Change in average RTSR from five days before announcement to five days

after announcement.

16 BCG REPORT

E X H I B I T 7

CHINESE COMPANIES ARE BETTER INVESTORS THAN ACQUIRERS


1The index measures the total shareholder return of each acquiring company relative to the performance of the stock market index in the market where the company is listed.

The share price five days before the announcement date (T–5 on the horizontal axis) equals 100.

6 months 1 year

RTSR index1

Definition

Passive acquirer holds minority share, no involvement in operations

80

100

120

140

105.6106.5

128.8

115.8

104.8

100.8

91.3

Seller keeps stake in newly formed business for limited time

Acquirer with 100% stake, no more parent involvement

Traditional acquisition (n = 10)

102.2

Strategic investment (n = 4) Partnership (n = 2)

102.5

T–5 T+5

E X H I B I T 8

PARTNERSHIPS MAY IMPROVE THE CHANCE FOR SUCCESSFUL INTEGRATION

89.2

96.0

99.9

115.7116.7

104.1

6 months 1 year

Low-integration deals (n = 8) High-integration deals (n = 8)

Strategic investments or acquisition with focus on stand-alone assets or resources

Majority stake with the purpose of integrating operations to achieve synergies

80

100

120

140RTSR index1

Definition

T–5 T+5


1The index measures the total shareholder return of each acquiring company relative to the performance of the stock market index in the market where the company is listed.

The share price five days before the announcement date (T–5 on the horizontal axis) equals 100.


and corporate processes are less well developedthan in large global firms.

At the operational level, they have yet to developeffective processes for target identification, valua-tion, and postmerger integration. They do not gen-erally possess best-in-class operations that could eas-ily be transferred to their targets. Nor are theyexperienced in eliminating duplications and wastein newly combined operations. As a result, they findit difficult to achieve the kinds of synergies thatgenerate most of the value in an acquisition.

Chinese companies alsoface major cultural barri-ers when it comes to inte-grating a non-Chineseacquisition. To be sure,any postmerger integra-tion must navigate oftensubtle differences in the cultures of the mergedentities. But the differences between how Westerncompanies and Chinese companies operate areextensive. Chinese companies tend to be highlyentrepreneurial. Often, they are run by a smallgroup of owner-managers who create a strong patri-archal culture characterized by personal loyalty.They make decisions quickly without a lot of analy-sis. They also lack process discipline, and theirmanagement processes tend to be disorganized.Integrating this kind of corporate culture with themore professionalized managerial cultures of mostWestern companies requires an even higher thannormal degree of sensitivity, determination, andflexibility. (See the sidebar “A Checklist for theChinese CEO,” page 18.)

Finally, these obstacles are exacerbated by the factthat, in many cases, Chinese acquirers are taking onespecially difficult deals—where the target com-pany is either losing money or has already gonebankrupt. This is due partly to their inexperience,partly to their sense of urgency about achievingglobal scale, and partly to the fact that politicalopposition frequently prevents them from winningthe most attractive deals. (Witness the negativepolitical reaction to CNOOC’s proposed acquisi-tion of Unocal.) It is hard enough for a Chineseacquirer to manage a U.S. or European company. Itis even more difficult when the challenge is to turnaround a failing enterprise that local managershave been unable to revive.

Emergence of the Temporary Partnership Model

To overcome these managerial obstacles, someChinese companies have embraced a hybrid integra-tion model that combines an outright acquisitionwith a temporary partnership between the Chineseacquirer and the Western seller. These partnershipssometimes take the form of a joint venture in whichthe acquirer holds the majority stake but the sellerretains a minority interest. Additional agreementsensure access to jointly used assets like saleschannels and to intellectual property such as patents

and brands. Both thejoint-venture agreementand any subsidiary agree-ments are typically limitedin time.

One example of this kindof partnership between

buyer and seller is TCL’s acquisition of Thomson’stelevision business. The two parties established ajoint venture, known as the TTE Corporation, inwhich TCL has a 67 percent share and Thomsonthe remaining 33 percent. The joint ventureincludes Thomson’s R&D centers in Germany,Singapore, and the United States; production facil-ities in Mexico, Poland, and Thailand; and approx-imately 9,000 former Thomson employees. It alsohas a long-term license to use Thomson’s brands(Thomson in Europe, RCA in North America) anda license to use Thomson’s patents (with the rightto negotiate further use for a fee after the licenseexpires). Thomson receives a royalty based onTTE’s earnings before interest and taxes. After 18months, Thomson also has the option to swap itsequity in TTE for equity in TCL.

Lenovo’s IBM deal is also structured as a temporarypartnership. As part of the acquisition, IBM took an18.9 percent equity stake in the Chinese companyand signed a five-year cooperation agreement.Lenovo took outright ownership of IBM’s R&D cen-ters in Japan and North Carolina and its ThinkPadfactory in Shenzhen and thus became the employerof some 10,000 former IBM employees. Lenovo alsolicensed the IBM brand for five years. Lenovo prod-ucts will be supported by IBM’s sales-and-marketingorganization, and IBM’s service organization willbe the preferred supplier of Lenovo leasing, war-ranty, and maintenance services. In exchange, IBMreceives licensing fees for use of its sales channels

Chinese companies find ithard to achieve the synergies

that generate most of the value in an acquisition.

18 BCG REPORT

as well as commissions on any leads that IBM per-sonnel generate for Lenovo.

The temporary partnership model is attractive toboth sides. From the perspective of the Chineseacquirer, such partnerships help smooth the inte-gration of a major acquisition by ensuring the con-tinuity of key management and technical personneland, over the long term, by transferring Westernmanagement capabilities to the Chinese company.They also provide a way for the Chinese company tobenefit from valuable assets, such as brands andintellectual property, that the Western partner isunwilling to sell. From the point of view of theWestern company, partnerships can be a way to exitan unattractive business while still participating in

ongoing revenue streams with minimal businessrisk. In some cases, the acquirer may even be anattractive partner for the seller in penetrating theChinese market.

When well structured, temporary partnerships giveboth partners an incentive to make the deal work.6

Although the sample size is far too small to drawgeneral conclusions, we note that the two joint-ven-ture partnerships in our sample do outperform themore conventional acquisitions. Whereas the pas-sive strategic investments in our sample created themost value—nearly 30 percent—the temporarypartnerships also created value. By contrast, con-ventional acquisitions requiring significant integra-tion destroyed value.

6. For more detail on the strategic and managerial challenges of corporate partnerships, see The Role of Alliances in Corporate Strategy, BCG report, November 2005.

• Ensure that strategy drives opportunity. Don’t justreact to the latest deal your investment bankersbring you. Define the role of M&A in your global-ization strategy and start evaluating potentialacquisition candidates now.

• Don’t be afraid to get your feet wet. Start byexpanding organically to better understand over-seas markets and, in parallel, start building oracquiring M&A capabilities.

• Do robust due diligence. Often ignored factorssuch as intellectual property rights, local laborlaws, and environmental standards can turn out tobe deal breakers. Make sure you give them suffi-cient attention before making a commitment.

• Create win-win transactions. The best deals arethose in which both parties achieve their goals.Design a structure that gives the seller incentivesto help the merged entity succeed.

A C H E C K L I S T F O R T H E C H I N E S E C E O

• Be sensitive to cultural differences. Typically,Western companies have explicit processes fordelegation, accountability, and transparency. Makesure you design the organizational structure andcommunications practices of your integrated oper-ations accordingly.

• Retain key people in the target organization. Theywill play a central role in transforming the newentity into a global competitor. Make them yourallies.

• Define and communicate clear synergy targets.Creating value through integration requires explicitrevenue and cost synergies. Define them inadvance and then use them to drive the post-merger integration.

• Drive the integration process aggressively. Makesure to use proven postmerger-integration pro-cesses and techniques.

Strategic Implications for Western Companies


For Western companies, Chinese outbound M&A is apotential competitive threat—but also an opportu-nity. On the one hand, the entry of an aggressivelow-cost Chinese competitor into an establishedglobal industry or market may change fundamen-tally the competitive dynamics of an industry. On theother, a Chinese acquirer may be the best candidatewhen it comes to exiting a business that is no longerattractive. To assess the precise strategic implica-tions, we suggest a three-step process.

Understand the Impact of Chinese Global Players

For starters, every Western company needs todevelop a detailed understanding of how its indus-try will be affected by new competitors from China.A good grasp of the competitive strengths andweaknesses of potential new Chinese players—byindustry segment, by region, and by growth strategy(organic versus acquisition)—is indispensable.Who are these likely new entrants, and what aretheir expansion strategies? Which steps of the valuechain will be affected?

Rethink Long-Term Strategy

Once a company understands the specific marketsegments and geographies that Chinese challengersare likely to attack, it is in a position to make fun-damental decisions about where it wants to com-pete in the long run and how it wants to respond tothe new entrants. It needs to identify the deepestand fastest-growing profit pools, and it needs to fig-ure out where the company’s value proposition,capabilities, and innovation power will be most rel-evant. The company must also make sure that itscost structure is in line with that of potentialChinese competitors and that it has an effectiveintellectual-property strategy for protecting its mostprofitable assets from low-cost competition.

Reassess Strategic Options

Once a company has made fundamental decisionsabout which markets to focus on, a hard look at rel-

evant Chinese global challengers should also informdecisions on how to implement the long-term strat-egy. This is partly a question of improving the com-pany’s competitiveness against its new competitors.But even more important, it also means assessingopportunities to cooperate with Chinese companies inorder to achieve one’s own fundamental goals. Formany companies, collaboration with a Chinese part-ner or full divestiture to a Chinese acquirer can bean effective way to minimize business risk or to com-pletely exit sectors that are no longer profitable ornot vital to a company’s competitive strategy.7

Even when an incumbent’s management teamdecides to retreat from a market segment, partner-ship with a Chinese player can be the right strategyfor staging this exit. In the case of an outright sale,a Chinese company may be willing to pay more fora business than a domestic competitor, because thedeal involves exactly the sort of assets—intellectualproperty, brands, distribution channels in maturemarkets—needed to offset the Chinese company’scurrent weaknesses. As discussed above, a tempo-rary partnership might in many cases create morevalue than an outright sale. (For more on this sub-ject, see the sidebar “Some Questions to ConsiderBefore Divesting to a Chinese Acquirer,” page 20.)

* * *

Far from being a short-term fad, Chinese outboundM&A is only one part of an even broader phenom-enon: the transformation of the global economy bya new generation of competitors from rapidly devel-oping economies. The arrival of this new genera-tion of global players is perhaps the most importantof the trends that will shape the world economy inthe years to come.

To take their place on the global stage, however,Chinese competitors will have to significantlyimprove their M&A capabilities—in particular,their ability to integrate new acquisitions effec-tively. And Western incumbents need to start nowto assess both the opportunities and the threats thatChinese outbound M&A represents for them—andto adapt their corporate strategies accordingly.

7. For more on divestiture, see “The Right Way to Divest,” BCG Opportunities for Action in Corporate Finance and Strategy, November 2004.

20 BCG REPORT

A Western company thinking of selling a business toa Chinese acquirer needs to answer three questions:Does it make sense to sell to a Chinese company?Should the deal take the form of a temporary part-nership? Who is the most appropriate partner?

Should we sell to a Chinese company?

• Do we have an established brand, intellectualproperty, sales relationships, or other assets thatmight be valuable to a Chinese company?

• Is the deal likely to cause domestic political oppo-sition—and if so, how will we manage it?

• Is there additional value in partnering with aChinese acquirer by bundling products or serviceswith the M&A deal?

• Will a relationship with a strong Chinese partnerhelp us gain access to the Chinese market?

Should the deal take the form of an alliance?

• What is the potential for generating a continuousrevenue stream from licensing fees for brands orintellectual property, sales commissions, or feesfor back-office support?

• Is the newly established business worthy of con-tinued investment?

S O M E Q U E S T I O N S T O C O N S I D E R B E F O R E D I V E S T I N G T O A C H I N E S E A C Q U I R E R

• Does the Chinese partner need the incumbentmanagement in order to succeed?

• Is a strong partner in the divested business impor-tant to the success of our remaining core busi-nesses?

• Would the absence of an alliance substantiallydecrease the value of the sold business in the eyesof investors?

• If we do decide to partner, what is our long-termexit strategy?

Who is the most appropriate partner?

• Is the acquirer a viable player with products ofinternational quality and a leading position in theChinese market?

• Does the acquirer have a clear vision and strategyfor the merged business?

• Does it have the ability to leverage—and not dam-age—the brand?

• Can we contain the risk of the acquirer becominga competitor in our remaining businesses?

• Do we and the acquirer have a shared view of howto govern the partnership effectively?

For a complete list of BCG publications and information about how to

obtain copies, please visit our Web site at www.bcg.com.

To receive future publications in electronic form about this topic or others,

please visit our subscription Web site at www.bcg.com/subscribe.

The New Global Challengers: How 100 Top Companies

from Rapidly Developing Economies Are Going Global—and

Changing the World

A report by The Boston Consulting Group, May 2006

Organizing for Global Advantage in China, India,

and Other Rapidly Developing Economies

A report by The Boston Consulting Group, March 2006

The China Rip Tide: Threat or Opportunity?

A white paper by The Boston Consulting Group, January 2006

A Game Plan for China: Rising to the Productivity Challenge in Biopharma R&D

A Focus by The Boston Consulting Group, December 2005

“Successful M&A: The Method in the Madness”

Opportunities for Action in Corporate Finance, December 2005

Balancing Act: Implementing an Integrated Strategy for Value Creation

The 2005 Value Creators Report by The Boston Consulting Group,

November 2005

The Role of Alliances in Corporate Strategy

A report by The Boston Consulting Group, November 2005

“Spurring Innovation Productivity”

Opportunities for Action in Industrial Goods, November 2005

“The New Economics of Global Advantage: Not Just Lower Costs

but Higher Returns on Capital”

Opportunities for Action in Operations, July 2005

“Winning in Today’s Chinese Automotive Market”

Opportunities for Action in the Automotive Industry, June 2005

“Globalizing R&D: Knocking Down the Barriers”

Opportunities for Action in Operations, May 2005

“Globalizing R&D: Building a Pathway to Profits”

Opportunities for Action in Operations, May 2005

“Avoiding Supply Chain Shipwrecks: Navigating Outsourcing’s Rocky Shoals”

Opportunities for Action in Operations, March 2005

Navigating the Five Currents of Globalization: How Leading

Companies Are Capturing Global Advantage

A Focus by The Boston Consulting Group, January 2005

“The Right Way to Divest”

Opportunities for Action in Corporate Finance, November 2004

Growing Through Acquisitions: The Successful Value Creation

Record of Acquisitive Growth Strategies

A report by The Boston Consulting Group, May 2004

Capturing Global Advantage: How Leading Industrial Companies

Are Transforming Their Industries by Sourcing and Selling in China,

India, and Other Low-Cost Countries

A report by The Boston Consulting Group, April 2004

“What Is Globalization Doing to Your Business?”

Opportunities for Action in Industrial Goods, February 2004

The Boston Consulting Group has other publications on China, globalization, and M&A that may be of

interest to senior executives. Recent examples include:

www.bcg.com

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