Clarify the purpose of the transaction
2、 To expand te sales market and digest excess capacity.
3、 To eliminate competitors and consolidate the market position.
4、 Transferring the origin of products to avoid anti-dumping, countervailing, and other trade protection measures.
5、Use foreign cheap factors of production to reduce production costs.
6、 To acquire foreign technology, patents, brands, data, or other intellectual property rights.
7、 Access to special natural resources.
8、 Use of M&A targets to increase the buyer’s visibility.
9、 Diversifying revenue sources and hedging exchange rate risks.
10、 Integrating upstream and downstream resources to achieve industrial integration.
Understand the counterparty
The buyer can gain insight into the seller’s value orientation, character and reputation, thinking style, behavior, negotiation style, economic status, and motivation, which will help the buyer to judge the feasibility of the transaction, design the transaction structure, determine the valuation and offer, develop negotiation strategies and control the transaction process.
They are selling their companies because of serious difficulties or crises, such as insolvency, criminal involvement, government sanctions, etc. The only purpose is to get rid of the burden, even at a favorable price as bait. In the face of such sellers, buyers have to realistically weigh whether they should pick up this bargain and whether they can fill the hole behind it.
There are many ways to get to know the seller, including positive, lateral, and negative methods. Asking the seller himself, checking with government agencies, and accessing bank credit records are common positive investigations.
Side investigations can include the target company’s customers, suppliers, partner organizations, employees, subcontractors, agents, etc. Doormen, receptionists, and cleaners are said to be one of the most valuable sources of information.
Conducting some activities outside of business with the selleris also a good way to conduct site surveys. For example, a major reason why playing golf is so popular with business people around the world is because it can improve mutual understanding and knowledge in a relaxed atmosphere.
The reverse side of the investigationcan start from the seller or target’s competitors, disputing parties or parties in conflict of interest, for example, to ask the target who has recently had litigation with the seller or target company, etc. If you can do all three, the buyer will not be far from “knowing the enemy and knowing himself”.
Targeted Due Diligence
Be more rational in valuation
The asset approach is generally based on the book value or liquidation value of the target assets and is usually applicable to loss-making enterprises or asset acquisitions.
The market approach is relatively simple, i.e. the pricing of similar companies or past similar M&A transactions is used as the reference value for valuing the target company or assets.
All three methods are based on financial statements and research data, which appear to be objective, but in fact, are all susceptible to subjective factors.
In short, maintaining a moderate level of pessimism and humility when valuing M&A targets can put buyers in a safer position.
Complete the deal in stages
Even if a phased acquisition is not possible, the buyer can at least consider paying in installments,lengthening the payment interval, and setting stricter preconditions, which can achieve a similar risk-averse effect.
Plan your M&A well in advance
Integration plan: What synergies can be realized from the acquisition? In what areas will the acquired company need to integrate to achieve synergies? What are the general steps of integration? How much will the integration cost?
Implementation plan: What are the steps to be taken to implement the acquisition? What governmental approvals will be required? What third-party cooperation is required? What intermediaries will be hired? What kind of M&A task force should the buyer assemble?
Time plan: How long is the acquisition planned to be completed? How much time is expected to be spent on each step? What are the variables that may delay the progress of the acquisition?
Buyers should be conservative and cautious when planning an M&A and should not be overly optimistic, as M&A involves many participants and stakeholders, and changes in any one of them can have a butterfly effect on the entire transaction.
For example, failure to incorporate the BVI shell company as the subject of the acquisition on time will delay the signing and delivery of the transaction. Therefore, leaving more leeway in every step and indicator will help make the M&A plan more objective, pragmatic, and closer to the actual execution results of the transaction.
Purchase M&A Insurance
Third, it is often difficult for a buyer to pursue a seller for breach of contract without lengthy and expensive judicial proceedings, especially for cross-border claims; even if the buyer is successful, it may be difficult to obtain actual compensation due to enforcement difficulties (the seller is insolvent or the seller’s assets are scattered in different jurisdictions).
Finally, in cases where the seller retains a portion of the equity or continues to participate in the company’s operations after the acquisition, the buyer’s claim is not conducive to maintaining a cooperative relationship and negatively affects the post-merger integration, with the buyer still losing out in the end.
As a hedging tool, M&A liability insurance can effectively alleviate the above conflicts. The principle of M&A liability insurance is to transfer the seller’s liability for breach of contract to the insurance company, which provides protection to the buyer through its own financial strength and credit.
For example, the most popular type of liability insurance is a representation and warranty policy, which, under the terms of the policy, allows the buyer to recover from the insurer in the event of a breach of representations and warranties made by the seller in the M&A agreement, without having to recover from the seller.
Of course, there is no conflict between the insurer’s claims and the M&A agreement’s liability for breach of contract, and the buyer can still recover from the seller under the M&A agreement for losses that are not covered by the insurance (e.g., losses up to the deductible and losses above the liability limit).
Compared with the default liability clause, the advantages of M&A liability insurance mainly include:
It can significantly increase the amount of compensation and enhance the protection for the buyer;
The insurance period canexceed the liability period promised by the seller, so that the buyer has more sufficient time to discover defects and seek compensation;
The buyer candirectly obtain compensation from the insurance company without seeking judicial remedies; fourth, through the transfer of liability, it is conducive to buyer and seller to establish and maintain a good relationship and improve the success rate of the transaction and integration.
Currently, in addition to representation and warranty liability insurance, M&A liability insurance available for purchase in the international market includes tax liability insurance, litigation buyout insurance, environmental liability insurance, fraudulent conveyance, and successor liability insurance. M&A liability insurance entered the Chinese market around 2010, and Chinese buyers can purchase liability insurance applicable to domestic or cross-border M&A in China.
Good cultural integration
Fusion, in which a new culture is created that is different from the existing culture of both parties;
Assimilation, in which one party accepts the culture of the other party in its entirety;
Separation, in which each party retains its original culture. Therefore, when to integrate, how to integrate, how fast to integrate, and to what depth should be considered under the framework of strategic objectives.
Overseas M&A is a risky challenge for both Chinese multinational groups that are among the top 500 companies in the world and Chinese private companies that have just stepped out of the country.
The challenges come from the external environment, from the counterparties, and from the Chinese buyers themselves. Chinese buyers cannot influence the external environment, nor can they control their counterparties, so they have to find their own path to reduce risks and approach success. Experience shows that a Chinese buyer can effectively improve the success rate of a transaction by doing a good job in eight areas: transaction purpose, counterparty profile, due diligence, subject valuation, transaction steps, M&A plan, risk transfer, and cultural integration.