PMI strategies: Make it or break it

Lenovo, on the other hand, was successful in acquiring IBM's PC division – at least on paper. Even when the deal was announced, Lenovo's newly-retired chairman Liu Chuanzhi understood that making the merger work would present risks. “One is whether the new Lenovo will be accepted by IBM's clients and the PC market, and the second is whether IBM employees will still take pride in being employees of the new company,” he said at a press conference. He also noted that integrating the two corporate cultures would be challenging. He was very right. Post-merger, combining the companies proved to be a rocky test and many critics watching from the sidelines emphasised that Lenovo had not adequately prepared a PMI plan or thoroughly considered all the integration details. It had to marry two vastly different cultures (both corporate and national), manage highly complex logistics and supply chains, and on top of these, formulate strategies to push forth its newly-enhanced business in a highly competitive industry.

Bring experience aboard

So once a Chinese company has fixed its eyes on a foreign target and has committed resources to completing the acquisition, how does it begin its PMI approach? There are four main areas of risk to consider: commercial, legal, political and cultural. Most specialists agree that it is key to have at least one person on the assembled M&A team that has done the same type of deal before. “Chief of all, you must have someone who has experience with the target and the host country as this will lend you a lot of intel,” says Shanghai-based Sovereign Group consultant, Sunny Liew. “They will be able to explain to you the nuances and idiosyncrasies of the deal, who the people are, the PMI, and you can really just pick their brain.”

“Chinese companies should seek advice from management consultants or other advisers with strong PMI experience,” accords Carson Wen, a partner at law firm Jones Day. “Also they should bring to their management team executives, whether Chinese or foreign and whether on a permanent or ad hoc basis, who have ample experience with offshore acquisitions and on PMI.”

However, simply having a strong and experienced M&A team is not enough. “If you just send out the best people but they don't have the internal structural support of policies, internal guidelines, or IT systems, it's still going to be very hairy no matter how experienced or well-meaning they are,” cautions Chamorro. “You must have the internal structure and policies in place already,” he advises. “These aren't things you can create at the drop of hat.” He stresses that attention must be given to integrating customer relationship management (CRM) structures and control policies prior to deal completion.

The security question

Political or security risk is perhaps one of China's greatest initial barriers to making significant investments overseas. The CNOOC-Unocal case is always the poster child for this. “Someone as strong as China investing in a foreign country will raise a lot of red flags, particularly in key strategic industries,” says Liew. People often view deals by the Chinese multinationals as Chinese government actions. “They are trying to second guess what the government is really trying to do behind the deal, “says Zhang. Recognition of China's growing might is a sensitive spot for numerous countries, and PRC companies need to be aware of the climate they will encounter when going abroad.

On November 6, Sprint Nextel rejected China-based Huawei's and ZTE's bids for a multi-billion dollar network upgrading contract with the American telecoms provider. Although this wasn't an investment, it underscores the reality that countries, especially superpowers like the US, are wary of China's trajectory. It was reported in the media that the stonewalling was due primarily to national security concerns from Washington. Although the US Department of Defense didn't specifically name Huawei or ZTE, it told the Wall Street Journal that it “is very concerned about China's emerging cyber capabilities and any potential vulnerability within or threat to DoD networks.” The rejection came for Huawei even after it had done everything possible to allay fears with American consumers and politicians about being a security or commercial threat. It had hired numerous Washington lobbyists, lawyers, consultants, and PR firms to promote an amicable image. It even created an American distributor of its products called Amerilink Telecom that boasted an elite board which included a former high-profile US politician, the former World Bank president and a former chief executive of Nortel Networks.

Know the local scene

Despite the recent experience of Huawei, it is general wisdom to apply the use of PR firms and lobby groups if planning an acquisition, particularly when investing in the US. Many major Chinese companies are aware of this and have gone most of the way in the right direction with national governments or executive administrations, securing the appropriate approvals and winning the right friends. However, it's vital for potential Chinese investors to remember how important lobbying at the local level is too. “What I've seen with Chinese companies is they've learned the 'Washington part' quite well, but what they haven't come to grips with yet is the local part,” says Chamorro. “You need to lobby at the local level where you're going to make the investment, with local politicians, the local community and local stakeholders.” Chinese acquirers should find out what the local issues are, take time to understand them and address the concerns of the community. “It could be jobs or the environment or it might be a whole host of things,” continues Chamorro. “Once you find out, you can begin to spin your investment in a more positive way.”

Quite often the fear of Chinese companies is based on stereotypes or pre-conceived notions that the Chinese are out to “dominate” the world and squeeze out overseas businesses by wholly replacing them and altering local business structures to match their own. An analyst pointed out that although some countries may bleat the national security argument as an objection to a Chinese acquisition, it is in fact a commercial or socio-economic fear more related to the spectre of losing jobs than anything. “Chinese companies should try to build this image of China as a good corporate citizen, complying with local labour laws and other various laws,” says Zhang. “They need to show that they will do the right thing otherwise it will be a political disaster.”

Merging cultures

The risk of merging cultures-both local and corporate- is a much more pragmatic concern that requires attention almost as immediately as the due diligence process of a deal begins. In a 2009 Merger Market PMI-related survey, 50% of respondents answered that integrating conflicting management styles was the greatest obstacle to completing a cross-border M&A. “The challenges posed by cultural differences cannot be underestimated,” warns Chen. “There are undisputable differences in management systems, underlying ideology and employee relationships between Chinese and Western companies, not to mention worldviews and lifestyles, all impacting the PMI.” He says that there will likely be mismatches in organisational structures and processes between the Chinese acquirer and its target, so much that the risk of loss of key personnel and customers must be considered seriously. “Work should be done on the alignment of interests and incentives for the management and employees of the target, and the involvement of the management of the acquirer and target companies should be initiated sufficiently early in the M&A process to instill a sense of ownership on the part of the management teams in both sides of the table to the process.”

Almost all M&A specialists agree that companies should have someone who is familiar with both Chinese and Western (or wherever the target is located) cultures on the management team of the newly-merged company. “They [Chinese companies] need a bridge between the cultures, they need to engage in negotiations in a very tactful way, fully appraised of the laws and practice of the target country which is often very different from China's,” says Liew. “If they have someone who can bridge the gap, he or she will be valuable and can be somebody the Chinese can rely on, trust and take counsel from.” Zhang recommends continuing to hire local management after closing the deal. Not only is this especially true if the loss of jobs was a major concern of the community where the investment is located, but it is a pragmatic strategy to encourage smooth integration. “Keeping on local management could serve as a stabiliser,” said Zhang. “The Chinese can also hire a local consulting firm to give advice on local issues, or hire native overseas Chinese to join the management team too.”

Have internal structures already in place

PMI strategies should be detailed with broad goals and a timeline. Chinese companies must not view the M&A and PMI as separate processes, but should take a holistic approach from strategy to target identification to valuation to integration. “The devil is not only in the value proposition and synergy considerations, but also in the details as well,” says Wen. All company policies must be in compliance with the local jurisdiction where the Chinese company is acquiring or investing, so its legal and M&A teams must ensure this is handled. “The meat on the bones has to be the standard operating procedures (SOPs) and policies by which the acquiring company operates,” said Chamorro. “This has be something that's already there, you can't just create them on the fly.”

Starting with the basics is the first step to avoiding major PMI hiccups. “Do your homework,” echo both Chamorro and Zhang. Due diligence is vital to minimise risks, especially political ones, so companies ought to make sure they know exactly what the entire deal encompasses. Successful PMI involves much more than simply acquiring the asset, so sufficient resources should be allocated early enough to lay out the groundwork for strategies focused on executive management integration, operations integration, cultural integration, employment and company policies integration, information technology systems integration, product and technology integration, and other key components of the business. “The follow up of PMI is heavy lifting, it's a lot of detail and interpersonal stuff, and it's not fun and sexy like doing the deal is,” he says. “So that's why it often gets secondary importance or is not the first call on resources.”