Helping to get the deal done

December 05, 2013 | BY

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Thomas Eastling, director of advisory services for American Appraisal in Hong Kong, spoke to David Tring about the work he is doing on China M&A and how domestic companies still have a lot to learn when it comes to cross-border transactions

What is American Appraisal?

American Appraisal is the leading international independent valuation company, with history of over 100 years. We provide fair market valuation services for all types of assets that appear on a corporate balance sheet. The company has a global network of offices. The Hong Kong office opened in 1977 and mainland operations began in 1994. In addition to the Hong Kong headquarters, we currently have offices in Beijing, Shanghai, Guangzhou, Taipei and a domestic affiliate valuation firm in Shenzhen. Our clientele includes both Chinese domestic firms and multinational corporations (MNCs). We offer both international and domestic (statutory) valuation services.I am in charge of transaction advisory services at American Appraisal. This is part of the company's drive to offer more high value-added services. For Asia, this comprises of mostly M&A, but in Europe this would be corporate finance.

What are some of the biggest challenges with due diligence?

As in any emerging market, buyers in China have to be willing to dig a little deeper than the standard legal, accounting and business due diligence steps in Western markets. This includes deep background checks on executives and suppliers or forensic accounting investigations into potential corruption issues. Foreign buyers have become much more savvy regarding due diligence these days in China, but surprises can still occur even to the wary. The problems Caterpillar had with a major acquisition last year shows how a financially astute company can still run into problems.

What are some of the main lessons Chinese companies need to learn when doing outbound M&A?

A growing part of our M&A practice now involves outbound transactions for Chinese buyers. As was the case in Japan during the late 1980's, Chinese companies are now experiencing a very steep learning curve in the challenges of cross-border M&A. Such challenges include a lack of English capabilities among the management staff of most Chinese firms, unfamiliarity with the different labour practices and tax regimes in foreign markets and most importantly the necessity of having a good implementation plan for the acquired entity once the deal is done.However, this is definitely changing, especially as Chinese companies increase their foothold around the world. China National Offshore Oil Corporation (CNOOC) is an example of a company that has gone very far in the past decade. The outfit's recent deal with Nexen shows how sophisticated they have become as they learn from each acquisition. Most of the companies I deal with do not have in-house teams, but this will change as they expand. Many Chinese companies are also not willing to pay fees for advisory outfits, but when something goes wrong, you have to have an advisory firm on-board.

Any highlighted deals you have worked on over the past year?

Much of the deals reported in the press are the large, natural resource acquisitions by the major Chinese state-owned enterprises. However, many mid-sized Chinese businesses are also actively seeking opportunities in the overseas markets to acquire technology, markets and customers. Our M&A focus is on cross-border deals in the small to mid-capital sector. These deals are too small to be of interest to the major investment banks and beyond the reach of the domestic financial advisors to be able to facilitate. Our bread and butter are cross-border M&A deals in the range of US$20 to $50 million that occur on a fairly steady basis through economic cycles.

What are some of the trends you are seeing in the M&A space?

The most interesting trend in my opinion is the rising potential for significant growth in M&A deals in the Chinese domestic market. This trend is being driven by the lack of liquidity for many private Chinese firms to fund their business, the inability of private equity firms to exit their investments through the traditional IPO market and the government's push for consolidation in industry sectors to produce national champions. All of these drivers will encourage a growing number of M&A and restructuring deals in China for well-positioned local advisory firms.

Another trend I have noticed in the past year is that more and more multinational corporations are looking to buy-out their joint-venture partners. One driver of this buyout trend is the substantial rights of minority investors in China to influence the MNC's offshore M&A activities that involve the Chinese operations. Although severing ties with the Chinese partner may also adversely affect the local business, many MNCs are still opting for complete control as opposed to the traditional JV setup. For example, we have seen our clients in the food and manufacturing sectors pursuing the buy out of their minority partners.

What are some of the major issues foreign clients have when doing M&A in China?

As many multinationals operating in China looked to restructure outstanding entities and buy out joint venture partners, foreign companies are coming under increasing scrutiny by the State Administration of Taxation (SAT) on the implication of capital gain taxation liability from thesetransactions. In conjunction with our associated Chinese valuation firm, we see a growing demand for our valuation services to assist foreign clients to document and support their transactions in China to protect against a potential capital gains tax exposure.

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