How To Succeed In Cross-Border Merger And Acquisition Deals In China

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Foreign direct investments have been increasing for the past few decades.

According to Baker & McKenzie for multinational companies venturing into China through Mergers and Acquisitions there are eight essentials that these companies need to be aware of in order to succeed.  They are as follows:

1. Knowing your China counter-party
2. Conducting deep due diligence
3. Structuring the deal
4. Navigating government approvals
5. Satisfying valuation requirements
6. Designing payment structures
7. Finalizing transaction documentation
8. Integrating the China target into your global business

Knowing Your China Counter-Party

Among the most challenging factor is knowing your China counter-party as there may be cultural and language barriers in addition to differing priorities and ways of doing business.

However, it is worth taking the time to do so since the cost of doing business with an incompatible business partner could be painfully high.

In China private parties are more commercially driven while state owned entities are more driven by non-commercial factors such as policies and politics. State owned parties are more bureaucratic.

In China saving face and building relationship are vital for negotiation and future business deals.

The chief negotiator may not the final decision maker but that person can help build relationship with the big boss. Dinner after the formal negotiation during the day and providing gifts are all part of the relationship building and negotiation process.

Knowing Your Target by Conducting Intensive Due Diligence

Accounting frauds, regulatory non-compliance and corruption are not uncommon in China.

Customs, non-reporting of offshore capital gains, transfer pricing issues, VAT and payroll tax underpayments are all potential areas of tax audits and tax assessments.

Poor record-keeping practices are also common.

As such, it is important to identify key areas of concern early in the deal investigation process and invest time and resources to prioritize real issues and determine practical solutions.

Obtaining Government Approvals Is Also Complex And Time Consuming

If Target business requires special licenses/permits Buyer needs to take into account the fact that these licenses and permits may not be readily transferable.

Therefore, it is important to understand approval requirements at an early stage and build accountability into the deal process by requiring China counter-party to obtain timely governmental approvals.

Asset deals may be preferable but may be more complicated and less preferred by the seller.

Valuation Requirements Must Be Met For Regulatory Approvals

It is important to use trusted valuation advisors and agree upon valuation methodology and parameters with the valuation firm. Buyer should actively involve in and monitor such processes.

Sometimes regulatory requirements may dictate a certain valuation method which may not reflect the fair business value of Target.

Designing Payment Structures

Seller may require full payment within one year or payments to be made outside of China. However, buyer’s interest may not be the same, and therefore buyer should consider use of installments, earn-outs, holdbacks and set-offs to back-stop indemnities.

Finalizing Transaction Documentation

China counter-party might not be agreeable to western style agreements. M&A and JV agreements must be governed by China law.

Buyer should take time to negotiate and educate themselves and counter-party for the appropriate legal documents. Close monitoring and proactive approach to drafting and translating legal documents are recommended. Binding arbitration in an offshore venue may be preferred.

Integrating The China Target Into Your Global Business

To maximize value from the M&A deal a smooth hand-over of target operations is required. To avoid compliance defects and resistance to change from incumbent management or employees Buyer and Seller’s operational teams should be involved in the diligence and closing stages. Buyers may want to retain and closely control key managers of Target company. Robust training and monitoring programs will help ensure a smooth transition.

Finally, Expect the Unexpected – there are always some surprises after the deal is closed.

In accordance with Circular 230 Disclosure

Director of Taxes with over 16 years of progressive experience in international corporate tax gained in Big 4 accounting firms and multinational companies in the U.S., Canada and Hong Kong.

Experience in leading a group of tax professionals and hands-on skills in income tax provision and reporting, income tax treaties, transfer pricing , international tax planning and tax audits.

One comment

  1. Kat Jennings says:

    Yvette, thank you for an excellent article on multinationals conducting business in China. Your expertise on doing business in these companies coupled with your strength in tax reporting, treaties and transfer pricing is very valuable to all who read your advice. Great job!

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