China: Effective Integration: The Key To Success Of Overseas Investment

Last Updated: 31 January 2018
Article by Zhong Lin

Overseas merger & acquisition (M&A) provides an effective approach for Chinese companies to embrace the global economy and diversify their portfolio across the world.

Overseas merger & acquisition (M&A) provides an effective approach for Chinese companies to embrace the global economy and diversify their portfolio across the world. Closing of overseas M&A deals only marks the first step towards successful overseas investment. More importantly, buyers need to have overall plans and strategic integration approaches in place to address subsequent issues related to integration, such as design of governance structure, formulation and alignment of rules and policies, and arrangements concerning equity incentives and employment contracts.

Integrating governance structures to prevent and control risks

A well-defined management system and power structure is the precondition for ensuring proper management and governance of the target. Therefore, since the due diligence stage, a Chinese buyer needs to take full account of the target's organizational structure, rules of procedure, remits and duties of the management, and decision making mechanism for significant issues. With overall strategies in mind, it should then proceed to establish a governance structure and design a solution for integrating with management organs, rules, policies, management and control approaches of the target, which will provide a foundation for effective management and control over the overseas target.

Once control over the target is acquired, the buyer should leverage the expertise of an experienced attorney team to identify positioning of the target in line with its development objectives and present conditions, design a governance structure with horizontal integration and vertical control in mind, and draft corporate governance rules and policies to define powers and duties of shareholders, the board of directors, general manager and officers, so as to ensure effective integration at corporate structure level.

Integrating the core team to maintain stability of the entity

Maintaining a steady core team and retaining key talents is also crucial for achieving effective integration. Several measures should be taken to ensure this. Firstly, at the outset of the M&A transaction, the buyer should fully assess the risk of losing the core team, and analyze why it wants to leave and how to keep the core team stable and retain talents. With assistance from an attorney team experienced in providing employment related legal services, it should develop a well-organized employee management policy and draft a carefully crafted sample employment contract that contains, among other things, non-compete and confidentiality clauses. Meanwhile, it should work out talent retention and incentive programs, which may include competitive remuneration packages and equity incentive plans.

Secondly, in consideration of the sentimental impact that the deal and subsequent handover may have on employees, a dedicated internal communication mechanism should be established to strengthen dialogue and exchange with employees. Finally, developing an international talent pool to build a strong expatriate team should be put as a priority, since international talents with pertinent training are able to drive integration of talents across the entity.

Driving business integration to achieve synergies

Normally an overseas M&A deal strategically aims at achieving business synergies so that core competencies of both the buyer and the target will be improved. Given the potential adverse impact that an M&A deal may have on existing suppliers and customer base, it is crucial to address relationship with external stakeholders properly, so as to maintain and develop the target's supplier resources, markets, customer base, channels and even brand effect and business model.

The buyer should put external publicity at the top of its agenda at the outset of the M&A transaction. Conveying the buyer's intention of takeover accurately and precisely and demonstrating its management and operation capabilities not only helps allaying concerns of stakeholders, but is also conducive to building trust and confidence in Chinese companies. Internally, thorough communication related to change of roles and duties should be conducted with employees of both the buyer and target to ensure transparency, consistency and continuity of internal rules and processes.

Completing technology integration to keep continuous growth

Chinese companies strive to go global because overseas M&A transactions provide them with access to advanced technologies and processes of targets and enable capital appreciation through optimized internal asset allocation.

Setting up policies and incentives related to technology research, development and maintenance will be conducive to achieving technology upgrading and building core R&D capabilities as well as the capabilities of maintaining and ongoing development of technologies, which in turn enables sustainable business growth. As integration of core technicians is concerned, while attaching significance to retaining and attracting core technicians, companies should also take appropriate measures to bring innovation capabilities of technicians into full play.

Driving cultural integration to enable holistic integration

Despite being the most challenging follow-up issue of overseas M&A deals, cultural integration is easily underestimated in terms of difficulty and process. Effective cultural integration should be built around the principle of "agreeing to disagree" and aim at exploring and absorbing merits in the target's culture so as to build an all-embracing, diversified corporate culture. For this purpose, when implementing the overseas M&A deal, the Chinese buyer should have appropriate cultural integration strategy and program in place for integrating its culture with that of the target in terms of code of conduct, philosophies and values.

Specifically, the information collection stage as part of preparation for the deal should cover cultural information of the target, including its logo, environmental facilities, working procedures, proceedings at meetings, code of conduct, daily etiquette, and approach of communication. Based on these details, an assessment and analysis that includes particularly comparison with the buyer should be conducted from multiple dimensions in order to work out an effective integration plan. It must also be noted that a progressive approach should be taken towards cross-cultural integration following an overseas M&A deal. Eagerness for quick results must be avoided.

A successful integration will enable complementation of advantages between the buyer and target as well as optimal resource utilization that drive synergies, improved operational competitiveness and maximized enterprise value. Effectiveness of integration will depend on the abilities to take strategic approach to integration the soonest possible and to properly cope with challenges arising in the integration process.

(The article was translated and first published by China Business Law Journal in its 2017 volume/ issue 7)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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