We already discussed some basic concepts related to M&A in China. Today I would like to move forward and to spend some words about the evaluation of your Chinese target company. First it must be clear that one of the major effects of the previously mentioned
M&A Regulations 2006
is the valuation requirements for all types of eligible targets. While China has gone through considerable restructuring of its SOEs (State Owned Enterprises) since its reform and opening policy there is still work to be done. One clear decision of the 12
th
five year plan is that China should continue to consolidate fragmented business sectors and restructure SOEs. One of the major reasons why restructuring will continued to be encouraged in one form or another is that various reports (including the World Bank’s China 2030 report) show that from China’s reform in the late 1970’s till recently SOEs are 1/3 as efficient as private enterprises.
In regards to SOEs the State-Owned Asset Supervision and Administration Council (SASAC) has already decided and implemented plans to reduce the number of SOEs to 80 by 2020 (down from 120 in 2010). Most SOEs tend to have large and complex organizational structures with many business units. While this might be overwhelming it also offers many M&A opportunities if foreign investors can work on reorganizing and splitting these various business units into M&A targets. With nearly 40 SOEs planned to be dismantled in the coming years, opportunities abound for those that are savvy in their negotiation process.
Furthermore, China is pushing for wider based consolidations both publicly and private in a number of sectors in order to create large corporate entities that will help to make industrial development more efficient. The main drive in this effort was to restructure six key industries including automobiles, steel, cement, machinery, rare earths and aluminum. In the summer of 2011 three more industries were added to this list including manufacturing, IT and medical supplies and equipment. While foreign companies and capital are welcomed to aid in the process of consolidating these industries it must be understood that the majority of the transactions will be instigated by Chinese firms that are looking to consolidate within China or expand outside of China. Still opportunities abound particularly in Shanghai where the local government is putting in place policies to financially aid M&A transactions that will come from the restructuring of the industries mentioned above.
Foreign companies that try to engage in using M&A to gain access to the Chinese market through a former state-owned asset or company should employ extreme patience and relationship building as there are still elements withing China’s political, legal and business establishments that still do not look fondly on the restructuring of SOEs. While in the future China’s increased internationalization and market reform will outweigh such concerns they are something foreign investors could still encounter in the coming years and should therefore plan accordingly.
When the target company is “state-owned” the investor should discuss the proposed acquisition with the
State Asset Supervision and Administration Commission
(SASAC) to determine the value of the assets or of the equity to be acquired. (For further considerations on SOE reform and Stated Owned Assets supervision and Administration System reform visit:
http://www.chinareform.org/publications/reports/200504/t20050416_111305.htm
)
The
State-owned Asset Valuation Administrative Procedures 1991
and the
Regulations on Several Issues on the Valuation and Administration of State-owned Assets 2002
are two pieces of law of general application when evaluating ‘State-owned assets’ including enterprises and units. In particular the
State-owned Asset Valuation Administrative Procedures 1991
require a ‘unit occupying State-owned assets’ to carry out a valuation if:
(i) it auctions or transfers its assets; (ii) it undergoes a merger or sale, enters into a cooperative arrangement, or operates as a company limited by shares; (iii) it forms an equity or cooperative joint venture with a foreign company; (iv) it undergoes liquidation; or (v) on the occurrence of any other event, it is required by law to carry out a valuation
. On the other hand the
Regulations on Several Issues on the Valuation and Administration of State-owned Assets 2002
expanded the range of transactions for which an enterprise is required to carry out a valuation. They include: (i) a whole or partial conversion of the enterprise into a limited liability company or a company limited by shares; (ii) the use of non-currency assets for foreign investment; (iii) a merger, division, or liquidation of the enterprise; (iv) a change in the equity percentages of the original shareholders, (v) a transfer of all or part of its property rights or equity interests; (vi) a transfer, exchange, or auction of its assets; (vii) a lease of all or part of its assets to a non State-owned unit; (viii) confirming the value of assets that are the subject of litigation; and (ix) any other transaction for which valuation is legally required (in this sense Art. 3).
We still have to discuss about the differences between an asset acquisition and equity acquisition, we will do it in the next ‘post’ including a brief introduction on the shares swap which represent a new method to enter the Chinese market.
– CRISTIANO RIZZI