Value-Creation: Key to Cross-Border M&A in Turbulent Times

There is no doubt that the Covid-19 pandemic has created unprecedented challenges for M&A around the globe, not to mention additional pressure from increasing economic, political, and technological decoupling between China and the West.  As a firm focusing solely on cross-border M&A involving China, 2020 was a difficult year for us. 

The impact of the pandemic on cross border M&A is different from that of the global financial crisis of 2008/2009, when Chinese companies seized the opportunity presented by falling asset prices overseas. This time Chinese companies willing to invest overseas face a very different environment: tighter credit and currency control policies in China, and heightened geopolitical tension. In addition, international travel restrictions and uncertainty around valuations have discouraged Chinese companies from seeking targets overseas.

Fortunately, technology has helped facilitate transactions, and mechanisms are available to bridge expectation gaps and mitigate potential risks. Videoconferences as a substitute for meetings in-person has been reasonably successful and sometimes, even, are easier to arrange; Virtual data rooms have for some time become commonly used for cross-border due diligence; and E-signatures and e-signings have become the norm. Apart from technology, creative deal structures and drafting of legal terms are commonly used to bridge valuation gaps, as well as circumvent uncertainty.

However much we are able to rely on technology to drive M&A negotiations, it is not a substitute for relationships built on mutual trust from a series of face to face encounters. A high level of trust is especially critical for closing cross-border M&A deals because there is often a significant culture gap to bridge, and buyers usually need to rely on the existing management of target companies to run the businesses for them post acquisition. For most Chinese companies, on-site due diligence is mandatory for their decision-making processes, in particular for state-owned enterprises.  They are among the few companies willing and able to buy overseas during this pandemic. Under the current circumstances, there must a clear strategic rationale behind the every large cross-border M&A deal.  Initiating deals based on a deep understanding of clients’ strategic interests, therefore, is not only necessary for client engagement, but also critical for closing transactions.

A good example of value creation would be the project which closed in early 2020 after the outbreak of Covid-19. We advised the French automotive OEM PSA with its disposal of CAPSA, its 50:50 joint venture with Chang’an Auto.  Both shareholders had been struggling for a long time to save the JV from bankruptcy but were not successful in finding a solution until we introduced Baoneng to them. The motivations of the three parties were so strong that they strove to overcome a number of obstacles, including valuation gap, complex contract manufacturing terms, regulatory restrictions, local government relationship, and significant cultural differences between the parties. During the closing period, when China was preoccupied with Covid-19, the three parties were able to complete the transaction and re-start the plant as planned.  PSA continues to engage us for its strategic initiatives in China even after its merger with FCA has made it one of world’s largest OEMs.  

Deep research into sectors has enabled us to capture market opportunities and create unique value for our clients during this challenging period.  Taking the automotive sector as an example, the industry is experiencing fundamental restructuring involving electric, autonomous, and connected cars.  While all the players are transforming themselves to adapt to the new trends, our ability to identify investment or cooperation (joint venture) opportunities for clients is much appreciated.  As long as we are able to prove our value creation capabilities we believe that transaction opportunities will surface.  We have recently discovered a rich seam in fuel cell technology, which is believed to be a promising clean energy solution replacing the internal combustion engine.  Many clients have shown a strong interest in the sector and are seeking to invest.  

Vermilion has been always a strong believer in value creation - not only during this special pandemic period - and it is the way we differentiate ourselves in the market.