Global M&A is on the rise. Chinese companies are making more acquisitions overseas and multinationals are aggressively targeting Chinese local players. However, not all these high-profile moves have had a happy ending. EBay quietly retreated from China three years after buying Eachnet in China, and BenQ, the Taiwan-based technology company, admitted failure one year after its acquisition of Siemens’ mobile business in Germany.
The most recent news is that Coca-Cola on September 3, 2008, announced a $2.4 billion takeover of Beijing-based China Huiyuan Juice Group, the number one juice maker in the country. The deal, subject to regulatory approval, would be the largest ever for Coke in China and is a clear sign that Coke would like to further expand into the Chinese juice market.
What are the characteristics of the re-energized global M&A market, particularly in China? What should a company do to ensure that its acquisition is successful and that the cultures of the two merged companies are well-integrated? In an exclusive interview with China Knowledge at Wharton, David O. Kompare, head of the global M&A practice at global consultancy Hewitt Associates and a veteran with 15 years of experience in the M&A business, discussed these issues.
China Knowledge at Wharton: You have worked many years in the global M&A business. Can you comment on recent trends in this area?
Kompare: I have been with Hewitt for 11 years, but I have been working in the M&A market for almost 15 years now. This is a very exciting time. It used to be a U.S. company acquiring a U.S. company, or a German company acquiring a German company. But over time, what is happening is that companies’ strategies [have become] more global, and they now realize that to be successful, they have to be successful globally. This has a number of implications. You have to go global for more cost-effective labor, for new technology, or in order to be competitive. You have to look for resources globally. The same is true if you want to be successful with customers; you have to be global. Take Hewitt, for example. The companies acquired by many of our clients now have operations in 10 to 15 countries. We are working on the HP-EDS merger now, and I believe EDS has operations in 67 countries. If we [want to] to be able to support our clients, we have to be global.
There are a number of challenges for companies trying to build from the ground up. So acquisitions make a lot of sense in terms of your ability to grow your business globally and to do so quickly. Not only do global acquisitions give you access to markets; they give you access to new ideas, new ways of doing business. So one of the most exciting [aspects] of the M&A market today is that if you find a company pursuing a global strategy, then acquisitions help to support that.
China Knowledge at Wharton: What do you think is happening with regard to Chinese companies?
Kompare: It’s a very dynamic and very interesting time for Chinese companies in the M&A market. It’s amazing [to realize] that interest in China [on the part of] our clients is greater now than at any time in our history.
China Knowledge at Wharton: Coca-Cola just announced that it is acquiring the China Huiyuan Juice Group.
Kompare: Yes. Companies interested in China want to leverage labor skills and labor resources…. I think the most interesting thing now is that you start to see Chinese companies going outside China. Based on my discussions here, it is becoming very clear that Chinese companies will continue to expand overseas, and that a number of state-owned companies will continue to run operations globally and look to acquire other companies. That’s very interesting and dynamic. That didn’t really exist in the past and I think it will be interesting to watch over the next several years how that develops.
How will employees in Brazil or France feel about having their company acquired by a Chinese company? What does that mean to the employees? So far, there has not been much experience in this area. I think one of the biggest challenges for Chinese companies [making] acquisitions is how to help the employees in those companies understand what it means.
China Knowledge at Wharton: What are the main challenges for foreign companies acquiring companies in China?
Kompare: I think there is a big learning curve for them, in terms of understanding how to operate successfully in the Chinese marketplace and how to [handle] the regulatory environment in terms of payroll taxes or safety standards or whatever it maybe. Companies are really only learning now what takes it to be a successful employer in China.
A client tells us that one of the challenges to operating successfully in China is the ability to retain talent. It’s a very competitive marketplace…. I think companies are struggling with the question of what can I do to make myself an attractive employer [so that I can] retain good employees, and over the long term, develop good management talent.
China Knowledge at Wharton: What is your advice in this area?
Kompare: Retaining talent is a very big challenge; [that is true] in other countries as well. Russia is another country where you have a very fast growing economy. When an economy is growing fast, often times the talent supply is not growing [equally] fast. That results in a very competitive market for talent.
I think when companies come here to look at potential acquisition candidates, one of the things they try to understand is … can we continue to run that company effectively, and are there changes [that should be made] after the acquisition. So I think retaining key talent and making sure [employees] can operate in an environment which leverages their ability to access markets and sell products is very important.
In terms of operating, there could be greater clarity in rules and standards, [including] making sure what the standards are.
The advice we give to companies here is not [much] different than elsewhere. I think they have to establish a strong brand as an employer, make employees understand why they are a good employer, why it’s a good company for the employees to work for. That is a challenging question. There are a lot of reasons employees choose to stay with a employer; maybe they feel they have very good career development opportunities, or they feel they receive good pay and good benefits, or maybe they enjoy the type of work they are doing.
So for companies that are going to retain people, they need to understand what motivates their employees and what’s important to them, and make sure they address those needs. We work with companies to help them understand how to be a more effective and a better employer through approaches like developing a training program or strategies on compensation. Are there ways they give employees flexibility to make decisions, to be more entrepreneurial, etc. There are a range of [steps] companies [can take] to retain employees.
China Knowledge at Wharton: After an M&A deal is announced, will there be panic in the target company, especially among employees?
Kompare: That’s a very natural concern, not only in China, but for employees anywhere. Hewitt has training programs to help companies more effectively conduct acquisitions. One of the things we talk about is that, after an acquisition occurs, the first thing the company should do is try to address the ‘me’ questions. When the acquisition is announced, there are a lot of things that are going to change — your business strategy, your different financial objectives — but the employees are really concerned with what does that acquisition mean to me? So we encourage companies who are doing acquisitions to address those questions.
Employees are concerned about whether they are going to lose their job, whether their benefits will continue, or whether they will continue to do the same type of work. The first thing you need to do is to answer some of those questions. The biggest mistake you will make is to delay providing answers, even if you [aren’t yet sure what the answers are.]
For example, one of the questions employees ask after the acquisition is, will my benefits change? Most of the companies may not have answers immediately, but the worst mistake you can make is not to say anything to employees because you don’t know. Because what happens is if you don’t say anything, employees always assume the worst; they always assume that they will lose their job and that their benefits won’t be as good as before.
You can help them to understand the process. You can say, “We understand and we don’t know the answers, but we will [have] a process to look at these questions.”
China Knowledge at Wharton: What will happen to managers if the acquired company would like to shift some business strategies?
Kompare: It’s a common concern for employees – whether they will lose their positions. But I think most of the companies we work with buy a company because there is value in it, often because of the people who work there. So in most instances, in the companies doing acquisitions, I don’t think they want to lose any valuable employees. In my experience, when companies make acquisitions, they are often more concerned about how to keep the people [rather than] about letting them go.
Particularly when a company makes an acquisition to enter a new market or a new technology they don’t know well, they need those employees. Employees are the value they buy. In the Coca-Cola acquisition, this juice company is very well known and very well run, so you wouldn’t anticipate that a successful company like that will have many changes. I am not working with Coke and don’t know the details, but I think often times employees don’t know how important they really are to the business.
Hewitt is a human capital firm and we have a strong belief that the value of the companies is in the employees who work for them — their contributions, their knowledge of how to make products and how to service customers…. Often it’s the people who make the difference in whether the company will be successful or not.
China Knowledge at Wharton: How about Chinese companies making global acquisitions?
Kompare:. Chinese companies are probably better positioned now than ever in the recent past to make acquisitions, because they have more resources and they are building up capital. They have the financial ability to make acquisitions. In other parts of the world, some of the companies don’t have resources to make acquisitions even if they want to. I think a number of Chinese companies are very well positioned because they have … a very favorable foreign exchange, so it makes foreign companies more affordable than in the past.
In terms of challenges, yes, they have some challenges: They didn’t make a lot of acquisitions overseas and they don’t have experience in drawing up contracts. So one of the challenges is to learn the process of acquisitions.
There are a number of ways to [accomplish this]. I mentioned that Hewitt does M&A training programs for companies. These programs are geared towards making clients understand how to do a better job in acquisitions in terms of due diligence, how to assess a target company and whether it’s a good acquisition or not, how to understand what the risks are, what kind of criteria they use and what kind of data is important to make those decisions. That’s not necessarily an easy thing, particularly if you haven’t done that before. We also have round table discussions where we get M&A experts of different companies together to share their experiences and lessons in the M&A market.
China Knowledge at Wharton: What’s your view on some of the acquisitions that failed, i.e., BenQ on Siemens and TCL on AlCart?
Kompare: Due diligence is a very challenging task. When you think about acquiring a company, there is a lot to learn about that company in terms of their financial status. How do they operate? How successful are they with their customers and employees. There are many things to look at in due diligence.
But half of a successful due diligence is knowing what kinds of things you should look at. For due diligence, there will be 20 binders of documents. You really need to know where to look [for information]. Sometimes you only gain that by experience. If you haven’t had that experience, we suggest you work with partners who have, [so that you can] understand issues [involving] pontential risk, which can vary from country to country. It’s important to have good local market knowledge.
Work with partners who understand the particular challenges you will face in the UK, U.S., Brazil, or Germany, because the challenges are very different. There are pension issues that exist in the UK but don’t exist in the U.S. In the U.S., it’s relatively easy to restructure your workforce, but in some countries in Europe, it’s very difficult. You need to understand the legal system and regulatory requirement, the union considerations, the labor considerations. So we work with companies in due diligence to help them understand, not only compensation and benefits programs, but cultural differences.
China Knowledge at Wharton: What are these cultural issues?
Kompare: We do M&A surve