M&A Due Diligence Conference Held in Shanghai

March 21, 2011 Posted by China Briefing Reading Time: 4 minutes

Mar. 21 – LexisNexis China, the global content-enabled workflow solutions provider, held its Fifth Annual Conference on Mergers and Acquisitions (M&As) Due Diligence in Shanghai on March 17 and 18. The two-day conference provided detailed analysis on China’s increasingly regulative M&A market, business valuation approaches, and risk assessment during due diligence practices. The event gathered senior managers of major businesses, professionals of law firms and accounting companies, as well as representatives of commercial and M&A organizations. China Briefing was among the key media partners attending the conference.

The reawakening of China’s M&A market
The prospect of China’s M&A market was one of the most widely discussed topics. While the number of inbound M&A deals peaked during the third quarter of 2010 following the country’s strong economic growth, distinct types of issues regarding increasing regulations, post-merger integration and cultural clashes also rose and require deeper understanding as well as more comprehensive due diligence from the buyers.

Speakers placed great emphasis on the importance of strengthening the understanding of local and international differences during the M&A process, in order to avoid business risks and pitfalls.

Effective due diligence practices
As the major focus of the conference, it is widely understood that effective and functional due diligence practices are the key for buyers to gain understanding of the local market, realize better integration at different levels and finally maximize the return on investment.

Speakers with diverse backgrounds elaborated on the fundamentals and essentials of operational due diligence practices from different angles.

Jay Zhang, Asia Pacific M&A director of Tyco Electronics, stressed the four areas in which a typical comprehensive due diligence must cover during data collection:

Company strategies
Operation and finance
Corporate legal structure and documentation
Procedures under the macro regulatory environment

While it is sometimes challenging for foreign buyers to understand a local company thoroughly and avoid pitfalls due to undisciplined bookkeeping and business practices, the tightening regulative environment could also be a hurdle. For example, with the rigorous enforcement of China’s Anti-monopoly Law, investors should be more aware of the country’s intensified restrictions on monopolistic conduct and market dominance abuse.

A comprehensive business valuation system during due diligence practices was presented in detail by Martin Zhao, the business development director of the paper-making company StoraEnso. While a multi-dimensional examination on market and industrial chains is critical to the M&A valuation, the final value range comes from a mixed use of distinct valuation methods based on estimated cash flow in the future, comparable company indexes, and historical dealing indexes.

Several speakers warned investors of the risks of neglecting the proper investigation on “soft assets” such as intellectual property (IP) and human resources (HR) during the due diligence practices. Esther H. Lim, founding managing partner of Finnegan Shanghai, pointed out that with the increasing importance of IP protection in companies nowadays, IP is starting to become many companies’ most valuable asset. Data show that if a buyer fails to effectively define, examine and analyze the target company’s IP portfolio during its due diligence, it can lose a significant amount of money every year for not extracting the full use of IP.

Monica Huang, senior manager of the People & Change Practice of PricewaterhouseCoopers Consultants, talked about HR issues during due diligence. She suggested buyers completely consider potential costs brought by key personnel loss, poorly-planned redundancy cuts, and strikes due to ineffective employee communication during M&As. It is essential for foreign acquirers to pay full attention to the invisible HR payments that are not kept in the books, the possible impact on staff after the corporate cultural and structural alteration, and the newly-generated costs under a more regulated environment.

Solving pre and post-merger disputes
Incomplete due diligence practices, poorly-designed risk control measures, ineffective post-merger supervision and management, as well as disparity in operation philosophy and business goal, can all be factors leading to disputes during processes such as capital increase subscription and control power definition. Liu Xiangwen, partner of King & Wood law firm, explained the major concepts, possible situations and legal solutions of disputes before and after M&As. Liu suggested investors who are faced with disputes to conduct a full investigation on government policies and local impact and competitors before proceeding a lawsuit.

Dezan Shira & Associates specializes in business advisory services with specific focus on due diligence, mergers and acquisitions, human resources, corporate establishment and intellectual property. For advice on any of these areas, please email info@dezshira.com, visit the practice at www.dezshira.com, or download the firm’s brochure here.

Related Reading
Mergers and Acquisitions in China

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Mergers and Acquisitions in China: Structuring and Valuing M&As on the Mainland

We use this issue of China Briefing to take a look at several aspects of M&As that foreign-invested enterprises should be aware of when investing in China.

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