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Foreign firms earn US$31b from China acquisitions

By Shangguan Zhoudong (chinadaily.com.cn)
Updated: 2007-05-18 14:21

Overseas companies earned US$31 billion last year in China from acquisitions, three times the total volume from 2001 to 2005, according to Beijing Business Today.

The figures were released yesterday in a report titled "Investing In China: Working With Headquarters", jointly published by Ernst & Young and the Economist Intelligence Unit.

The report shows that overseas companies spent about 12 to 24 months on a single acquisition in China. But in the United States, an acquisition needs only three to nine months.

It goes on to say communication is critically important, with nearly 60 percent of those surveyed saying they spent more than 20 percent of their time involving their head offices during the transaction and execution process, whether to seek approvals or to keep them informed of developments, the study found. A little over one-quarter said they spent 10 to 20 percent of their time interacting with their headquarters.

Crucially, of those surveyed reported that less than 50 percent of the deals their companies evaluated fell through, 20 percent said they spent between one-fifth to one- third of their time during the transaction process dealing with their headquarters. For those with an over-50 percent success rate, they spent twice as much time, or 44 percent dealing with their head office.

Spending more time is by no means a guarantee that any of that time is spent wisely, however. What the study found was that head offices' involvement in the deal process is often beneficial, but not always. Nearly 72 percent thought it increased the likelihood of a deal happening. Conversely, 27 percent said it had no impact on a deal at all, or could even decrease the chances of success.

Those that said head office involvement was detrimental to the success of a deal cited inappropriate valuation standards and a poor understanding of the China market, which meant local managers often had to spend a good deal of time explaining local conditions to executives at their headquarters.

"The findings show that using China teams for negotiations, together with help from independent financial advisers, actually helps reduce deal times, and the frustration for company executives all around," said Bob Partridge, managing director and transaction advisory services leader for Ernst & Young China. "Having the right kind of help is important, and that is where local expertise plays a major role in helping deals from start to finish."

In the first four months of this year, China approved 12,349 foreign-invested enterprises, down 2.29 percent from the previous year. China received US$20.4 billion inforeign direct investment(FDI) from January to April, up 10.2 percent from a year earlier, according to statistics from theMinistry of Commerce.

China also saw 3,052 foreign-invested enterprises approved in April, down 18.18 percent from the previous year. The country received US$4.47 billion in FDI in April, an increase of 5.49 percent from last year, the ministry says.