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The Road to Globalization for Chinese Multinationals

Chinese companies looking for deals abroad face five main challenges when globalizing through M&A - including the often overlooked human capital.

Chinese companies looking for deals abroad face five main challenges when globalizing through M&A "including the often overlooked human capital.

Recently, Germany, Japan and the United States have seen a spate of inbound M&A transactions initiated by Chinese manufacturers. The reason is clear: the Chinese manufacturing industry is in desperate need of advancement. This phenomenon tells us a few things: that global industrial transformation has reached its peak; many industries are still hard-pressed for capital as a long-term consequence of the 2008 financial crisis; and the value of the renminbi has empowered Chinese enterprises to expand.

Challenge 1: Underestimating the importance of HR due diligence and the human aspect of a deal

In the majority of cases, M&A is  based on human interactions.  HR functions should be involved early to avoid disruptions and ensure a smooth transition. The importance of HR is often underestimated by Asian organizations, and Chinese companies are no different. Assessing possible human risk is often thought of as "soft," but a failure to do so could result in significant "hard" financial losses.

When a Chinese electronics company acquired a French electronics firm, leadership planned to selectively retain employees according to their M&A goals. However, in France, the law protects the disadvantaged so companies cannot easily lay off old, sick, or disabled employees.  The company would have had to let go mostly young workers. Instead, they let go all employees and rehired those they wanted to retain. The company paid a total of €270 million in various fees, a majority of which were settlement payments for dismissed employees.

Other areas that HR can help to shine a light on in the early stages of a deal include:

Pension liabilities
Many Western companies have defined benefit retirement plans, which promise employees a predefined pension on retirement. The risks of these plans not often found in Chinese companies can easily be underestimated. It is essential to ensure the company accurately discloses  pension obligations and confirms assets are set aside to cover these obligations. Pension liabilities are often substantial and should be taken into pricing considerations.

Total Rewards
Western enterprises' pay philosophy and salary structure can be very different from those of Chinese buyers. The Lenovo Group's acquisition of IBM's personal computer business is an example. Before the acquisition, the base salary of IBM employees was much higher than that of Lenovo employees. Re-levelling would be difficult, as a cut in salaries would have retention implications for IBM staff, and raising Lenovo staff salaries would incur enormous labor costs.

Executive pay arrangements
Western companies sometimes offer top executives a change-in-control severance agreement that compensates executives  with a large amount of cash, stock, or related benefits when a company is acquired. For Chinese companies, such a benefit is rare. If these contracts are not thoroughly reviewed at the due-diligence stage, the buyer may have to pay a severance after the acquisition. For example, when Google acquired Motorola Mobility, ex-CEO Sanjay Jha received $66 million in compensation.

Labor unions
Labor unions play a different role in China than other parts of the world. In China, unions help organize workers and settle labor/ management disputes, rather than participate in decision making regarding corporate operations. This is very different from countries such as France, where a company with more than 50 employees must set up a labor union committee, and the union has the right to participate in making and vetoing labor rules. In many countries, the labor union has the power to stop an M&A on behalf of employees through a strike or other disruptive actions.

Involve HR in due diligence covering five risk areas:

To read entire article, please click here.

Source: China Business Review - GAI



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