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M&A in China - A focus on value: The human capital factor

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M&A in China - A focus on value: The human capital factor

 

 “In established and more mature Western organizations, value tends to be driven by systems and processes. In emerging and younger Chinese organizations, value tends to reside within people and their relationships. Retaining key talent post-deal is absolutely essential to your China deal.”
Garry Wang, M&A leader, China

 

If there were “deal traffic controllers” monitoring China’s skies, their radar screens would be lit up like the evening runways at the Beijing Capital International Airport. The promise of 1.3 billion increasingly well-educated consumers, China’s accession into the World Trade Organization and a friendly investment environment have all contributed to China’s breakneck growth in the last few years. One of the most accurate statements made about China is from author James McGregor. He called China “simultaneously the world’s largest start-up and the world’s largest turnaround.” The “sleeping dragon”i   is not only awake, but the fastest-growing economy in the world. Despite the global economic crisis that began in 2007, the value of M&A deals in China increased 44 percent in 2008.ii  Chinese cross-border activity reached its highest level in 2008, with a record 51 percent increase from 2007. iii

 

China has indeed come a long way. In 1985, when China’s economy began opening up to the world and one of the first M&A transactions was completed, transaction values totaled a mere US$124 million that year. More than 20 years later, transaction values in China topped US$160 billion.iv 

 

Will this market continue to sizzle? All signs suggest – yes. In M&A Beyond Borders: Opportunities and Risks, a report Mercer recently completed in cooperation with the Economist Intelligence Unit (EIU), nearly 60 percent of the 670 executives surveyed around the world say that China, India and Southeast Asia figure significantly into their companies’ M&A strategies, well ahead of North America and Western Europe.v  Separately, the American Chamber of Commerce in Beijing reports that 51 percent of the respondents in a business-climate survey of US companies state that China is the top priority in near-term global investment plans for their companies. Without a doubt, companies around the globe are focused on China. 

 

The flip side of this equation is also heating up. As the number of inbound transactions have risen, so have outbound transactions in China. Chinese state-owned enterprises (SOEs) and private companies with healthy balance sheets have been on a worldwide hunt for resources, technology and brands. According to Thomson Reuters, China’s outbound M&A activity recorded a 64.4 percent growth, totaling US$47.8 billion in 2008, up from a total of US$29.1 billion in 2007.

 

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i Napoleon referred to China as the “sleeping dragon” and warned that when she awoke, she would shake the world. Hundreds of years later, China is the fastest growing economy in the world. The country’s low cost of labor, the increasing quality of that labor, a growing consumer class with a penchant for Western goods, and China’s membership in the World Trade Organization (WTO), all make it an attractive place to do business, Thunderbird School of Management, “Doing Business in China, 2007”.

 

ii Thomson Reuters, third quarter 2008, Financial Advisors.


iii Thomson Reuters, third quarter 2008, Financial Advisors.

 

ivThomson Reuters, third quarter 2008, Financial Advisors.


v M&A Beyond Borders: Opportunities and Risks, published in co-operation with the Economist Intelligence Unit, March 2008.


 

 


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M&A in China - A focus on value: The human capital factor

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