International Law

How To Cultivate A China Merger Or Acquisition

By Dan

This post was written by Simon Malinowski, a Harris & Moure summer associate.  

There is a terrific podcast interview between Kent Kedl and Dr. Kim Woodard on deal cultivation in China mergers and acquisitions on the China Business Blog. The podcast is entitled, "Deal Cultivation in China M & A." and though its focus is M&A, its wisdom on China business applies across the board.  

The podcast focuses mostly on pre-due diligence, which Kedl and Woodard define as the information necessary to evaluate acquiring a company in China, and on the importance of building a strong, trust-based relationship to ensure a smooth pre-due diligence process. Though the importance of building a strong relationship is not unique to China, Kedl and Woodard note that this should take place earlier in the process for deals in China than in the U.S. 

In China, the pre-due diligence phase is vital for setting the tone for the entire relationship between the foreign company and its Chinese target because at that point everything is still malleable. There is no contract in place and there is still the opportunity to walk away from a prospective deal. With M&A, this opt-out ability is typically inherent in the non-binding letter of intent. 

Foreign companies can best develop a strong trust-based relationship with their potential business partner or target in China through lots of golf, an affinity for tea-houses, and a willingness to endure a prodigious volume of second-hand smoke. Though the first of these is not foreign to Western companies, with respect to the last two, Kedl notes 'now is the time to start learning new things.' 

The importance of building trust on local terms gets to the heart of the matter.  The US way of doing things by bringing in lawyers and accountants and other outside "deal-makers" at the first step of the process is still foreign to Chinese business.  Cultivating a deal on Chinese terms can go a long way towards towards what should be your ultimate goal: a trust-based relationship with your Chinese target company.

Kedl and Woodard also discuss how a strong level of trust increases the likelihood the Chinese target company will disclose its own shortcomings.  In China, almost every company circumnavigates at least some of the government's various bureaucratic requirements or as Kedl and Woodard so eloquently put it, 'there is no spotless laundry.' 

I recommend you listen to the entire podcast here.

Full post as published by China Law Blog on July 01, 2010 (boomark / email).