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CCID Consulting Forecasts Opportunities and Risks of M&As for Chinese Enterprises in 2009

2009-01-14 11:04 1832

BEIJING, Jan. 14 /PRNewswire-Asia/ -- CCID Consulting, China's leading research, consulting and IT outsourcing service provider, and the first Chinese consulting firm listed in Hong Kong (Hong Kong Stock Exchange: HK08235), recently released its article on opportunities and risks of M&As for Chinese enterprises in 2009.

The Trend of M&As Will Continue

As the US subprime mortgage crisis spread and worsened into a global financial tsunami last year, all major securities markets in the world plunged, European and American enterprises fell into financial difficulties and investor confidence was seriously undermined. Signs of global economic recession have surfaced. Affected by this, M&A activities among enterprises worldwide are much reduced. In 2008, global M&A trading value stood at $2.85 trillion, down by 36% year-on-year. For 2009, turmoil in the international financial markets triggered by the US subprime mortgage crisis will continue to affect many countries. As the influence intensifies, the global economic crisis will deepen and the world's economic prospects will remain bleak. Due to difficult credit and leverage acquisition financing caused by the global economic crisis in 2008, M&As worldwide are expected to shrink further in 2009, with the M&A trading value falling to $2 trillion, down by 30% from 2008, the lowest in five years.

Chinese Enterprises Will Have Rare Opportunities

In contrast to the global M&A market, M&A transaction value in China in 2008 rose by 36%, reaching $167 billion. China accounted for 6.9% of the M&A cases in the world, doubling that in 2007. Domestic enterprises' overseas M&As increased by 74% in value year-on-year, reaching $49 billion. We think that the current economic situation both at home and abroad shows that 2009 will be a good year of M&As for enterprises. As the financial crisis further affects real economies, numerous European and American entity enterprises will enter into operational difficulties similar to the three US auto giants GM, Ford and Chrysler now facing the dilemma of bankruptcy. This will bring a rare opportunity for Chinese enterprises to "enter the world market". 2009 will be the best opportunity for Chinese enterprises to make acquisitions and mergers overseas, they should wait for and seize the right opportunities to make multinational M&As. Recently, the China Banking Regulatory Commission issued the Risk Management Guidelines on Merger and Acquisition Loans of Commercial Banks, giving the green light for commercial banks which meet the right conditions to operate M&A loan services and provide good credit support for the M&A market. The move will give powerful support for qualified Chinese enterprises to "enter the world market". Currently, the concerned department is studying relevant policies and measures to broaden the conditions for domestic enterprises to make multinational M&As and support them in seizing opportunities that will enable them to enter the world market.

M&As with Shareholding has Become an Effective Practice

There are ubiquitous examples of European and American companies taking shares in Chinese enterprises. However, there is only a limited number of cases in which Chinese enterprises have shares in big European or American companies. This situation may change in 2009. There are many motives for Chinese enterprises to make M&As overseas. One common motive is strategic considerations for searching for resources, technologies and markets. Currently, Hi-tech IT enterprises, energy, mineral and other resource-based enterprises, manufacturing, financial and banking enterprises are all affected by an adverse situation of falling values and profits, making their trading prices attractive. If the economic situation continues to deteriorate, the price will fall accordingly. In making M&As overseas, Chinese enterprises should mainly concentrate on the four types of enterprises above. Outstanding enterprises in China such as leading IT and manufacturing enterprises and central financial and resource-based enterprises have the conditions and ability to actively enter the world market first, and forge in-depth stock right cooperation with the bellwether enterprises, technologically leading enterprises and resource-based enterprises in Europe and America. These will be the main targets for Chinese enterprises to take shares in. When these enterprises have broken cash flows, they will have to lower the investment thresholds for Chinese enterprises in order to ease their fund pressures. By acquiring stock rights from these enterprises at a due price, Chinese enterprises can get relevant technologies and resources and search for global resources to pursue their own fast development in the international market.

Three Major Strategies for Overcoming Risks

While Chinese enterprises' determination to expand overseas is encouraging, there are risks that also deserve attention. There is no doubt that Chinese enterprises' M&As overseas will not be plain-sailing. International experience shows that 60% of M&As end in failures. It is obvious that due to information asymmetry, cultural differences and other factors, overseas M&As will have a much greater possibility of failure than domestic M&As. Meanwhile, multinational research has also proven that successful overseas M&As in history often show strong complementary advantages and help home enterprises and especially late-mover countries to use their late-mover advantages and make leapfrog developments.

Strategy 1: Choose Carefully and Stick Strictly to the Principle of "Cash is King"

When selecting a target for a M&A, acquiring enterprises should firstly consider their cash status, followed by whether the target enterprises have healthy main businesses and big growth potentials. Against the broad background of a financial crisis, Chinese enterprises need to maintain healthy cash flows. They should not make blind M&As. Instead, they should keep cash and carefully select companies which are worth investing in. When making M&As, the ability of financing and whether the cash flow can be sustained are both factors for essential consideration. In this sense, a M&A of a suitable scale looks to be a fairly realistic option.

Strategy 2: Be Careful About Bottom Fishing, and Strengthen Core Business

Though the current financial crisis has brought Chinese enterprises with an unprecedented period of strategic opportunity for M&As, we nevertheless understand that this period of opportunity is not merely from appealing prices of foreign enterprises and assets, and bottom fishing should be far from the only perspective through which we understand the background factors for enterprises to make M&As overseas. Instead, Chinese enterprises should place their focus on M&As that can strengthen their core business rather than make expanded M&As. Even in a crisis, they should not acquire problematic businesses whose estimated values may look low because they may not be able to produce synergetic effects with them.

Strategy 3: Take Strong Shareholdings in M&As, and Firmly Seize Control Rights

Most Chinese investments or M&As overseas are characterized by a low percentage of shareholdings. The result is that Chinese enterprises lack control power or decision rights on the board of directors. If Chinese enterprises make an M&A but do not have the control power, it will be difficult for them to get the economic interests that suit them most, let alone the choice of brand, technology, talent and market expansion targets for M&As. It follows that taking controlling power into their own hands is what Chinese enterprises must grasp at all times when they take shares in M&As overseas.

About CCID Consulting

CCID Consulting Co., Ltd. (hereinafter known as CCID Consulting), the first Chinese consulting firm listed in the Growth Enterprise Market of the Stock Exchange (GEM) of Hong Kong (stock code: 8235.HK), is directly affiliated with China Center for Information Industry Development (hereinafter known as CCID Group). Headquartered in Beijing, CCID Consulting has so far set up branch offices in Shanghai, Guangzhou, Shenzhen, Wuhan and Chengdu, with over 300 professional consultants after many years of development. The company's business scope has covered over 200 large and medium-sized cities in China.

Based on major areas of competitiveness: industrial resources, information technology and data channels, CCID Consulting provides customers with public policy establishment, industry competitiveness upgrading, development strategy and planning, marketing strategy and research, HR management, IT programming and management. CCID Consulting's customers range from industrial users in electronics, telecommunications, energy, finance, automobile, to government departments at all levels and diversified industrial parks. CCID Consulting commits itself to becoming the No. 1 advisor for enterprise management, the

No. 1 consultancy for government decisions and the No. 1 brand for informatization consulting.

For more information, please contact:

Cynthia Liu

Coordinating Manager

CCID Consulting Co., Ltd.

Tel: +86-10-8855-9080

Email: liuyan@ccidconsulting.com

Source: CCID Consulting Co., Ltd.
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