According to the Wall Street Journal 4 Moon 22 According to reports, a representative of Blackstone Group is set to sell... Strategic Hotels & Resorts Inc. The union representative of the employees wrote a letter to the U.S. Secretary of the Treasury. Jack Lew The U.S. Committee on Foreign Investment, led by the Treasury Department ( Abbreviation: CFIUS) Investigation Strategic Hotels & Resorts With 65 The deal to sell the company for hundreds of millions of dollars to Anbang Insurance Group has cast a shadow over Anbang’s merger and acquisition deal. Fortunately, the Wall Street Journal subsequently updated its report, stating that the union had withdrawn its demand.

Together with recent related incidents, this event once again highlights the risks associated with Chinese companies’ overseas M&A activities. Only through thorough preparation and careful handling can we prevent problems before they arise.

Insufficient disclosure may lead to the failure of mergers and acquisitions.

“When investing in developing countries, the challenges often revolve around issues of social stability and security, as well as financial concerns such as exchange rates and financing channels. In contrast, in developed countries, the challenges typically stem from differences in local rules and regulations—issues that include labor unions and legal matters,” said Su Li, Managing Partner, Greater China, EY Financial Transaction Advisory Services. 21 A reporter from Century Economic Report stated.

Specifically, Su Li analyzed that cross-border M&A by Chinese enterprises is still in its early stages. Overall, Chinese companies still have room for improvement in their experience with cross-border M&A. The primary reasons why Chinese firms fail to acquire overseas targets can be attributed to the following factors: First, when bidding for high-quality assets globally, Chinese companies often find themselves outbid and outmaneuvered by other international buyers, which can lead to unsuccessful acquisitions. However, aside from the acquisition price, sellers place even greater emphasis on the certainty of the transaction. For instance, when Chinese companies undertake overseas M&A deals, the transactions may require approval and review from entities such as the State-owned Assets Supervision and Administration Commission, the Ministry of Commerce, and the State Administration of Foreign Exchange, introducing a degree of uncertainty. As a result, overseas sellers may perceive that, compared to bidders from other countries, Chinese companies as ultimate buyers carry lower certainty. Fortunately, currently, the approval process has been shifted to a filing-based system, which has significantly boosted the confidence of overseas sellers.

“Second, there’s the issue of financing. We’ve observed that, in current overseas M&A deals involving Chinese enterprises, there’s generally a disagreement between the two parties over whether securing successful financing should be made a prerequisite for closing the deal. This is crucial because it raises the question of whether the acquiring party would have to pay a ‘break-up fee’ if the financing doesn’t come through on time—a point of contention that often makes it difficult for the two sides to reach an agreement.”

“Grasping the pace of mergers and acquisitions is also crucial. As newcomers to cross-border M&A, some Chinese enterprises often struggle to identify where the risks lie in a project. When faced with a relatively tight transaction timeline, these newcomers frequently find it difficult to keep up as planned,” said Su Li.

“In addition, obtaining approval from the local government does indeed pose a significant challenge—mainly because Chinese enterprises may not disclose sufficient information or maintain adequate transparency, leading to subtle pressure on project approvals exerted by public opinion cultivated by local media,” said Huang Yaohé, Managing Partner of PwC’s China Corporate Finance Services. 21 A reporter from Century Economic Report stated.

In addition to mergers and acquisitions, some Chinese companies have run into trouble after completing overseas M&A deals.

“In Europe, when it comes to the renovation or reconstruction of historic buildings, conflicts frequently arise between building owners and local governments. This is not intentionally aimed at Wanda’s status as a Chinese investor. For local governments, the reconstruction of historic buildings often has implications for the city’s overall urban planning. For example, previously, a local European company attempted to convert a purchased castle into a shopping mall, but was blocked by the local government.” — Professor from the China Enterprise Globalization Research Center at the Sino-European Business School Klaus Meyer This is precisely why the Wanda Spain Building project has run into complications, according to the reporter.

Clear layout and thorough due diligence

To avoid these issues, respondents recommend carefully considering the strategic layout in advance and conducting thorough due diligence on the local business, political, and even cultural environment.

“Before making overseas acquisitions, it’s crucial for Chinese companies to carefully consider their strategic positioning—whether the goal is to acquire technology or to expand into new markets, and so on,” said Su Li. “Once a clear strategic framework has been established in the early stages, due diligence can begin as soon as possible, without being constrained by the usual two-month timeline.”

“In a cross-border M&A deal I handled, a private enterprise had already conducted thorough strategic planning in the early stages. After identifying several potential targets and carrying out extensive preliminary due diligence, the company was able to move swiftly and smoothly into the actual M&A process,” said Su Li.

In addition, a due-diligence team familiar with the target country’s legal and regulatory environment is also required. “Today, an increasing number of Chinese enterprises are seeking cross-border M&A deals; yet, their leadership teams often lack individuals with extensive experience in foreign markets. Chinese companies that aim to go global should bring people with local expertise into their decision-making ranks.” Meyer Say.

In Huang Yaohe’s view, the due diligence that Chinese companies need to conduct in the early stages of cross-border M&A is quite different from that required for local M&A.

“Because overseas, everything—from the legal system and business logic to commercial practices, financial systems, tax regimes, human resources, and union organizations—is different from that in China, so domestic M&A experience can’t simply be applied,” said Huang Yaohé. He analyzed that, in addition to the basic due diligence involving finance, taxation, and legal matters, Chinese enterprises need to pay special attention to three key aspects when conducting due diligence on cross-border M&A deals.

“First, there’s the due diligence on personnel. After an acquisition, it’s common to need to adjust staffing—this, in turn, involves foreign pension systems that may differ significantly from China’s. We’ve seen many projects where buyers didn’t factor this cost into their initial plans, only to discover later that it could represent a substantial expense.”

Another point is... IT In terms of system integration, I’ve seen some cases where no preliminary investigation was conducted. Later, it turned out that the two parties were using completely different systems, which led to many unnecessary complications.

“Moreover, for small and medium-sized manufacturing enterprises, it’s extremely important to thoroughly research local environmental policies in advance. Environmental regulations abroad tend to be relatively stringent, and meeting these local requirements for production can be significantly more costly compared to domestic conditions,” said Huang Yaohé.

Engage in in-depth communication with stakeholders.

In addition, it is also particularly important to engage in thorough communication in advance with stakeholders other than the seller and shareholders.

Klaus Meyer He pointed out that communication with local unions is essential in the pre-merger and acquisition phase. “Unlike in China, unions abroad often wield considerable influence. For Chinese enterprises, engaging with unions early on during the M&A process—when both sides can identify shared interests—can significantly reduce the likelihood of union resistance later on. Take Germany as an example: Previously, a Chinese company’s leadership conducted an in-depth dialogue with the local union before acquiring a German firm, and the outcome was quite positive,” he said.

Su Li said, “Don’t just communicate with the seller and shareholders—reach out in advance to other stakeholders as well, such as the union and local government. Clearly discuss with them the personnel plans and development strategies following the merger and acquisition. This is a way to demonstrate sincerity and build trust.”