SEARCH FOR VALUABLE COMPANIES IN CHINA

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SEARCH FOR VALUABLE COMPANIES IN CHINA
Mr. Juergen Kracht Managing Director of CDI
China CBBC event 17.09.2002
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Who is CDI- China?

• International Company Search Firm
  Specialized in Support for Mergers,
  Acquisitions, Divestitures and Joint Ventures
• Hundreds of Successful Assignments
  Over the Past 26 Years
• 50 CDI Members and Associates in 30 Main Offices
  Located in Europe, North America, Latin America,
  Asia, and Australia
• Local Partner in China
• Fiducia Management Consultants

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Contents

• I. Define What You Are Looking For
• II. Define Criteria for the Company Search
• III. Conduct Industry Research Long List
• IV. Develop a High Value Short List
• V. Preliminary Contact and Negotiation Approach

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I. Define What You Are Looking For.

• Before the actual process of searching and
  evaluating potential target companies, the search
  criteria and the minimum conditions should be
  defined. This helps later to achieve an optimal
  match
• Desired investment type
• - Acquisition A B A
• - Merger A B C
• - WFOE, Greenfield project A
• - Joint Venture A B A B C

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I. Define What You Are Looking For - Case Study
Lion Nathan

LION NATHAN

• Australian brewery Lion Nathan witnessed between
  1992-1995 a substantially growing beer market.
  At that time, China was the
• second largest market for beer in the world
• Consequently, the company invested about US300
  million in one of the worlds most modern
  breweries in Suzhou near
• Shanghai
• After 3 years of planning and building the
  brewery was opened in early 1998

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I. Define What You Are Looking For - Case Study
Lion Nathan

• BUT IN THE MEANTIME
• SUNTORY,
• their Japanese competitor, set up a Joint
  Venture in China
• Established their brand name
• Secured exclusive distribution channels
• Secured customer acceptance as well as a big
  market
• share

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I. Define What You Are Looking For - Case Study
Lion Nathan

• CONSEQUENCES FOR LION NATHAN
• The early bird catches the worm
• Competition had toughened when they finally
  entered the market
• SUNTORYs exclusivity deal with distributors
  made it difficult
• to gain ground and to catch up
• As a consequence, Lion Nathan tried to find a
  buyer for its
• investment

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I. Define What You Are Looking For.

• Envisioned economic sector
• Manufacturing
• Entry into Chinese market
• Expansion within Chinese market
• Export to developed countries
• Export to developing countries
• Sales and distribution network
• Sourcing
• RD centre
• Services
• Software development

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I. Define What You Are Looking For.

• Envisioned overall investment value
• Time frame for investment
• Self assessment Our prior engagement in China
• - Economic sector
• - Legal form
• - Investment value
• - Location
• Date of establishment
• Success/Failure and reasons

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I. Define What You Are Looking For.

• Geographical preferences

• Resulting from research into the statistics, and
  interviews with corporate strategists, Fiducia
  has grouped Chinas provinces into eight regions.
  These regions are based on the following
  criteria
• administrative provinces
• population and population density
• per capita GDP and total GDP growth
• per capita disposable income
• per capita value of import and export
• FDI and per capita FDI
• infrastructure
• tradition, culture and dialect

• Northeast
• Heilongjiang
• Jilin
• Liaoning

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II. Define Criteria for the Company Search

• Agree internally on strategy and goals
• Set up milestones
• Define internal resources
• Define level of confidentiality
• Decide on external advice

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III. Conduct Industry Research
Actions
Preparation Phase

• SWOT Analysis
• Assess sustainability of business
• Assess strategic positioning
• Evaluate potential target companies

Business Strategy

• Determine value drivers
• Set up a project team
• Information gathering and exchange

Set up a Team
Industry and Market Assessment

• Review industrys legal aspects in China
• Assess market attractiveness and risks
• Evaluate business impact of potential acquisition
• Identification of critical risk areas

• Review and finalize proposed approach
• Structure objectives and prepare detailed project
  guideline
• Assess indicative value objective (value adding
  target)
• Define search criteria

Segmenting and Profiling
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III. Conduct Industry Research e.g. Furniture
Industry

Share in total production
Heilongjiang
25 20 15 10 5 lt 5
Tianjin
Shandong
Jiangsu
Zhejiang
Guangdong
23 of Chinas furniture production is
located in Guangdong province.
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Chronological Sequence for a Company Search I
Potential Targets
Month 1 2 3
4 5 6
Industry Universe Filter Universe Longlist
Profiles Filter Long- list Shortlist
Profiles Follow up Lobbying First Contacts Filter
Short- list Location Visit Meetings Letter of
Intent Due Diligence Final negotiations
500 30-50 3-4 3 2 1
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III. Conduct Company Search

• Meet with project team
• Discuss Dos, Don'ts and Maybes
• Develop long-list
• Evaluate possible or desired candidates

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III. Conduct Industry Research - How to Find
Potential Partners
Two different approaches SCREENING vs.
NETWORKING
A large scale survey is carried out,but the
target may be outside the scope! Furthermore, the
result may be difficult to evaluate due to the
high number of companies fitting the criteria.
At first, known opinion leaders in related
companies are asked Who is the market leader
in..? Next, a step-by-step interview approach
leads to a limited number of targets.
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III. Case Study Medical Equipment Long-List (1)

• Electromedicine, incl. Cardiac monitoring,
  cardiac devices
• Target Location Status
• Beijing Jingbo Electro instrument
  Institute Beijing
• Tianrong Medical Communication Equipment
  Co.,Ltd. Xuzhou
• Shenzhen Mindray Bio-technical Electronics Co,
  Ltd. Shenzhen
• Huahai Electronics Co.,Ltd. Xian
• Jinkewei Industrial Co.,Ltd. Shenzhen
• Hospital Information Systems (HIS)
  Technology
• Target Location Status
• Beijing Xianda Medical Equipment Co. Beijing
• Beijing Yacht Information Engineering Tech
  Co.,Ltd. Beijing
• Beijing Image Technology Development Co.,Ltd.
  Beijing
• Shanghai Fugle Shanghai
• Picosoft Electronic Technology Development
  Co.,Ltd Shanghai

• Initial Contact Made
• Profile available
• Consider for short list
• Not interested
• High potential for Short List

1,2,3, 3,4 1,2,3,4,5 1,2,3 1
1,2,3, 3,4 1,2,3,4,5 1,2,3
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III. Case Study Medical Equipment Long-List
(2)

• Nuclear Medicine
• Target Location Status
• Beijing Jianerkang Medical Equipment
  Co.,Ltd. Beijing
• Beijign Beitu Dongya Bio-technical
  Institute Beijing
• Beijing Wandong Medical Equipment
  Co.,Ltd. Beijing
• Aisui Technology Ltd. Guangzhou
• Picosoft Electronic Technology Development
  Co.,Ltd Shanghai
• Ultrasound
• Target Location Status
• Angel Science and Technology Development Co.,
  Ltd. Beijing
• Anke High-tech Co., Ltd. Shenzhen
• Shenzhen Mindray Bio-technical Electronics Co,
  Ltd. Shenzhen
• Haiying Group Wuxi
• Therapy- radiation planning systems
• Target Location Status
• Beijing De-haier Technology Co.,Ltd. Beijing

• Initial Contact Made
• Profile available
• Consider for short list
• Not interested
• High potential for Short List

3,4 1,2,3,4,5 1,2,3
3,4 1,2,3
3,4 1,2,3,4,5 1,2,3
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III. Team Meeting

• Conduct a project team meeting to evaluate long
  list
• Define Dos
• Define Donts
• Define May bes

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Chronological Sequence II
Potential Targets
Month 1 2 3
4 5 6
500 30-50 3-4 3 2 1
Industry Universe Filter Universe Longlist
Profiles Filter Long- list Shortlist
Profiles Follow up Lobbying First Contacts Filter
Short- list Location Visit Meetings Letter of
Intent Due Diligence Final negotiations
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IV. Develop a High Value Short List
Hard Work
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IV. What is the True company value ?
Does your company invest or donate its money ?
vs.
In western society, motives are like the skin on
an apple, peel it off and you find the hidden
motive(s). Not so in China here youre dealing
with an onion with many layers. Therefore
making a substantial investment in getting to
know and checking the prospective Chinese
partner(s), is not money that should be
begrudged. The results of wrong preparation and
valuation can be read daily in the newspapers.
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IV. Structured Approach in Ascertaining True Value
Commercial (Soft) Due Diligence Operational Due
Diligence Management and staff audit
Environmental Due Diligence
Business/ Market
Legal Due Diligence
Financial/ Legal
Financial Diligence
Historic
Future
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IV. Develop a High Value Short List

• - Value Benefit Analysis
• 1. Agree on relevance of different factors within
  project group
• 2. Evaluate each factor (1poor, 5excellent)
• 3. Points Relevance Evaluation
• 4. Rate the results
• Apply criteria catalogue for all topics and
  companies
• Screen targets
• Establish short list

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IV. How to Evaluate Potentials? - Value-Benefit
Analysis

Evaluation 1poor, 5excellent Points
Relevance Evaluation
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IV. Develop a High Value Short List -
Value-Benefit Analysis

• Advantages of this approach
• - Technical and systematic approach avoiding
  prejudices
• - Mandatory assessment for all listed companies
• - Identical yardstick for all companies
• Disadvantages
• - Manipulation still possible. Result can be
  influenced
• by selection of relevant criteria

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IV. Case Study Illustrative Short-List

• Company Overview
• Established in 1995, Beijing ABC Technology
  Co., Ltd. has four branches, ten regional
  offices in Mainland China and Hong Kong, with
  sales reps and dealers scattering around the
  country. ABC HQs is based in Beijing Zhongguancun
  Technology Zone. In 2001, ABC invested heavily
  in setting up the 80000 square feet facilities
  for technical support, product development, and
  manufacturing, which feature
• a ISO management system for specialized mass
  production.

Address 12 Floor Jiuzhou Building, No. 89
Fuxing Road Beijing 109887 Tel. [phone], Fax
661111111 Email abc_at_abc.com Website www.abc.com

• Products Market
• Product development has been concentrated on
  anesthesia workstation and information management
  system, and video colposcope imaging system.
  Since 1996, ABC has been successful in
  representing international manufacturers such as
  WowMedical, Ita-Medical and USmed.
• Activities
• In 2001, ABC invested heavily in setting up the
  80000 square feet facilities for technical
  support, product development, and manufacturing,
  which feature ISO management system for
  specialized mass production. ABC is going to
  build up efficient and reliable partnership with
  international medical device manufacturers by
  contract manufacturing, technology transferring,
  as well as maintaining and repairing.
• Financials
• Total revenues of RMB62 million are expected in
  2002, 10 increase of 2001.
• Objectives
• Management and The Directors require a capital
  infusion to expand the business as desired, and
  are therefore looking for a strategic partner who
  would inject the cash necessary for radical
  expansion through internal growth and
  acquisitions.
• Ownership structure Private company

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Chronological Sequence III
Potential Targets
Month 1 2 3
4 5 6
500 30-50 3-4 3 2 1
Industry Universe Filter Universe Longlist
Profiles Filter Long- list Shortlist
Profiles Follow up Lobbying First Contacts Filter
Short- list Location Visit Meetings Letter of
Intent Due Diligence Final negotiations
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V. Preliminary Contact and Negotiation Approach

• First Contact
• - Have clear objectives
• - Be creative on the approach method and tactics
• - Meeting provide suitable environment, be well
  prepared, profound research
• - Prior to exchanging data and information with
  a negotiation partner sign a confidentiality
  agreement. If needed seek legal advice
  before Due Diligence!

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Chronological Sequence IV
Potential Targets
Month 1 2 3
4 5 6
500 30-50 3-4 3 2 1
Industry Universe Filter Universe Longlist
Profiles Filter Long- list Shortlist
Profiles Follow up Lobbying First Contacts Filter
Short- list Location Visit Meetings Letter of
Intent Due Diligence Final negotiations
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V. Negotiation Approach

• The approach needs to take into account that the
  negotiation partners face
• Barriers
• - different language, dialect
• - different culture and values
• - different legal basis
• - different interpretation of definitions
• - different level of knowledge
• Basic differences
• The Chinese learn 4.000 characters the
  Westerner learns 26
• Naturally this brings with it a different way of
  thinking, different definitions, the danger of
  misinterpretation etc.

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V. Characteristics of Western and Chinese
Approach
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V. Characteristics of Western and Chinese
Approach
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V. The Language and Cultural Gap
The gap between China and the West is big and
the two sides may very well talk past each other.
For all the words they never communicate.
Macartney, British diplomat in China, 18th
century
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V. Initiating Contact - Guiding Principals

• Make it easy for your partner to respect
  youhave patience, endurance, persistence and
  show interest
• Give your partner detailed information in advance
  about yourself, your company, its intentions and
  your authority
• Negotiate in a friendly atmosphere but stay firm
• Be careful with information it is a hot
  commodity
• Be diplomatic

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V. Initiating Contact - Guiding Principals

• Ask questions
• Do your homework, be well prepared with detailed
• knowledge
• Where there is no trust, there is no relationship
• A Chinese only does business with friends, not
  with strangers
• Raise issues, present them in a logical sequence

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V. First Meeting

• Watch out for details (how are you received,
  seating arrangements etc.)

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V. Negotiation Tactics and Guidelines

• Chinese negotiation mechanism
• Difficult positions are approached indirectly.
  Use a middleman to clarify positions and to
  fathom alternatives.
• Use an informal approach to gather information
• Dont be taken in.
• Chinese know how to present a picture we like
  to see. To seek truth from fact Deng
  Xiaoping

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V. Negotiation Guidelines

• Keep your options open
• Keep reserves for the final negotiation round
  with the top hierarchy
• Have negotiation alternatives at hand
• Have patience
• Negotiate step by step
• Confirm what you have agreed on in writing and
  move on. (Very useful for later renegotiation)

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V. Negotiation Guidelines

• Use clear and polite language. Make sure
  your message is getting through clearly.
• Set your own internal targets of non negotiable
  and negotiable items - and maintain them. Be
  firm on this.
• Work with different alternatives to find out the
  other parties priorities, so that the
  negotiation does not fail.
• Suggest compromises. React in a flexible way if
  you can not accept demands.
• Be careful if the other party adopts salami
  tactics.

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V. Negotiation Guidelines

• Remember
• A picture or sample replaces a thousand
  words. (An old Chinese saying)
• Illustrate your view point with examples from
  other areas, form daily life. It helps to
  make your point.
• Listen carefully
• Agree early on deadlines. Leave if you dont
  see progress, the partners reaction will show
  their sincerity.
• Remember Time has a different value in China!
  

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V. Negotiation Guidelines

• Maintain minutes to confirm issues mutually
  agreed on Give all negotiation partners a
  copy.
• The one who does the work controls the
  negotiation progress. In conflict
  situations, a detailed and exact
  documentation gives support for arguments.
• Occupy territory early. Open with a big move,
  make concessions that dont hurt. Draw back in
  slow, but not predictable steps.
• This will give the other side the feeling they
  are achieving success!

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V. Negotiation Guidelines - for Westerners

• The use of spies
• Corporate espionage is a critical element in
  China.
• Expect that the Company driver who brings you
  home after a day of hard negotiations speaks
  English/French etc. - thus he understands what
  you say to your colleague(s).
• Do not assume that the negotiator(s) require
  translators They only want to win time!
• Be creative - but act within the law - if you
  want to know more about your competitors
  business and intentions.

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V. How the Chinese view the Foreign Business
Partner

• Arrogance, showing off superior knowledge
• Lack of politeness
• Too direct
• Aggressive
• Lack of self-control, hot tempered
• Stubborn, hard, reserved
• Perfectionists, complicated, excessive strife
  for accuracy
• Lack of respect for Chinese culture and society
  
• morality, virtue, the elders (Result of a
  survey among Chinese managers)

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V. Europe is not one country but
 Heaven is Where the police are British the
cooks are French the mechanics are German the
lovers are Italian and all are organized by the
Swiss    Hell is Where the cooks are British the
mechanics are French the police are German the
lovers are Swiss and all are organized by the
Italian (some Stereotypes)
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V. Chinese Proverbs

• Sun Zhus 36 strategies for negotiating in China
  
• If you want to catch something you have to
  release it first
• Relax and wait for the opposition to tire
  himself out
• Lure the tiger out of the mountain
• Throw a brick to gain a Jade stone
• Make noise in the East while attacking in the
  West
• Watch the fire burning from across the river
• Conceal a dagger in a smile
• Retreat is the best option
• Decorate the tree with fake blossoms
• Use a beauty to ensnare a man

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V. Chinese Proverbs

• Deng Xiaoping
• It does not matter if a cat is yellow or black,
  as long as it catches mice
• Grope ones way stone by stone across the
  river
• Seek truth from fact (business records,
  statements, statistics etc)

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V. Finally
Define what you are looking for, combined with a
sound strategy, a solid negotiation
approach.and you have a deal. Mutual
misunderstandings can have momentous consequences
(e.g. The first British embassy to the court of
the Chinese Emperor in 1793)
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V. Recommended Literature

• Asian Values Western Dreams by Greg Sheridan
• The Immobile Empire by A. Peyrefitte
• Sun Tzus Art of Negotiating in China by
  Laurence Brahm
• The Asian Mind Game by Chin-Ning Chu
• Negotiating in China 36 Strategies by
  Laurence Brahm
• The man with the key is not here by Xiao Mao and
  Nan-Tzu

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