Nicholas V. Chen was featured in a report titled “New Horizons: How external counsel can help you explore and secure market entry opportunities“, published by IR Global. This report features contributions from several IR Global members and was distributed in the Association of Corporate Counsel (ACC) newsletter to their members. Below please find an excerpt from the China/Taiwan section. If you would like to download the full report from IR Global directly please click here.

QUESTION 1

What are the biggest advantages of using M&A to enter new markets in the current landscape, as opposed to market entry via exporting, direct investment, subsidiaries,
and other methods?

New foreign market entrants may compare greenfield start-ups vs acquiring existing targets, which reflect different strategies and implementation plans. Each approach entails different starting points and presents different potential growth trajectory and velocity. By incorporating more local insight, market knowledge and operational capacity, one can significantly enhance the enterprise’s ability to build a sustainable, scalable,
resilient business.

Assuming suitable targets can be identified as a baseline platform, entering a new market through M&A allows the investor to “hit the ground running.” To capitalize on this beachhead, the challenge becomes how to continue to grow, meld and acquire additional key components of a successful business including:

  • Key upper management, technical, supply chain and operational teams (including China proven HR, legal, security, logistics team leaders)
  • A recognizable and trusted local brand for market traction. The days of blind adoption of foreign brands are gone in China. Building and managing localized intellectual property capital is an important factor for success.
  • Insight into complex consumer/customer preferences. Chinese consumers have very specific tastes and needs that will likely not mirror those of consumers in your home market. Your product/service offering will need to meet local preferences.
  • Compliance capacity. Local systems to manage relationships with key stakeholders in government and others in the ecosystem related to each industry.
  • Capacity to manage regulatory approvals systematically.
  • Logistical infrastructure/assets (distribution centers, vehicle fleets, manufacturing facilities, AI and e-capabilities, etc.).
  • Future opportunities and repeat income business streams to be cultivated based on serious market ‘street-smart’ understanding of trends and supply/demand.
  • Understanding of the local context and its connection to global trends.

In reality, finding a perfect target that offers all of the above might prove to be “mission impossible”. The next best thing is to work with a knowledgeable team on the ground that can develop a strategy to find several targets that together provide the competencies needed to address any gaps.

QUESTION 2

The social and environmental impact of target markets are becoming a key part of M&A – what’s your advice on how clients can navigate this complex area and gain full transparency?

The post-WW2 Bretton-Woods religious commitment to “maximizing shareholder value” had its Chinese parallel in Deng Xiao Ping’s “To Get Rich is Glorious”. Spectacular double-digit growth for decades, with many innovative disruptive enterprises dominating new sectors, has been visible across the Chinese, regional and global business-scape.

The externalities of environmental pollution, increased wealth gap and deterioration of the rights of marginalized and under-represented stakeholders has received governmental and regulatory attention. Market penalties and increased enforcement, denial of access to financing and listing, and the recent focus on “Common Prosperity” are certainly trends for the future.

Even dominant local champions such as Alibaba, Tencent, Didi and many local companies have begun adjusting to this new paradigm and megatrend. Lavish waste, ostentatious consumption and high-profile flaunting of wealth are closely associated with potential corruption and tax evasion.

While different than western ESG standards, China has already begun to implement and enforce its own CSR and de-carbonization commitments. International companies that do not learn and abide by these evolving guidelines and systems operate at their own peril.

Some Chinese banks have adopted Equator Principles to ensure that project finance access must comply with EP/IFC Performance Principles. Thus, annual corporate performance certification by third party professionals will be required for project finance. Corporate laggards who fail to comply will be in a Jerry McGuire scenario with their shareholders, unable to secure financing necessary to “show them the money”.

QUESTION 3

Corporate acquirers are facing stiff competition from private equity players on the global stage, changing the pace of overseas M&A. What’s your advice to clients trying to navigate this competitive, fast paced M&A market?

Corporate, PE, or hybrid PE/Corporate buyers along with founders and other stakeholders in an M&A deal are very different animals with often divergent goals. The goal of maximizing shareholder return is often incompatible with broader stakeholder interests such as ecological responsibility, community engagement, workers’ rights and the many guidelines set out in ESG, CSR and Equator Principles. The interests of
founders to protect their management team and the workers who built the startup may take precedence over maximizing profit in the short term. Time horizons, strategic development pathways, leveraging different talents and strengths over time are likely to be more important than maximizing stock price. PE investors are often focused on valuation at an earlier exit, when a corporate player is looking at a longer time frame.

Trying to compare lychees and kumquats can be misleading. Focusing on operational and market realities such as synergies, teamwork, leveraging strengths, and many other things that not countable on a balance sheet are less important to pure financial investors. In truth, many pay lip service to the value of operational and management teams, but in reality have little real understanding of the complex realities of operating in a rapidly changing Chinese market. A corporate buyer can get an edge over a purely financial investor by showing the target that they are committed to work together to generate sustainable growth.