The decision of Chinese regulators in early 2009 to block Coca-Cola's planned $2.3bn purchase of leading local juice-maker Huiyuan has raised concerns in the minds of other would-be overseas-based acquirers.
In the wake of the tough divestment conditions imposed by China’s competition regulator on InBev’s merger with Anheuser-Busch in 2008 – and together with the strictures placed even on outbound M&A – the Coke decision highlights not just the changing legal and political landscape in one of the world’s most exciting economic regions, but the worrying prospect that more deals could be stopped.
The message is clear. Companies contemplating adding to their China portfolios, either directly or by undertaking a deal that has the potential to touch China, should carefully consider the best ways to convince the authorities that their plans can proceed.
M&A success everywhere is dependent on a variety of factors, including price, industry fit and financing. But the experience of working with multinationals in China over several years tells us that good outcomes increasingly hinge on proactive legal and communications strategies.
Communications matter in China because, contrary to what some may think, the public view is taken seriously. Deciphering and influencing it is tough in the Chinese political environment, but by adopting a proactive strategy – identifying supporters in advance, engaging with the local media and understanding the online environment – companies can significantly improve their chances in the high-stakes M&A game.
China, it should be stressed, remains generally welcoming to investment by foreign-owned companies and the vast majority of proposed investments are approved.
Companies with an eye to the M&A landscape should nevertheless be mindful of the range of regulatory authorities involved. It is a list that includes the Ministry of Commerce (MOFCOM, responsible for the overall merger review), the State Administration for Industry & Commerce (SAIC, responsible for investigating abuse of dominance) and the National Development and Reform Commission (NDRC, responsible for price-related anti-competitive behavior). China’s Anti-Monopoly Law, which became effective on August 1, 2008, provides the legislative framework, and reviews related to M&A are undertaken mainly on anti-monopoly and national economic security grounds (similar to CFIUS, the Committee on Foreign Investment in the United States).
But it has become apparent, arguably in the Coke case, that agencies may refuse to approve transactions involving a well-known trademark or famous Chinese brand. The process also tends to be delegated to the lower levels of agencies and too often results in complex, opaque and sometimes contradictory decisions. And with three regulatory bodies there is inevitable jockeying for power; with Coke, for example, the Ministry of Commerce appeared unconvinced that other agencies would have been able to remedy any future anti-competitive consequences of the proposed merger, which would no longer fall on MOFCOM’s turf. The timing of the process, meanwhile, can be hard to predict and the reasons for rejection are often vague and unclear, perhaps a product of the heavily political context in which decisions are made, though equally likely something that China’s regulators will quickly learn to present better.
In such an environment companies have to move quickly to engage in the regulatory process so as to set the agenda for discussion and debate. In our experience acquirers should ensure that three main areas are covered. First, they need to anticipate well ahead of a bid who their opponents are likely to be. Second, they have to engage the domestic media. And finally, they should beware of, and plan for, the societal reaction – especially online.