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.
FIND YOUR FRIENDS AND MANAGE YOUR OPPONENTS
One way to get going is to prepare a comprehensive map of all opinion formers and decision makers potentially involved in the decision, linking them to the sensitive issues that a bid might provoke. If possible, identify domestic interests that will be friendly to the deal and will be effective advocates if the Ministry of Commerce, NDRC or SAIC approach them for an opinion. Encourage them to go public with their views. As well as seeking to demonstrate the benefits of a merger to consumers, consider how the deal aligns with Chinese government initiatives, such as the current focus on environmental sustainability and the call for the building of a “harmonious society”. Try to assess whether other parts of the Chinese government (sectoral agencies, state-owned enterprises, and others) would support such a deal.
Anticipating those likely to oppose, of course, and devising an effective strategy to manage them is just as important as lining up allies. This requires in-depth research of the public positions taken by the media and think tanks and at conferences in the past, and better still some detailed research of opinion leaders.
ENGAGE WITH THE LOCAL MEDIA
The Chinese business and financial press is increasingly capable and credible: engaging with local reporters, indeed, is a critical way of building a reputation in the market. Failing to do so can be costly. Our own conversations with journalists suggest that Coke was initially too conservative in the way it dealt with the local media, handing out press releases but engaging in little of the background briefing that would be considered normal and helpful in Europe or the US. Some reporters said that they could not get the information they needed to write a balanced story, especially early on. That allowed others – notably competitors briefing against the drinks giant – to grab the initiative. The impression gained ground that there was little public support – and not a little public opposition – to the Coke–Huiyuan deal.
The sense of frustration journalists feel when trying to get relevant information from companies is something we hear about a lot. International journalists have long said it inhibits them when trying to write positive commentary about Chinese companies; to hear the same cry from locals about multinational acquirers is a salutary lesson for those planning to bid for Chinese assets. Previously good media networks can get strangled in the legal anxieties over disclosure during an M&A, so even organizations with traditionally sound media contacts, as Coke had, can fast lose goodwill.
The Chinese local media is particularly thirsty for third-party commentary and connecting them with academics, analysts and other industry experts can pay off handsomely. Chinese journalists, like their counterparts in most other parts of the world, will give more credence to independent experts than to the principals in a takeover drama.
Do not, of course, neglect the international media. Nearly all stories with content related to China very quickly make their way into Chinese media: the views of the likes of the Wall Street Journal, Financial Times and Reuters, normally delivered through their increasingly popular Chinese language online editions, are all influential with decision makers, domestic media and opinion formers.
UNDERSTAND THE POWER OF ONLINE COMMENTARY IN CHINA
At the close of 2008, when the Coke transaction was officially made public, China had an estimated 300m internet users. Shortly after the news was announced SINA.com, a prominent online news provider, posted a special micro-website where it asked users to vote on whether they were in favor of the transaction. It attracted more than 500,000 hits, with a wave of negative responses in their online poll. This not only set the tone for the rest of the transaction but hampered efforts to reassert the consumer benefits.
This impact is increasingly common. Carlyle’s proposed acquisition of Xugong ran into an extremely aggressive and hard fought online media and blog campaign by one of Xugong’s competitors. Outside of M&A, companies such as Starbucks, which was pressured to close an outlet in the Forbidden City, understand the power of bloggers to disrupt their business objectives in China.
M&A in China is as much a political as a judicial process. The opaqueness, newness and complexity of the regulatory regime mean it may appear unpredictable. But fast, up-front and clear communication to relevant opinion leaders and both local and international media can help convince the public, educate officials and overcome the distrust with which inbound investment is often unnecessarily viewed.
TIMELINE OF A DEAL THAT FAILED
August 1, 2008
China’s new Anti-Monopoly Law becomes effective.
Coca-Cola sponsors the Beijing Olympics at an estimated cost of $400m.
Coca-Cola and Huiyuan jointly announce a conditional cash offer to acquire all of Huiyuan’s issued shares and outstanding convertible bonds. The deal was valued at HKD 18bn (approximately $2.4bn), of 300 per cent more than its closing price on Friday August 29.
Online media group SINA announces that more than 80 per cent of respondents to its online survey voted against the acquisition; coverage highlighted that the loss of the brand to a foreign firm would be a travesty and referenced Procter & Gamble’s (P&G) acquisition of major domestic washing powder brand Panda and how P&G had systematically decreased annual production from 60,000 to 4,000 tonnes.
Coca-Cola submits notification materials to MOFCOM.
September 25, October 9, October 16, November 19
Coca-Cola submits supplementary information in accordance with MOFCOM requirements.
MOFCOM informs Coca-Cola that it is officially starting the first-stage review of the proposed transaction.
MOFCOM decides to conduct a second review
March 6, 2009
Coca-Cola announces it plans to invest $2bn in China over the next three years. The investment would go toward new plant and distribution infrastructure, sales and marketing, and research and development.
Two days before the end of the 90-day review limit, MOFCOM announces the rejection of the proposed merger.
Tim Payne is Managing Partner of Brunswick’s Asia business and is based in Hong Kong. He is grateful to Simone Yew and Gil Ohana of WilmerHale and Taiya Smith, Visiting Scholar at the Carnegie Endowment for International Peace, whose Insights contributed to this article.