Dealmaking in China demands a different approach
May 19, 2022 | Case Study
Marcus Shadbolt, Managing Partner
Vermilion Partners is a Beijing headquartered investment banking advisory firm, offering cross-border and domestic financial advisory services in China, Europe and other Asian markets for over 25 years.
Chinese companies have routinely demonstrated how comfortable they are making overseas acquisitions. For foreign companies seeking to acquire in China, however, the process is much more challenging and time-consuming.
So much so, says Marcus Shadbolt, managing partner at Vermilion Partners, a Beijing headquartered investment banking advisory firm, that doing deals in the country “requires a different approach from other regions such as the US and Europe”.
Doing your homework is critical
Part of that involves knowing who to approach at the target company, and how. “Culturally, it is important to identify and approach the target in the right way even if it takes time to gain access properly,” says Shadbolt.
He adds, acquirers will need to demonstrate patience in their pursuit, too. “In many cases, it is important to guide the target company through the M&A process,” he says, as Chinese companies more often than not have little or no previous experience of due diligence or M&A.
This together with perennial challenges within the market has slowed down the dealmaking process, in some instances quite considerably. One of the most well-known challenges is the lack of publicly available information on Chinese companies, which presents all manner of problems for buyers across all stages of the M&A process, and especially at the front-end, when identifying targets and running preliminary due diligence.
‘Fast Forward’ due diligence
Virtual data rooms, which are commonplace in North American and European M&A markets, are seemingly rarely used in China.
“Standard vendor due diligence and virtual data rooms keep you at arms-length from the company, which is usually fine in Europe where the asset is well-known and the basis of information reliable and complete. But in China, there is often a lack of reliable information readily available so it’s essential to get to know the target intimately at first-hand,” says Shadbolt.
It is crucial, therefore, “to conduct an extra layer of diligence at the outset in order to invest time and resources in the right deals,” says Shadbolt.
To help, Shadbolt says Vermilion has pioneered an approach it calls ‘Fast Forward’ due diligence where, on behalf of the buyer, the firm conducts an initial investigation into the target company. This involves Vermilion spending time with the company’s management and undertaking an initial review, which often leads to the company restating its financial accounts so they are compliant and conform with western accounting standards. The process also involves looking for issues that might become deal-breakers and, more importantly, understanding how the target company really works across key business areas such as its supply chain, distribution channels and on corporate governance.
The aim of this is not to replace formal and detailed confirmatory due diligence, but to ensure there is the right basis for initial discussions. What’s more, by front-loading the due diligence in this way, this enables the acquirer to establish, as soon as possible, whether the deal is viable or not.
“It’s much better to do this early because it’s hard to revise heads of terms when you find something out later in the process,” says Shadbolt.