What are the merger and acquisition options for a foreign company hoping to enter the Chinese market?
M&A is a key component of the new wave of foreign investments flowing into China recently. There are two essential choices for foreign companies interested in M&A with domestic companies: direct and indirect M&A.
Unfortunately, there are no definitive or clear guidelines as to what constitutes direct M&A, however, there are 3 situations in which it can be found:
1) State-owned Enterprises (SOEs) using foreign investment in asset restructuring. It is common practice for SOEs to use this type of direct investment to pay liabilities and create working capital. The legal basis for this can be found in the "Provisional Rules on Utilizing Foreign Investment in Asset Restructuring of SOEs" (State Economic and Trade Commission (SETC), 1998)
2) Acquisition of small SOEs. The advantage of this situation is that companies who encounter difficulties getting licenses, may acquire a small SOE, thus eliminating the barriers and making it much easier to get a license. However, there are disadvantages to this situation as well. Small enterprises that tend to be available are not usually profitable. More often than not, they are close to bankruptcy, making it highly unattractive for M&As, as those that acquire them are also forced to take on its debts.
3) Local Regulations. This occurs when a foreign investor, a title which may be expanded to include Taiwan, Hong Kong or Macao, acquires assets ranging from a minimum of 25% up to 100% of a domestic enterprise. The foreign investor may then apply for approval and registration of that very enterprise as a EJV, CJV or WFOE.
The indirect method is self-explanatory, and occurs when a foreign investor invests in another company outside of China, and uses that very company to own parts of a Chinese firm. Most deals are done in an indirect M&A method, however, this method has many disadvantages. While indirect investment may be suitable for foreign companies who have already had a considerable presence in China's market, it may be inapplicable for companies who have not entered the market yet, and want to maintain a market share for only a short period of time.
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