International Financial Management Group Work 王启乐 09301005 林绮晴 09306028 吴小旋 09306010 2013/1/15 1. Find the stories of companies that have done a good job of implementing critical successful factors necessary to implement a M&A activities. And re-edit as a CASE-STUDY format. In 28th September 2008, ZOOMLION signed an acquisition delivery agreement with CIFA, and they finally completed the M&A. Backgrounds for this M&A CIFA CIFA was an Italian engineering machinery manufacturer, founded in 1928 and headquartered in Italy. It had seven domestic factories in Italy, two sales/service centers in the United States and Mexico. CIFA had a good reputation in the industry by its producing concrete batching plant, concrete pump, concrete mixer truck, concrete cloth machine, stabilized soil mixing equipment, concrete jet car and concrete construction formwork, etc. CIFA is one of the big three of concrete machinery manufacturers and big two of concrete pump, concrete pump truck manufacturers in Europe and the United States. Its core competitiveness is its performance-price, it has a 10% - 20% price advantage relative to the global industry. Relative to the Asian concrete machinery manufacturers, it has technical advantage and brand value advantage. In 2006, CIFA acquisitioned by private equity investment fund Magenta. In October 2007, Magenta and CIFA’s two holding families decided to sell the shares as its asset-liability ratio is up to 83%, earnings per share are bad. Zoomlion Zoomlion co., LTD., (hereinafter referred to "zoomlion") founded in 1992, is the leader of Chinese construction machinery equipment manufacturing enterprise. Zoomlion mainly engaged in high-tech equipment’s R&D and manufacturing of required construction engineering, energy engineering, environmental engineering, traffic engineering, and other key state infrastructure construction engineering. ZhanChunXin, chairman of zoomlion, said that he doesn’t want to compete among the home country, but he wants to compete with international competitors and be the leader enterprise in the world. So zoomlion is always on its way to become international and professional. In 2001, zoomlion acquired English the way the company 80% equity by $1.96 million. This was the first successful case for domestic enterprises merger and acquisition with international well-known enterprise after China joining WTO. This acquisition helped zoomlion to make expansion in Europe from technology, capital and market aspects. It was also the milestone for zoomlion’s internationalization strategy. At the same time, this march in trenchless construction fields results in a promotion in technical level for at least twenty years in advance. On August 30, 2003, the largest mergers and acquisitions agreement of Chinese construction machinery industry signed in Changsha. Form that on, PuYuan engineering machinery co., LTD incorporated into zoomlion as a wholly owned subsidiary. This gave zoomlion the national leading position in hoisting machinery field. In the meanwhile, the enterprise became a relative state-owned, equity diversified listed company, thus completed the transformation form research institutes to internationalization enterprise. On March 25, 2008, zoomlion purchased 100% shanxi New HuangGong machinery co., LTD. with RMB 34 million. With the aid of New HuangGong company acquisitions, zoomlion successfully went into the field of mechanical field conditions, realized the diversification of the products and the horizontal extension of industrial chain. Details for this M&A On one hand, zoomlion wants to accomplish its internationalization strategy with the help of CIFA’s advanced technology and channel of distribution. On the other hand, CIFA wants to solve its financial problems, even carry forward its business. Under this condition, the M&A between zoomlion and CIFA comes. Zoomlion brings in some selected Common investors. They are Hony Capital, Mandarin Capital Partners, Goldman Sachs Group Inc. All these investors are professional, but they have different advantages. Hony Capital focuses on domestic professional investment companies, and mainly invested in mature enterprises of mature industries or emerging industries. It also pays close attentions to those state-owned enterprises for mergers and acquisitions and private enterprises with rapid growth. Mandarin Capital Partners is now the largest sino-italian private equity fund. It has raised 328 million euro. Its mission is to improve the process of globalization of Chinese companies and help them to get distribution channels, global brand, as well as professional technical efforts in Europe. Goldman Sachs Group Inc has rich region market knowledge and operation ability. Along with the development of global economy, the company also continuously develops to help customers quickly discover and seize the investment opportunities around the world. After the merger, zoomlion, with CIFA, builds the development platform, taps strategic market, firmly keeps a foothold in the concrete machinery field. Of course, zoomlion realizes the profit growth. With 3 years’ integration, zoomlion and CIFA are in good system. Zoomlion formally becomes the biggest enterprise of concrete equipment manufacturers in the world. 2. Read the case that you have edited, and hand in your views and analysis on four questions as follows: (base on your understanding of FINANCIAL MANAGEMENT, MARKETING, TECHNOLOGY, ECONOMIC CHANGE and so on.) 1) State the critical successful factors that are the focus of the successful M&A activities. First of all, according to the "law of seven-seven", 70% of the M&A have failed to realize their expected commercial value and 70% of those failures result from the cultural integration after M&A. As the time of Cross-border M&A, cultural differences will be the biggest barrier. In order to solve this problem, Zoomlion is particularly careful when choosing the joint investors. Hony Capital, a Chinese local fund, possesses an international view. Goldman Sachs is an investment agency with plenty of experience of global investment management, and Mandarin Capital Partners’ management team is an Italian team relatively familiar with China's national conditions. In the earlier stage of integration, this combination can effectively buffer the conflict of culture and concepts. It constituted a valid "cultural buffer zone", so that the direct collision during integrating different enterprise cultures can be reduced, and the smooth progress of consolidation guaranteed. After purchasing, the attention to the cultural integration also played an important role for the acquisition of propulsion. Another critical successful factor for M&A is the structure design, since they must consider the convenience of putting investment funds into Europe and getting dividend return, making the most reasonable and efficient tax arrangement based on the international tax rules. Issuing debt, borrowing or direct CIFA shares holding will be proceeded through a company B with a special purpose established in Hong Kong. Besides Hony Capital, Goldman Sachs and Mandarin Capital Partners, the wholly-owned subsidiary A found in Hong Kong of Vanda Hong Kong co. LTD which is the Zoomlion’s subsidiary companies in China holding 60% of its shares. This purchasing framework enables the company to reduce cost this way in the future. What’s more, the reasonable strategic objectives are also critical to the success of ZOOMLION. Zhan Chunxin, the chairman of the board, once set a strategic objective that the company would become the NO.1 in Chinese machinery industry and enter the world’s top ten in five to ten years. In order to achieve this goal, obviously, epitaxial expansion such as is essential. They should actively make M&A event, enrich product category from components and parts to financing leasing industry. To achieve its long-term goal, Zoomlion "have to" conduct through "fission" and whether this "fission" go smoothly is related to the company’s fate. Therefore, serial acquisition will bring both benefit and risk to Zoomlion. Those serial deals and multinational acquisition CIFA are seemingly absurd, however, in fact, they have been carefully designed by Zoomlion. Each of them is to improve Zoomlion’s product category and market structure, and eventually to realize globalization. Purchasing PowerMole is for getting trenchless technology, PuYuan crane lead core technology, Shaanxi New HuangGong developing mechanical field conditions and CIFA the first position in global concrete field. Concentric diversification makes a increasingly strong presence of Zoomlion’s core competitiveness in mechanical manufacturing; from single to multiple makes its leading position more and more stable. There is no denying that Zoomlion is far-sighted in brand strategy planning. Preceding domestic rivals, they build a fairly stable and complementary brand strategy through a series of merger, acquisition and restructuring. The power of their committing to globalization also cannot be denied. Purchasing the world’s third and becoming the world's first fundamentally change the structure of domestic competition, and make a good start in internationalization. The philosophy of Zoomlion is: never spend time in self-replicating at low starting point or relying on the simple accumulation to complete scale expansion, but use capital, an eternal golden link, to achieve your ambitions. In general, the enormous achievement Zoomlion has made in decade is based on capital use and strategic deployment. 2) List the summary of lessons learned which made the factors successful. So far, all of the above listed are critical successful factors in acquisition case of Zoomlion and CIFA. Under the background of economic globalization, there are other factors which will affect the M&A activities success.The success of the M&A depends on whether the integration of two companies is efficient to enhance the core competitiveness of enterprises. (1). Ability of Strategic integration. The strategy integration in the process of merger and acquisition is to integrate the preponderant strategies of two enterprises in order to improve the profitability and core competitiveness of the enterprise.Strategic integration is not only to get new core ability, but also to solve problem of new ability and the original one getting together. (2). Ability of Organization and system integration. The target of organization and system integration is to form a unified organization structure and management system after M&A, in order to realize the stabilize the operation as soon as possible. The applying of integrated management system should hep to realize the establishment of the scientific management standardization, planning, decision-making and balances system to help enterprises to achieve expected goals. Only if the enterprise improve its management, it can achieve good results after the M&A activity. (3). Ability of human resource integration. Human resource is the important resource of an enterprise so the integration of human resource is a critical factor which determines the success of M&A. Enterprises should develop the stability of its own policy to maintain important talents, ensure smooth internal communication, and cultivate the employee commitment through the time of M&A integration as soon as possible. (4). Ability of culture integration. The most difficult factor after the M&A is the cultural integration. According to the statistics, in the past two years, 65% of the global merger and acquisition enterprise ended in failure, of which 85% CEO admitted that management style and corporate culture difference are the main reasons for the failure. The reason why cultural integration becomes the the most difficult task of M&A integration is that the enterprise culture is deeply rooted in the history of the organization which affects value orientation and behaviors of employees. The integration of enterprise cultural is essentially the change of human thought and behaviors, which can hardly be solved by any rules and regulations. 3) What is the company should do next to improve its post- M&A initiatives. (1) Strategy integration. Zoomlion’s strategy is focusing on development and improvement in engineering machinery field and aim to becoming an international enterprise group. CIFA company vision is competing business in engineering machinery sector with Piao time meister companies which is the leader of this field in euro. So, we can see that strategies of zoomlion and CIFA are basically consistent. It is not that difficult to do the strategy integration. (2) Cultural integration. As the differences in language and culture between Italy and China are so large that, zoomlion should adopt a series of measures to meet the cultural integraation, such as suggesting Chinese staff to adjust to Italian business habits and do negotiations directly. Also, both zoomlion and CIFA should encourage their personnel to learn the new language, culture, communication system, etc. In this way, staff can establish a good working relationship and cooperate with each other efficiently. (3)keep CIFA’s independence. Zoomlion should basically keep CIFA ’s independence, especially in the human resource part. Zoomlion can transfer the original CIFA CEO to zoomlion headquarters to be a vice President of strategic planning and development department. (4) Establish a coordinative office. Zoomlion can set up a "collaborative office" to carry out cooperative mechanism. Market group, technology group, the production group, procurement group and comprehensive management group are involved. In every aspect of integration, both zoomlion and CIFA should give their advices. Only in this way, interface can be done. These steps, on one hand, can help to realize the Chinese producing of CIFA products, improve CIFA products’ performance-price in China; On the other hand, can help to transfer home-made parts to CIFA global supply chain system and rapidly improve the customer value. Moreover these steps can optimize CIFA global supply chain system, reduce its global sourcing and operation cost, improve its global competition ability, and finally realize the transfer of CIFA advanced technology to China and get the initiatives from the M&A case. 4) It is reported that Chinese government has imposed some restrictions on foreign companies’ involvement in M&A activities, please provide your analysis to the rationale behind the government policy mentioned above. For example, September 3 in 2008, it was announced that Coca Cola had quoted 17.9 billion HK dollars to purchase Huiyuan company in China. After one years later, this activity was rejected by the Ministry of Commerce, applying the related clauses of Anti-Trust Law in China. Although it aroused many arguments among countries, there is rationality for Chinese government to implement such policies. In international mergers and acquisitions, the government is always responsible for the maintenance of the interests of the state. According to UNCTAD, one of the reason why the MNCs prefer international merger and acquisition is to obtain host country’s strategic assets, such as trademark, franchising, patents, local technology and distribution channels and they are also able to bypass some trading barriers, which can quickly occupy the local market in the international market full of fierce competitions. As the M&A activities refer to the interests of the state, the government always interfere with them at varying degrees. Not only China, even the United States where the restrictions of foreign investments are few, make some limitations on some M&A activities especially in industries of communications, transportation, real estate, natural resources, energy, banks, insurance and so on. It is understandable of China to set restrictions on international M&A activities especially the Coca-Cola and Huiyuan case mentioned above. There are four reasons that behind the prohibition of the acquisition and other similar situations. First of all, it’s the very way to control the foreign company occupying the Chinese market. In the Coca-Cola and Huiyuan case, as we all know, the Coca-Cola company is to some extent a monopoly enterprise of soft drinks in the world. If the M&A activity carries out, Coca Cola has the ability to conduct the monopoly place of soft drink industry to the juice industry, which may cause that few other companies being able to enter this industry. Huiyuan has occupied 46% market share of juice in China and Coca-Cola had 25.3% market share. If those two companies joint together, there may be 70% market share occupied by the M&A activity. That is to say, the competitions in juice industry will be restrained, leading to the severe operating condition of the medium-sized and small enterprises of China. Chinese government hope to stabilize the market share of domestic companies. In addition, if the other companies can hardly enter this industry any more, the employment of China may decrease to some extent. Secondly, the M&A activity may negatively affect the profits of orchardists, who are in the upstream of the supply chain. As many factors of the fruits growth including life cycles and farming seasons, it is the seller market, channels and processors who have the decisive influence. It is likely that upstream supplies abuse the dominant position in the market after foreign company dominant the industry, which had happened in the soybean market in China. Thirdly, the M&A activity involves large amount of capital transferring between related countries. Huiyuan is a large state-owned enterprise of China. Chinese government interfering the economic activity is also partly because that if Coca-cola acquires Huiyuan company, China will transfer a large amount of capital to foreign countries, while huge amount of dollars may flow into Chinese market, which will make the financial market unstable. Fourthly, technology factor is also a worry of Chinese government to take the action on such M&A activities. Technology innovation is a big concern of China in whichever industries, with which the competitiveness of Chinese products can increase. The company of developed country acquiring Chinese company may bring new technology of western countries to some extent. Yet, if the big company like Coca-Cola seize the leading position in the drink industry, there is little space for Chinese-domestic companies to live any longer, not to speak of developing the new technology of their own in this industry. The M&A activity may have more negative impact than positive impact on the industry technology development. All in all, M&A activities between China and oversea countries may have large impact on Chinese employment, economic growth, industry structure, technology and other aspects, which are the important factors of macro-economic. In order to achieve those goals, it is necessary for Chinese government to make restrictions on the foreign companies’ involvement in M&A activities, in case that the negative effects occur. 5)Under the current International Financial Crisis, what are the advantages and disadvantages for the proposed M&A activities? Please explain. Since 2008, the international financial crisis has been more and more severe. Foe the reasons of maintaining the resource supply to the economic growth, transforming the mode of economic growth and dealing with the industry competitions in the varying situation, many enterprises in different countries have launched international mergers and acquisitions, which are the important methods of realizing the fast growth and global operations for the enterprises, and also the strategic method to obtain the resources such as technologies and market. Some countries like China keep the continuous economic growth and domestic demand, which provides a good environment for M&A activities. Also, the global financial crisis creates some opportunities of overseas mergers and acquisitions for enterprises. The advantages of M&A activities especially for parent enterprises are as follows: Firstly, obtaining the resources from others. The M&A activities for accessing resources are influenced obviously by the economic situation.By the influence of the worse global economic situation, the International Monetary Fund continuously turn down the expectations of 2009 world economic growth. However, some countries which are little affected by the crisis can still expect maintaining fast economic growth. Under the circumstance, those countries are still faced with huge energy supply gap in production areas and the consumption fields. Little economic growth of the countries of Europe and the United States, which are the major energy consumers, may lead to some development stagnation of the enterprises of energy production and processing. At this time, it provides a good chance to take actions of M&A activities. For example, 2009, China Oilfield Services Co. LTD. Purchased Norwegian Offshore Drilling Company ASA equity, which referred to 2.5 billion dollars. Secondly, obtaining the technologies from others. Compared with the multinational companies of the developed countries, most of the enterprises in developing countries are still at the stage of chasing after the leading technologies. Since the latter half of 2008, some leading enterprises of advanced technology in Europe and the United States are faced with financial distress. In these developed countries, the financial crisis is moving to deeper economic crisis. The reason is that the real economy and financial system have close interdependence, and once the financial system collapses, operation chain is easy to be broken, the entity enterprise may be cut off, which provides the developing countries with the opportunity of entering the countries with leading technologies to access and learn from their technology. Under the circumstances, some IT high-tech enterprises, and equipment manufacturing enterprises can beneficial the most from M&A activities. Thirdly, capturing the international market share. International M&A activities are the important methods for the enterprises to enter the overseas market quickly. Faced with the international financial crisis, it is the perfect way for some enterprises of developing countries to make the acquisition of mature enterprises with mature sales channels to capture the foreign market share. In our group case, Zoomlion acquired CIFA which is one of the biggest concrete machinery manufactures in the world in September 2008. After the completion of the acquisition, Zoomlion has become the leading enterprise of the world concrete machinery industry. CIFA originally had big market share in Europe, the United States, central Asia, the Middle East, Russia and other areas and had the establishment of a sales and service network. Through the transaction, the company can not only enter the eastern Europe, Russia, India in a short time which are the places with the potential development, it can also save the high cost of opening European market and accumulate funds to develop other markets. In addition, through the brand interaction, it can improve the position of Zhonglian brand in the international market rapidly. The advantages of M&A activities especially for the enterprises merged by other companies of other countries are obvious in the international financial crisis. The financial crisis negatively affected the entity economy. Many companies are faced with the problem of capital shortage. Along with the decreased demand of the consumers, they are likely to take the action of cutting down the market share, which lead to the reduction of production process and accordingly the unemployment of the whole society increases. The international M&A activities properly solve all the problems. The parent countries will bring a large amount of currencies into where the subsidiaries are located, to some extent deal with the shortage of capital. And the original company can still keep operation in the severe economic environment, which may maintain the employment, stabilizing the business as well as the living condition of employees. In general, being merged by the companies from other countries may stimulate the economy of the host country. Although international financial crisis creates many opportunities for MNCs take M&A activities, the crisis covers a large scale in the world and may last for a long time, there may also be disadvantage when M&A occur. M&A is a huge systematic project. According to the international experience, 70% of international M&A didn’t receive the desired effect. Some enterprises cannot get rid of the shadow from the failure of overseas mergers and acquisitions.There are many risks in M&A activities especially in the international financial crisis, which may considered as the disadvantages. First of all, the financial risk. Financial factors include inflation, interest rates, GNP growth and labor costs. These factors can affect the cost of production and revenues to the subsidiary. In the particular time of financial crisis, the inflation, interest rates and currencies’ exchange rate are all unstable, which causes the volatility of the cash flows and capital values of companies. One of the disadvantages of the M&A activity is to bear more unstable financial factors than in other normal times. Secondly, the agency problems. The agency problem reflects a conflict of interests between decision-making managers and the owners of the MNC and agency costs occur in an effort to assure that managers act in the best interest of the owners, which are normally larger for MNCs than purely domestic firms, because MNCs incur larger agency costs in monitoring managers of distant foreign subsidiaries. In addition, foreign subsidiary managers raised in different cultures may not follow uniform goals, especially when the economic condition is not the same as before. Thirdly, the country risk. Forms of country risk include the possibility of blocked funds, changing tax laws, public revolt against the firm, war and a changing attitude of the host government toward the MNC. The countries faced with the financial crisis severely is likely to take more open policies to welcome some MNCs stimulating their economy. Although it is a long-term situation, the economy life cycle reflects the ultimate recover of economy, which may change the attitude of the host government toward MNCs at that time. MNCs should make analysis carefully in case that the tax laws and restrictions is carried out in host countries. In addition, the war risk is an inevitable factor to MNCs that they should always bear. In a short, in the international financial crisis, when carrying out the M&A activities, the companies should not only grasp the opportunities, but also analyze calmly and properly avoid risks.