Invest in mid-market buy out opportunities in China only through cross-border strategic investment vehicles that will invest and obtain control simultaneously in local companies located BOTH in China and in North America presenting substantial synergies.

Upon completing the M&A exercise, the Western company will contribute
state-of-the-art management, processes & systems to the China entity, as well as access to Western markets, becoming a vehicle for an IPO in a suitable Western stock exchange.

Background: China and other emerging economies in Asia

China and other emerging economies in Asia have become highly attractive to international investment management firms. However, few investment candidates in these countries have the management and operational standards Western Private Equity investors expect.

Main consideration

Furthermore, the typical Western model of assigning a new turnaround leader to the invested company in China/emerging Asia is unlikely to work. Operational capabilities of the Asian target are likely to be excessively undeveloped, i.e., totally inefficient and ineffective, often just nonexistent altogether, for a single person or even a full new management team to execute a turnaround in any sensible period of time.

Risk minimization

Investments in China/emerging Asia are less risky if made through a suitable strategic partner, e.g., a North American company that will provide managerial resources, install proven operational processes & systems, training both locally in Asia and back home, and facilitate access to international markets, including market intelligence, strategy and channels. Simultaneously, the Western partner is likely to benefit from existing sourcing & manufacturing operations in, and access to China and other Asian markets.

Preferred structure

This structure requires a cross-border investment vehicle that will originate investments simultaneously in two synergistic local/regional companies in two continents, China/Asia and North America (or Europe). Currently, investment funds are practically continent-centric. Their geography-driven operations often prevent their investment managers from considering simultaneous related investments in two different continents, hence the need to create a new vehicle.

Investment execution

The investment process will entail two parallel efforts. One initiative will focus on identifying a suitable Western company, which may possibly be suffering stagnation or lack of growth, but with well- established, efficient operations, brand and market share. In parallel, another effort will focus on screening emerging China/Asia companies with high investment potential, which have reached maximum potential locally on their own, and are ready to partner with/acquire a foreign entity to go to the next level, i.e., an international expansion, through an M&A / RTO initiative funded by this cross-border investment vehicle.

Value generation

Rigorous operational M&A due diligence will ensue. The investments will be structured and executed generating untapped value resulting from the M&A effort, implementation of efficient Western systems & management, and both entities growing in new markets. Exit alternatives will be assessed, including IPO potential in a capital market valuing this Asia–North America model, or strategic sales.

Conclusion

This innovative model, while conceptually quite straightforward, requires extensive strategic expertise in identifying the investment targets, their synergies, opportunity for value creation, structuring the transaction, and overall planning and execution of the investment and subsequent M&A exercise. The opportunity for value creation in our global economies is immense, but the challenge is not insignificant either.

About the author: Jordi George Argente

Jordi George Argente is an experienced professional working at the Board-level, with over 20 years of international management experience, including a large-scale turnaround for a State-owned enterprise in China. Mr. Argente has developed innovative concepts for private equity groups managing global VC & mid-market buy-out funds wishing to invest in China and other emerging economies.

China is synonymous with strong and secure economic growth. Indeed, so entrenched is this sentiment that commentators talk of Chinese exceptionalism; i.e.; that the usual rules of economics do not apply. But rules are rules. And there’s concern that China’s rapid build up of credit has left it vulnerable to a sharp slowdown. A very fragile China are in deep trouble that will impact globally!

Dragon’s Debt. China’s solution to the economic and export fallout from the financial crisis was to invest more at home.So it’s been consuming a strong cocktail of excess investment fueled by large debt. It’s a heady brew that leaves the country’s banks sitting on a high level of bad loans, as signaled last week. And the strains are beginning to show. As China faces this problem/major issues globally while trying to reform its economy, the best outcome is that growth will slow substantially. But there’s still time to avoid the worst. China`s issues will impact on global economies and effect growth!

UK`s Two Directions. Although the number of mortgage approvals fell in April, the average value of each approval rose. The UK housing market is currently experiencing two opposing winds. One is new mortgage regulations, sensibly aimed at ensuring borrowers are better able to afford a future rise in mortgage rates. The other is rising demand, supported by Help to Buy. So far the scheme has helped over 27,000 households buy a home, most of who bought properties valued at £250k or less. Banks lending to many very high borrowing proposals for houses and many overseas buyers just buying for investment and not letting the houses!

A stitch in time. No member of the UK Monetary Policy Committee (MPC) has voted for a rate hike for almost three years (since July 2011). But it looks like that will change before too much longer. In an interview with the Financial Times, MPC member Martin Weale said that if you want to raise rates gradually, then you have to start sooner. He said “we can wait a bit longer” but the implication is he will be voting for a rate hike before the year is out, possibly as early as August. If markets are correct, it will be the first half of next year before a majority of the nine-person committee joins him. Major challenges on bank rate rises will see many house borrowers very worried for the future!

And I’m feeling good. UK firms and households are feeling chirpy. May’s GFK consumer confidence index rose to its highest level since 2005. Although consumers are particularly pleased with the UK’s economic performance, as well as hopeful about the future, they’ve yet to see a marked improvement in their own finances. Likewise, the CBI growth indicator reported that British firms are experiencing the strongest growth in orders and activity since the survey began in 2003. We already knew the UK economy has a spring in its step. But few of us mind being reminded of our good points all the same. Growth based on UK government and domestic borrowing THEREFORE TROUBLE AHEAD WHEN THE UK BANK RATE RISES!

Do not panic. US output shrank by 1.0% on an annual basis in the first quarter, enough in normal circumstances to have us reaching for the panic button. But there’s no need. Firms running down their stocks accounted for a large chunk of the fall and the icy grip of winter on construction activity for most of the rest. Growth of 3.1% in consumer spending was a more accurate reflection of the economy’s health. And with the Purchasing Managers’ Index hitting a four year high in May, Q1 looks like no more than a blip. Domestic and Government borrowing are very high, so there will be major trouble ahead!

Bubbling along. US house prices increased by 10.3%y/y in March according to Case Shiller. That’s a little slower than the 11%+ rates recorded in the second half of last year but not much. Incomes are rising at a fraction of that rate, so house prices are becoming less affordable by the day. Yet with US long-term interest rates falling to their lowest levels in almost a year and mortgage rates following them, a frothy housing market could be with us for some time yet. Many challenges ahead with a flat housing market in the future! Will we see the same problems as we did in 2008?

Cosy. We’re used to reading about the high price of houses. But less attention is paid to the wider costs. London’s meteoric house price growth is having an effect on how many people are living in a typical house. The share of households with six or more people rose by a third in the 10 years to 2011. Cosy, as estate agents might say. Estate agents making a fortune again on the back of very high selling prices!

Crossroads. India’s economy grew 4.6%y/y in Q1. Although that’s a decent pace of growth by western measures, its low for a country at India’s stage of development. India’s most powerful economic weapon is a functioning democracy. However, the country has just elected a proven reformist as prime minister with a strong parliamentary majority. India’s problems/issues are a mirror image of China’s. It’s underinvested in infrastructure. That may be about to change. India running into economic trouble the same as China, therefore the impact is a double whammy globally!

Very Fragile China/Very fragile India! Globally, there is trouble on its way `big time`!

About the author: Colin is a former successful Managing Director of Transactional/Print Manufacturing Plants, Document Management/Workflow Solutions companies and other organisations, Former Group Chairman of the Academy for Chief Executives, Non-Executive Director, Mentor -RFU Leadership Academy, Mentor -Coventry University, Mentor -The Chartered Institute of Personnel and Development, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM/Software/PDF and over 1000 articles published on business and educational subjects worldwide. Plus, International Speaker/Visiting University Professor.

View Colin’s short bio

Managing the cultural gap with Chinese companies who want to do an IPO in London

I have been working with Chinese Companies for over 5 years and have been Associated with 3 Chinese companies as Chairman or NED that have listed in London (AIM).

With the globalisation of world business, China has become an appealing market for foreign investors. The problem of cross-cultural management arises as the cooperation between China and its culturally different Western partners continues to increase at an unprecedented rate.

The biggest barrier in doing business in the world market is managing cultural differences.  It ranks first in areas such as “law, price competition, information, language, delivery, foreign currency, time differences.  The spread of businesses onto the global stage brings the issue of national and regional differences to the fore – particularly in business –thus creating a number of management issues.

It is a big culture shock for Chinese business men and companies, who are considering coming to the UK to do business, perhaps to do an IPO, to later discover that they did not meet the transparency, legal, corporate governance and on-going obligations required to achieve becoming a listed company.

It can also be observed that most of the failures faced by cross-national companies are caused by neglect of cultural differences. The globalisation of the world economy, on one hand, has created tremendous opportunities for global collaboration among different countries; on the other hand, however, it has also created a unique set of problems and issues relating to the effective management of partnerships with different cultures.

Understanding the IPO process

Chinese business men in general do not fully understand the way business is done in the West including the IPO process.  Equally, the reverse applies; the people here also do not fully understand the Chinese culture or the way they do business. Here lies a dilemma.  Part of this cultural imbalance makes it important that Chinese companies have directors on their boards who speak English and know how business is conducted in the West.  These companies need to understand that they and their Directors will undergo examination and due diligence processes before an IPO can take place.  This due diligence process would include:

• Financial Position
• Business Plan and working capital requirements
• Legal Position
• Organisation Structure
• Directors in terms of suitability to be a Director of a listed company

The above would be examined and investigated by the Brokers / Nomads, Lawyers and Reporting Accountants.

China and the UK differ greatly with regard to their economic systems, political systems, social values, and laws, despite the substantial changes that have occurred in China during recent years.

It has been widely accepted that cultural differences greatly affect human thinking and behaviour and thus business organisations in which people interact on the basis of shared values. Management is embedded in a wider societal setting, and is heavily influenced by local historical and cultural norms. The significant differences between the UK and China seem to affect some aspects of their management practice.

Chinese Companies need to understand that a competent board of directors need to be set up with Executive and Independent Non-Executive Directors.  The concept of Non -Executive directors is not completely understood or appreciated and how they can add value to the progress and credibility of the company, including communicating with institutional investors.  By having experienced UK based English speaking Non-Executive Directors on their board with experience of working with Chinese companies, would greatly assist the Chinese directors with the IPO process and also assist post listing with regard to dealing with advisors, communication, listing rules and good Corporate Governance.

My personal experience is that generally one has to earn the respect and trust of Chinese colleagues on the board, and when there is mutual respect they will take the advice on running a listed company in the UK and comply with the rules, of Corporate Governance including risk management.

In the process of cooperation, we in the UK place greater importance on contractual safeguards than the Chinese. This is based on the belief that contracts can ensure that their partners’ tendencies to focus on individual goals and aspirations do not interfere with their own individual goals and aspirations. But the Chinese don’t consider contracts as seriously as we do. They think there will always be changes and the contracts can be reasonably modified according to changes. Instead, they tend to pay more attention to relationships than contracts.

To deal with a difficult or controversial request in the IPO process, indirect forms of influence are preferred by Chinese managers to avoid losing face and damaging guanxi.  When their Western partners propose to use direct and open ways to deal with the issues, they may feel embarrassed. On the other hand, Western partners may get totally confused by the roundabout way the Chinese use to solve seemingly simple problems.

In conclusion, it is very important for Chinese or other companies wishing to do an IPO to appreciate that the IPO is only the beginning and not the end of the process, in terms of success and capital growth for shareholders

About the Author: Frank Lewis has over 25 years of experience in both listed and private companies. He has held a number of board positions as Chairman, Non Executive Director, CEO and Finance Director, both in the UK and abroad with growing mid-market companies.

With a background in sophisticated and developing markets, he has the commercial prospective required to assist with growth strategies, acquisitions and flotations. View Frank’s short bio

International Management: A sticky wicket? Some facts about the global economic climate

Not a reference to the England cricket team’s difficulties on the subcontinent but a term economists use when inflation is resistant to change. Should we then be overly alarmed to see inflation stuck at 2.7% for three months straight in the UK? Perhaps not, but against this backdrop it is little surprise that retail sales were weak over Christmas and the high street is struggling. Conditions for US households are more benign and there is increasing evidence that the housing market has finally turned a corner in the world’s largest economy. The pretender to this crown, China, is also showing signs of improvement. Dampening the New Year cheer in the global economy is the news that the previously resilient Germany seems to have succumbed to the downturn in the Eurozone. How are the US going to repay their debt of $16 trillion and increasing daily?

UK retail sales fell over Christmas

December can be a make-or-break month for retailers, so the “official” data last week were keenly anticipated. In the end, they were disappointing but not catastrophic. The value of sales fell 0.1%m/m, pulling the y/y growth rate down to just 0.7%. If we strip out price increases and focus on volumes (i.e. the quantity of stuff we bought, rather than the amount we spent), the y/y growth rate was just 0.3%. With the exception of 2010, when the “Big Freeze” hit, that represents the weakest December since 1998. When you put it like that, the disappointing news that we will be losing some well-known retailers from the high street does not look so surprising. Also, what about the big drop in net profit for these retailers that will impact on the UK Government revenues!

UK inflation unchanged but the squeeze on households continues. Consumer prices rose 2.7%y/y in December, the same rate as in November and October. The pressure on inflation is being caused by utility prices (gas prices rose 5.2%y/y) and food prices (up 3.9%y/y) and with more price rises on the way throughout 2013/14 and beyond. There was some respite on the petrol forecourt, however, where pump prices fell very slightly. Inflation therefore remains higher than income growth, with average weekly earnings rising just 1.8% over the year to October. Against that backdrop, 2013 will be another difficult year for retailers.

Inflation less of a headwind across the Atlantic

Conversely, US CPI inflation edged down to 1.7%y/y in December, whilst the core measure that excludes ood and energy was stable at 1.9%. Inflation averaged 2.1% last year, comfortably below 3.2% in 2011 and the 10yr average of 2.5%. Risks that poor harvest yields and tensions in the Middle East would push commodity prices higher failed to materialise (they will rise in 2013/14). This will have been a relief for households who seem to have been more exuberant over Christmas. Retail sales were up 4.7%y/y in volume terms in December – a stark contrast with the UK. The net profit, is there any?

A busy end to 2012 for America’s bricklayers. New housing starts were up 12%m/m in December to an annualised 954,000 – the highest level since June 2008. For the year as a whole the increase was even more striking: a total of 871,000 houses were started, 28% more than in 2011. Along with a declining supply of repossessed homes, modest support from rising employment and steadily rising prices, it looks as if the US housing market finally turned a corner last year. More unemployment on its way!

Germany dragged into the mire

There was evidence that economic weakness in the Eurozone periphery is spreading to the core, as German GDP contracted (0.5%q/q) at the end of 2012. For the year as a whole Germany grew by just 0.7%, down from 3% in 2011, partly due to a slowdown in export growth. Things may get worse before they get better. Germany’s central bank cut its GDP growth projections to just 0.4% in 2013. Certainly this is an economy that is highly sensitive to the health of its trading partners. Ominously, almost 40% of German exports head to neighbouring countries in the Eurozone

Eurozone inflation steady

Inflation was unchanged at 2.2%y/y in December. The ECB sees inflation dropping below its 2% target during the course of 2013, given weak economic activity and high unemployment. This will take some pressure off consumers’ disposable income but will be far from sufficient to achieve a recovery in the Eurozone. Indeed it is likely that conversations will again remain firmly centered on the Eurozone crisis at the Davos meeting in Switzerland this week. The Eurozone is still in deep trouble!

China re-accelerates, but the true test still to come

China’s economy grew 7.9%y/y in Q4, bringing an end to the growth slowdown that had lasted almost two years. China has achieved this by spending more on infrastructure – the government’s favourite tool for stimulating growth. The true test of China’s new leadership will be rebalancing the economy towards consumer spending. So far, it has merely talked-the-talk on reform. In this context there is some good news. Disposable income growth is running at almost 13%y/y for city dwellers, well above average.

The USA has still major issues across many sectors. Plus, borrowing are $16 trillion and growing daily! When will it end?

What do you think about this?

Why do politicians/bankers/lenders ignore history? And yet history repeats itself several times because these people do not read! People need to read `The Rise and Fall of the Roman Empire` and then perhaps they will learn how to avoid repeating history.

The Credit Crunch of AD 33 Repeats itself time and time again!

What with the Bank of England pushing £375+ billion and the USA Federal Reserve $1+ trillion into their countries respective banking systems, readers may be interested to learn of the following from `Banking & Business in the Roman World`:

In AD 33 the lack of cash continued to become increasingly serious (where have we read this before many times?). To remedy the situation, through the intermediary of `ad hoc` financial offices directed by Senators, the Emperor himself offered interest-free loans amounting to an overall sum of 100,000,000* sesterces from his personal fortune for the duration of three years. The borrowers were required to offer security in the form of real estate or buildings. In this way they were not forced to divest themselves of their patrimony in order to pay off their debts. Fides, that is to say confidence, returned, and the situation was retrieved for a short time.

We live in a global trading environment of which there are so many players chasing very few opportunities that it is driving down prices globally and still people do not wish to buy!

Plus, the banks globally are still stashing cash at the highest levels ever recorded, why? We all know why, don`t we! Will we see a run on the banks soon?

The Euro currency will continue to suffer in the hands of Greece, Portugal, Spain, Italy and Ireland followed by France who are `all` in `deep` financial difficulty as first stated in January 2008. Who will leave the euro currency first? Then who will follow? What future has the Euro?

What are your plans for your future to be successful?

About the author: Colin is a former successful Managing Director and former Group Chairman of the Academy for Chief Executive, Non-Executive Director and Mentor – RFU Leadership Academy, helping companies raise their `bottom-line` and `increase cashflow`. Author of several publications, research reports, guides, business and educational models on CD-ROM/Software/PDF and over 400 articles published on business and educational subjects worldwide. Plus, International Speaker/Visiting University Professor.

How can a MNC manage to sustain growth in China?

When I entered my current company, I faced two major problems when I took up the China business. Firstly, at that time we did not have our own facility in China and our business was mainly relied on two major distributors. Unfortunately they were not cooperating smoothly and always complaining with each other instead of putting effort in business development. This channel conflict seriously affected our business growth even though when the market is booming.

Secondly, local competitors were improving their product quality and services and some customers were moving to local products. Even worse, some copycats of my company’s product were coming out to the market because of lack of intellectual protection in China. Unless some actions were taken, probably we would have lost market share or even the whole market.

In order to service and manage the market closely, I started up a legal entity in China in short period. A local sales team was set up in order to manage the existing two distributors. Quickly, I found that both channels had plans to leave the business because they thought I will develop new distributors to replace them. I convinced them that they will get more support than before because of the new local office and promised that they will get reasonable return if they operate under my strategy on a clearly defined territory, pricing and report system etc. After setting up a level playing field, more new channels were recruited since then. Soon, number of channels tripled and sales were more balanced than before.

When fighting with local competitors, setting up a local entity is important so that my customers could receive local support and pay in local currency. More importantly, we could understand the customer demand and gave them confidence. In order to compete with copycat, I adopted a policy that for all products delivered in China, a counterfeit sticker (which was a label with serial number) was attached so that customers could telephone and check whether the purchased product was a real one or not. This really worked and the copycat product problem was basically solved.

China is a big and potential market but many MNC must have long term commitment and localization if they want to be successful.

About the author: Start up the China operation for a MNC and successfully increase presence and sales (grow 30-40% YOY). Manage 20 people, oversee P&L , focus on sales and marketing, revenue increase 30-40% YOY with over 40% margin. View Terry’s short bio