Overseas M&A diagnostic of the ‘Chinese’ approach

By Felix Egli, Wu Fan, Vischer
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Recently, we had the honour of visiting a Chinese private equity (PE) fund playing a leading role in overseas acquisitions. We were soon surprised to learn that the fund did not actually intend to hire a law firm in our jurisdiction, but wanted us to feed them with potential leads for their overseas deals. Like the average Chinese businessman, they, too, see lawyers as so-called “intermediaries”.

Felix Egli 菲谢尔律师事务所 高级合伙人、中国业务部主管 Senior Partner, Head of China Desk VISCHER
Felix Egli
Senior Partner, Head of China Desk

In the Chinese business world, lawyers are commonly referred to as “intermediaries”, which is obviously very different to Western concepts. In this column we will show you the reason why, in order to help you avoid the pitfalls that result from such misconceptions.

Why lawyers aren’t intermediaries

During our conversation with these PE fund managers, we of course asked them why they were not working with M&A advisers for this purpose. The answer was that they had worked with M&A advisers in the past, only to discover later that they had been on the seller’s side. They felt “cheated”, which led to the radical decision to never work again with M&A advisers.

We replied that we certainly know companies for sale if they happen to be for sale by, or targets of, our clients, but that we are obliged by our professional laws and standards to exclusively pledge all loyalty and allegiance to our clients. We would clearly breach this obligation if we were to broker companies put on sale by our clients as we could not possibly safeguard the interests of potential buyers while representing the seller. It is also clear that we would not be loyal to our clients if we were to broker their targets to a competing potential buyer.

So, many Chinese businesspeople expect an impartial intermediary, but lawyers are by definition not only partial, but prohibited by professional laws and standards from being impartial to the detriment of their clients, which is why it is a misconception to try to search for acquisition targets through law firms from the outset.

吴帆 Wu Fan 菲谢尔律师事务所 中国业务部 顾问 Counsel China Desk VISCHER
Wu Fan
China Desk

M&A search a professional service

M&A advice is typically a service provided by an investment bank or an M&A advisory or consultancy firm. The Chinese business community may be more familiar with the notion of investment banks in association with IPOs, but an investment bank can facilitate mergers and acquisitions, and reorganisations, and broker trades for institutions and private investors as well.

In Switzerland, all major banks such as UBS and Credit Suisse have full-service investment banks that have extensive expertise across a range of industries and countries. The full-service investment banks usually work on big deals involving large-market (listed) and upper middle-market companies.

Smaller deals involving middle-market companies are the market segment of the boutique investment banks and local M&A advisory firms. They specialise in some aspects of investment banking such as corporate finance, capital raising, M&A finance consultancy, as well as business consultancy relating to reorganisations and restructurings as their primary activities.

Boutique investment banks and local M&A advisory firms may specialise in certain industries such as media, healthcare, industrials, technology or energy. Some may specialise in certain types of transactions, such as capital raising or mergers and acquisitions, or restructuring and reorganisation.

They typically have a limited number of offices and may be active only in certain geographic areas. In other words, they are mostly specialised and local, serving the middle-market or SME segment, and are well known within their niche. Middle-market and SME companies play a key role in the Swiss and other top European economies.

Target search is fee-based service

In the West, whenever a company is approached by an investment bank or M&A advisory firm to acquire certain assets, it will most likely hire its own M&A consultant to deal with the issue jointly, and not jump on the bandwagon by also relying on the seller’s consultants and expect them to be “fair”.

Further, if the company has the strategic need to buy in certain assets, it will hire an investment bank or M&A advisory firm to extend the scope of possible targets by identifying businesses that offer a good strategic fit.

Such an M&A consultant is then meant to deliver a whole range of subsequent services like investigation and valuation of the target, project evaluation, financial and commercial advice on takeover offers, strategic advice and assistance with deal planning, etc.

All such services demand considerable experience and knowledge in finance, as well as in the business or industry concerned.

It goes without saying that such services create value for the client and are therefore fee-based. Like other professional service providers, the fees are effort-based and calculated according to the hours spent. For target search activities, usually a small fee covering costs is charged, supplemented by a considerable success fee.

We strongly recommend Chinese companies to apply the same best practice when conducting their strategy-led overseas acquisitions. Regrettably, bargain hunters – which unfortunately the majority of Chinese buyers still are – find this recommendation quite senseless, as, by nature bargain hunters dread any penny spent on professional fees.

Lawyer’s job in M&A transactions

The lawyer’s job is advising you on all legal aspects of the possible transaction, including performing the legal, tax and IP due diligence, drafting and negotiating your share purchase agreement and all related agreements, assisting you in attaining government approvals – including securing merger clearance – and in deal closing.

Thanks to our multiculturalism, our experience of working closely with M&A advisers and investment banks, and our deep knowledge of both the Chinese and Swiss legal and financial systems, we are in an excellent position to perform this task.

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