KSF For Chinese Companies Investing Abroad Value Partners

China M&A Conference 2008-P0

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Beijing, October 2008

0


1• Chinese outbound FDI have increased sharply and this process is likely to accelerate in next years,
driven by the stronger position of Chinese companies and by the current international scenario

2• Over the past years there have been some remarkable success stories of foreign expansion by
Chinese companies, while other initiatives have encountered some difficulties. As a matter of fact,
Chinese companies are often hesitant to pursue outbound opportunities because of their lack of
international experience

3• In order to succeed in their overseas expansion, Chinese companies should go through four key steps:
a) Develop a clear international strategy; b) Prepare the organization and resources to succeed; c)
Build strong understanding of target markets; d) Manage carefully the post acquisition phase

4• Chinese companies should move quickly in this direction to capture the opportunities offered by the
current scenario

1





current scenario

2


CAGR 2003-2007
USD billion, 2003-2007

Key drivers:

• Chinese companies’
strong demand to gain 26.5
access to: 75%
- Natural resources 21.2
- New markets
- New technologies

• Strengthening
competitiveness of 12.3
Chinese companies

• Sufficient FX reserves 5.5
accumulated in the past
2.9
• China government
incentives
2003 2004 2005 2006 2007

Source: Ministry of Commerce, Statistic Bureau, Value Partners analysis

3


%, 2007
Accumulative Outbound FDI as % of GDP by 2007

UK 61.5

• Compared to developed
France 54.7
countries, China outbound
FDI vs. GDP is still very
low
Taiwan 41.3
• The low ODI reflects that
Chinese companies still
Germany 37.3
rely heavily on domestic
market as well as
resources
Malaysia 31.2
• Going forward, along with
20.2 GDP growth and
US
globalization of Chinese
companies, there is a huge
12.4 potential for increase of
Japan
Chinese outbound FDIs

China 3

Source: United Nations Conference on Trade& Development, Ministry of Commerce, Statistic Bureau, Value Partners analysis

4


! quot;
# #
Analysis based on 46 outbound FDI transactions above USD10mln in 2005-Sep.2008

Chinese outbound FDI by industry Chinese outbound FDI by geography

100%=49.5 billion USD (~53% of total ODI) 100%=49.5 billion USD (~53% of total ODI)
Machinery:2% Telecom & high-tech: 2%
Latin
Transportation & Consumer goods: 1% America • Shift from Asia to other
logistics: 2% Others: 1% Oceania
geographies

5%
5%
26% North
Africa America
17%
Natural Financial
resource 51% services
40%

Europe 23% 24%
Asia

Source: Thomson Financial, Value Partners analysis

5


# $ $ % &

Analysis based on 46 outbound FDI transactions above USD10mln in 2005-Sep.2008
Reasons for outbound Value of deals
No. of deals Top industries Top target areas
investment (bln USD)
1 Entering new market
• Banks • USA
26 29.5 • Investment advice • Hong Kong
• Semiconductors • UK

2 Financial investment/ • Banks • Hong Kong
diversification 28.9 • USA
22
• UK

3 Access to natural
• Oil and gas • Kazakhstan
resources 19 19.9 • Iron ores • Canada
• Gold ores • Australia
• Used to be primary
4 reason in previous years
Access to capabilities • Banks • USA
(e.g. risk management, 12 17.8 • Hong Kong
product design)

5
Increase manufacturing • Semiconductors • Japan
scale 9 2.8 • Medical apparatus • USA

Source: Thomson Financial, Value Partners analysis

6


$
Chinese companies among Fortune 500, 2003 vs. 2007

Number of Chinese companies Average revenues
CAGR 03‘-07’ USD billion CAGR ‘03-’07

35 12% 37.6
24%

23.9

15

2003 2007 2003 2007

• New companies joining the list are mainly in Energy, Financial sector, Telecom &
High-tech industries, reflecting strengthening diversification of China economic
structure
• Thanks to quick increasing of revenue size, 6 Chinese companies newly join in top
200 and 3 newly join in top 25 (Sinopec, State Grid, China National Petroleum)

Source: Fortune500, Value Partners analysis

7


Jan 2007
P/E ratio in different countries, Jan.2007 vs. Oct. 2008 Oct 2008

Countries Index P/E change % change

17.4
USA S&P 500 -18%
14.2
24.5
USA Nasdaq -30%
17.0
14.0
UK FTSE 100 -33%
9.4

Germany DAX 14.2
-18%
11.7

France CAC-40 15.4
-36%
9.9

Spain IBEX 35 21.2
9 -58%

Italy MIB 30 17.1
8.3 -51%

Australia S&P/ASX 200 17.3
-29%
12.3
Singapore Straits Times 14.3
6.7 -53%
• Average PE for above countries in Oct.2008 is 9
• For comparison, PE in Shanghai index is 16

Source: Stock exchanges in different countries, Value Partners analysis

8


' (!#
(!#

Cases Key consideration to make a M&A case abroad
Lack of international Possibility to get Difficulty to develop Difficulty to work with
expansion experience targets’ key information Greenfield projects foreign partners

Chinese M&A
investments abroad

• As newly emerging • The target markets, if in • Due to limited • Chinese companies may
global players, Chinese developed countries, international local market face significant difficulty
companies are fairly have systematic experiences, it is hard for due to then lack of
weak in international company database for Chinese companies to understanding on foreign
expansion experiences M&A reference start up a new entity in culture
foreign environment

Foreign M&A
investments in China

• Developed countries • China enterprise • Foreign companies • Foreign players must
have established strong database is still under usually can leverage on develop capability of
track records in construction own experiences and adapting to Chinese
international expansion • Still need to dedicate a local professional culture
lot of efforts to verify the support to set up WOFE
information in China

9





current scenario

10


) $ %
$

Company Introduction

Some • Acquired the whole PC business unit of IBM in May, 2005
remarkable
success
stories… • By 2007, Huawei set up more than 100 branches in the world and
gets 72% sales revenue from overseas market

• Zoomlion acquired the Italian company CIFA in September, 2008

…some • CNOOC bid to buy Unocal in June, 2005
initiatives that
encountered
difficulties • Haier bid to buy Maytag in June, 2005

• TCL found a JV (TTE) with Thomson in July, 2004

• A Chinese textile • Tried to buy assets of an Italian company
company

Source: Industry research, Value Partners analysis

11


* $ +(
,
- .

KSF Description Rationale

Combined • The acquisition brings together most valuable • Lenovo can quickly access to
strengths of competencies of two companies: target markets and customer
two companies - IBM’s strong product design, customers segments thanks to IBM’s long
services and branding established market position
- Lenovo’s competitive production, supply chain • IBM can focus on providing IT
management and procurement solutions by giving up non • Successfully
• Through the acquisition, Lenovo gains access to strategic business to a leading penetrated into target
global corporate client computer market player markets

• Gained strong
product design and
advanced customer
service
Realized the • In order to smooth the acquisition impact, little • Smooth transition after the competencies
importance of change on organizations and processes in the acquisition helps to retain
cultural fit and first year post acquisition customers and talents • Effectively generated
made it top • Located the HQ in US and hired foreign • Two companies’ culture might synergies after the
priority post management team compensate with each other acquisition
acquisition • Carefully introduced Lenovo’s key sales model and benefit the new entity in the
to overseas markets since the third year after long term
acquisition


12


/ $ $ % %
&


Started • Entered Africa, mid-east, Asia-Pacific, CEE • Emerging markets have lower
expansion from and Latin America since 1995 entry barriers and are more
emerging - Emphasize on competitive price strategy sensitive to pricing
markets • Developed countries require
• Later entered developed countries in Europe stricter qualifications and
• Successfully
and USA longer entry time
penetrated into both
- Started with partnership with world leading
emerging and
competitors
developed
Created a pool • Recruited qualified talents and retained them • Chinese sales team not only is countries
of managers with competitive salary packages competent to win contracts in
capable to fierce international competition, • Built a strong
work in • Deployed key personnel in sales team to but also has strong international sales
international develop international markets since 2000 commitment to company culture team
environment - Accounts for ~50% of overseas staff
• Effectively delivered
products and services
Retained • Invited consulting firms who specialized in • Effectively identify local customer to meet local clients’
advisors to Telecom industry to conduct detailed local needs so as to develop right needs
help it market research products/service to fit with it
understand
customer
needs


13


0 1 #
%


Strong • CIFA is an Italian manufacturer of concrete • Rapidly move production of
rationale for machineries, the only one with a full range of some components to generate
the deal products cost reduction synergies for
• In several segments CIFA is a recognized CIFA
leader, thanks to technology, quality and • Leverage CIFA’s distribution
• Successfully
reasonable price channels to sell low end
completed
• A rigid labour environment in Italy makes products manufactured by
acquisition
changes and efficiencies difficult Zoomlion
• Zoomlion recently emerged rapidly thanks to • Reduce duplicated investments
• Created global
the explosion of construction sector in China in several markets
leader in the industry
and enjoying the cost advantages of China
production
• Started integration
Participation of • CIFA’s ownership, a PE fund was looking for process
• Financial partner could help to
financial an exit find the right investor through its
partner • It identified Zoomlion as a potential investor strong network both in
investment and industry area
Recognition of • Zoomlion already started to approach some • Understanding of different
cultural foreign emerging markets cultures could help to facilitate
diversity • Both parties had good communication during the negotiation process
the process


14


quot;22 /
1 $ $

Player Description Why did it stop?
• In June 2005, CNOOC placed a bid for Unocal, • Unable to identify the sensitivity of the
the NO.9 petroleum company in USA bid at early stage
CNOOC • In July 2005,Chevron emerged as competitor of - US might worried about China’s
the bid and soon got Unocal shareholders’ ambition to get its strategic energy
support resources through the bid
• Both companies launched PR and lobbying
activities, but in the end USA government decided • Lack of experience in communication
to examine CNOOC bid with US media and government
• As a result, CNOOC withdrew the bid and - Too late to start lobbying and PR
Chevron won

• In June 2005, Haier submitted LOI to Maytag and • Faced challenges from US people and
started due diligence government due to CNOOC bidding
Haier • Ripplewood and Whirlpool joined in the acquisition
competition with higher price • Lack of experience in communication
• Haier withdrew the bid and Whirlpool won with US media
- Not actively disclosed to media the
bidding plan/intention, leading to
suspicions from US people


15


' * & '
$ % &
$ 3 )

Player Description Why did it experience problems?

• In July 2004,TCL set up TTE, a JV with • Lack of understanding of differences
Thomson, in which ~9,000 employees of between French and Chinese culture
TCL Thomson joined - French might prefer work and life
balance, while Chinese might not
• In 2005, TTE lost ~70 mil EUR care to mix work and life together

• In Nov 2006, TCL launched restructuring plan • Lack of experience in dealing with
on TTE, stopping its sales activities in European European Unions
market - European Unions strongly protect
workers’ rights, leading to tough
• By 2006,TTE lost ~250 mil EUR due to business negotiations and high restructuring
loss and restructuring cost cost


16


# &

Context Rationale of deal Why did it fail?

• A world wide textile production • By acquiring assets, Chinese • The Chinese company saw the
shifting from USA/EU to Asia company could have deal only as an opportunity to
(not only China) - Shorter time to market make some savings but did not
- Faster than long row of realize the value of anticipating
• An Italian textile company was competitors to win the competitions of ~2 years
looking for a buyer for some competition
assets (machines) • Different cultural approach to
• For Italian company: negotiate:
• A hot market where buyers had a - Assets has interesting value - Italian company changing
1.5/2y waiting list to buy these - Not necessary to sell the whole opinion very frequently
types of machines company, which might make - Chinese company not always
the potential buyer afraid of giving clear messages
liability/employee issues


17


#
%
&

Key weakness of Chinese companies Implications

• Limited knowledge of international markets, e.g. • Chinese companies often
- Market situation hesitant to pursue
- Regulations outbound opportunities
- Customers
• Approach tends to be
• Limited availability of managers who can operate in
reactive rather than
international context, e.g.
- Language proficiency proactive, leading to
- Foreign culture understanding suboptimal selection of
- Social network opportunities

• Lack of systematic process, e.g.
- Strategy definition
- Roadmap development
- Execution process

18





current scenario

19


&
%

1 2 3 4
Develop a clear Prepare the organization Build strong Carefully manage the
international strategy understanding of target Post Merger Integration
markets phase
• Define objectives • Define need for resources • Build market database • Quickly take key strategic
decisions, to define main
• Understand internal • Prepare organization • Create networks in target directions to follow
strengths/weaknesses responsible for countries
international expansion • Identify key resources in
• Analyze global competitive • Identify most suitable charge and involved in the
scenarios • Recruit/train people targets process

• Define priorities • Define process to scout • Understand valuation and • Define initiatives and their
- Countries and pursue opportunities value drivers priorities, targets to
- Targets achieve and monitoring
• Manage negotiations tools
• Ensure alignment of top
management • Understand the relevance
of cultural and
communication issues

20


1 2 3 4

45

Activities Key success factors

Define objectives • Objectives need to be clear, both qualitatively and quantitatively
• Develop specific goals for different timelines (short term, mid term
and long term)

Understand internal • Leverage on both outsiders’ and insiders’ observations to form
strengths/weaknesses objective opinions
• Tailor international strategy to internal capability of companies

Analyze global competitive • Proactively collect and analyze competitors’ moves to understand
scenarios the full picture of global competition
• Focus on most similar competitors to gain further understanding

Define priorities • Priorities should reflect above considerations/analysis, i.e.
- Consistent with objectives
- Matched with internal capabilities and help to strengthen
competitiveness
Ensure alignment of top • Make sure all top management are on board to discuss the strategy
management and express opinions
• Keep timely sharing of opinions among top management

21


1 2 3 4

3& 4

Company Key actions Effects
China Minmetals • Defined a clear mid to long term strategy • By now has 21 branches &
• Decided to shift from “trader” role to the comprehensive metal companies located in Asia,
group, covering full industry value chain Europe, America, Oceania,
• Carried out series of international investments in order to access and Africa
to ore resources (upper stream) and overseas distribution
channels (down stream)

Haier Group • Aims to create an international brand • Set up local R&D center,
• Investments follow importance of regional markets in terms of trading company and
sales revenue: from Southeast Asia to Western market factories in more than 30
• In regional markets, priority of investments are first in sales, countries
second in setting up factory
• Design customized products with local R&D center

Industrial & Commercial • Mainly to follow its client’s, e.g. Chinese SOEs’ • Open 9 overseas branches &
Bank of China internationalization path: 3 representative office
- Focus on nearby economic areas that are strongly related to • Acquired 6 foreign banks
Chinese business activities during 2000-2007
• Provide products/services customized to different countries’
clients


22


1 2 3 4

-5 .


Define need for resources • Identify suitable talents/experts to focus on international expansion
• Allocate sufficient funding to support possible expansion

Prepare organization • Dedicate specific departments/teams to focus on international
responsible for expansion
international expansion • Clearly define the roles of all related departments as well as work
process
Recruit/train people • Target both Chinese and foreign talents who have solid overseas
business experiences
• Provide practical training, e.g. on site training in foreign markets

Define process • Standardize target market screening criteria
• Clarify decision making process to speed up possible initiatives

23


1 2 3 4

3& -

Huawei • Deployed Chinese sales talents to overseas market, providing: • 50% overseas staff are
- Competitive salary package Chinese
- Promotion based on overseas performance
- Intensive training

China Mobile • Defined needs for HR resources according to international • Set up dedicated team for
expansion plan overseas expanding
• Prepared HR resources both from internal training and outside • Mainly rely on in-house
headhunting expertise but start to attract
• Strengthened HQ management structure to cope with higher outside talents
risk and cost pressure from international operations

Aluminium Corporation • Cooperate with foreign universities to develop specific project • Build up international talent
of China dedicated to develop international talents pool covering law, finance
• Recruit international M&A experts from market channels and non-ferrous metals, etc.
• Provide overseas on job training for talents who are going to
be sent to overseas market


24


1 2 3 4

6 Build strong understanding of target markets
5


Build market database • Build comprehensive fact books of player in target market
• Collect key data about most interesting players
• Update information frequently

Create network in target • Identify insiders who can effectively help to facilitate the process
countries • Start contacts with local regulators and keep timely communications
• Leverage local professional firms and business partners to reach
important contacts

Identify suitable targets • Cleary define the target screening criteria
• Leverage local networks and professional firms to identify target pool
• Shortlist targets based on quick verification on their business
soundness and interests to discuss investments

Understand valuation and • Conduct in-depth due diligence to understand target’s financials and
value drivers business potential
• Referring to industry experiences, find out key value drivers and
quantify the impact to valuation

Manage negotiations • Approach targets in co-operative manner
• Pay attention to the undisclosed subtle message of stake holders of
the targets and correctly address their real motivations when
proposing deal solutions

25


1 2 3 4

3& 6

ShenZhen Mindray Bio- • Working closely with many professional firms e.g. investment • Acquired Datascope in
medical Electronics bank, auditors, lawyers and HR advisors, etc. on due diligence, USA in March, 2008
synergies analysis and negotiation
• Conducted in-depth market analysis on USA market

China Merchants Bank • Identified HK as target market, following CMB’s strategy to focus • China Merchants Bank
on nearby markets succeeded in acquiring
• Working with international investment bank to develop Wing Lung Bank in Hong
valuation on targets based on due diligence Kong in June, 2008
• Cleary understood needs of the shareholders of target,
facilitating the negotiation process

Eurizon Capital • Developed in-depth China market understanding with the help of • Acquired 49% (maximum
consulting firm to define a clear market entry strategy shares a foreign investor
• Mainly monitored the investment criteria and valuation can get) of a leading
process, leaving consulting firm to organize all relative parties to Chinese fund management
close the deal (lawyers, auditors, etc.) company

(Acquisition of Penghua Fund)


26


1 2 3 4

7 (

Activities Key Success Factors

Quickly take key strategic • Quick identification of macro priorities, consistent with the
decisions identified rationale behind the deal
• Definition of main objectives to achieve and milestones
• Clear leadership to orchestrate the entire process

Identify key resources • Selection of a joint (contribution from both the involved parties)
Integration Team in charge of defining guidelines to follow
• Appointment of a skilled Integration Manager, accountable for the
end-to-end process

Define initiatives and • Detailed function/area analysis with following prioritization of the
priorities initiatives to activate (trade-off impact vs. ease of implementation)
• Clear timing and deadline
• Frequent progress reviews and interactions

Understand cultural and • Open communication among team members…
communication issues • …taking into account cultural differences
• No conflicting environment between the entities (“we” vs. “they”)

27


1 2 3 4

3& 7

Lenovo / IBM • Quick understanding that solution to the potential cultural clash • Powerful leader in the PC
with cultural integration was a key factor to succeed industry, with very broad
• Significant attention paid in recruiting US-educated Chinese portfolio
middle-managers • Global player integrating two
• Some experienced managers from IBM put in charge of the cultures, languages,
international portion of the combined business processes and markets

Nissan / Renault • Identification of the synergies and of the targets to achieve • 5th largest global
through the partnership: automaker
− Brand complementarities: Nissan for US, Renault for EU • Global market share of 9%
− Marketing, design and small cars expertise as contribution from (by volume)
Renault, large cars and manufacturing excellence from Nissan • 38 industrial sites in 17
• Intercultural challenges harmonized through the charismatic markets
leadership of Carlos Goshn

Arcelor Mittal • Identification of the synergies (purchasing, manufacturing and • World leader steel company,
marketing) as pillars for the entire process with over 320,000 employees
• Definition of special governance mechanisms to facilitate in more than 60 countries
effective integration • Industrial presence in
• Significant effort in managing “external” relations before, Europe, Asia, Africa and
during and after the deal signature America

28





current scenario

29


'
&
1 %

Opportunities in current scenario Priorities for Chinese companies

• Increasing strengths of Chinese companies 1• Develop international strategy

• Favourable economic context
- Attractive valuation of foreign companies 2• Prepare organization for
- Increasing need for capital in foreign countries international growth
- Appreciation of RMB
3• Actively scout for M&A targets
• Government support through a disciplined process

30

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