Study on the Risk Prevention of the Overseas Merge

Study on the Risk Prevention of the Overseas Mergers and Acquisitions of ZhejiangScientific and Technological EnterprisesHu FengZhejiang Gongshang UniversityHang Zhou, P. R. Chinayanjiulilun@Abstract—Under the circumstance of global financial crises, the overseas mergers and acquisitions conducted by Zhejiang scientific and technological enterprises helps them attract advanced patent technology by lawful methods, increase the technological element and competitive advantages of the products, strengthen the enterprise core competitiveness and occupy foreign market. It also helps the transfer of economic growth mode, promote the industrial structure adjustment and optimize the industrial upgrade. However, while overseas mergers and acquisitions provide Zhejiang scientific technological enterprises with a shortcut to obtain advanced technology, they might also cause enterprises to be trapped in the technological trap and cannot escape. Therefore, Zhejiang scientific and technological enterprises should highly emphasize the risk control in overseas mergers and acquisitions, and adopt measures to ensure the effectiveness of the overseas mergers and acquisitions. Keywords-scientific technological enterprises; overseas mergers and acquisitions; risk control; enterprise valueI. INTRODUCTIONSo far, China has been one of the largest manufacture countries in the world. However, it can not be called a great scientific and technological country. China has many scientific and technological enterprises, but their products are single and theydo not have strong independent research and development capacity. Guided by the national “going-out” strategy, in order to catch up in respect of the technology, more and more Zhejiang scientific and technological enterprises take part in overseas mergers and acquisitions. Under such background, on one hand, overseas mergers and acquisitions provide a valuable opportunity for Zhejiang scientific and technological enterprises to have a leapfrog development; on the other hand, the risks behind overseas mergers and acquisitions just like beautiful traps which make Zhejiang scientific and technological enterprises unable to escape.II. OPPORTUNITIES FOR ZHEJIANG SCIENTIFIC AND TECHNOLOGICAL ENTERPRISES TO CONDUCT OVERSEAS MERGERS AND ACQUISITIONS AFTER THE FINANCIAL CRISESA. Advantage in purchase powerGood financial status and profitability of Zhejiang enterprises provide a material foundation for overseas. In the meantime, the healthy financial system in China and the sufficient liquidity also provide a strong financial base. In addition, the appreciation of ren mi bi has greatly enhanced the overseas purchase power of Zhejiang enterprises.B. Price opportunityIn the financial crises, the market value of many foreign listing companies greatly shrinks, including some high technological enterprises with good prospect and performance. The market value is much lower than the internal value, which implies the investment value. Many scientific and technological enterprises are in bad debts, and their share price drops greatly. Some are even disposed at discount because of bankruptcy. In order to avoid further decrease of the asset price, the US government has adopted three stages of measures, i.e. interest rate adjustment, helpingenterprises and comprehensive stimulus to save the market. From the current market reaction, these policies slow down the decrease speed of the asset price, and the price of some enterprise shares also begin to rise, but there is still distance from the high point. When the financial crises broke out, many investors were pessimistic about future economic development, and there were many irrational elements in financial asset pricing. Therefore, it takes time for the price of the financial assets to get back to the high point. In addition, it is unclear whether the real economy has currently “touched down”, and it is still possible to surge. The uncertainty of the economy and high unemployment rate in the western developed countries make the investors more worried about future. Compared to the western world, Chinese economy has maintained the smooth and rapid development. Although Zhejiang is an important world processing base, it does not have corresponding power in respect of the product rice. The main reason is that Zhejiang enterprises do not have independent property rights in many products, especially the high-tech products. By participating the mergers and acquisitions against foreign high-tech enterprises, Zhejiang enterprises may improve their scientific and technological level, thus strengthening the pricing power to promote the country to transfer from the large manufacture country to the strong one.C. Policy opportunityAfter the financial crises broke out, the western developed countries tended to tighten money, and the credit shrink accelerates the impact of the financial crises on real economy. The GDP of developed countries fell to the ground and the unemployment rate rose continuously, making the residents frustrated in the consumption. In order to reverse the difficult situation, many governments make policies to save the market. They regard overseas investment as a healing method,and remove the constraints to a certain extent for foreign capital to invest domestically to attract more overseas capital and activate the vigor of national economy.III. RISKS IN THE OVERSEAS MERGERS AND ACQUISITIONS OF ZHEJIANG SCIENTIFIC AND TECHNOLOGICAL ENTERPRISESA. Risk of culture differenceThe culture conflicts caused by the enterprises cultural difference may result in the loss of talent, which is the largest risk for Zhejiang scientific and technological enterprises in overseas mergers and acquisitions. For most high-tech enterprises, talent is the first element influencing the enterprise’s survival. In the overseas mergers and acquisitions of Zhejiang scientific and technological enterprises, although the merged enterprises have become part of the merging enterprises, their common sense, values and code of conduct are not changed in nature. If the fierce culture conflicts arising from such trans-cultural environment cause the loss of talent, what the merging enterprises purchase is an empty bottle, and nothing can be gained in the mergers and acquisitions. There is a famous 70/70 rule, i.e. 70% of the mergers and acquisitions can not have the expected gains, 70% of which is due to the integration after mergers and acquisitions, and the most difficult part is the integration of enterprise culture.B. Technological riskCompared to the scientific and technological enterprises in western developed countries, most Zhejiang scientific and technological enterprises fall behind in respect of the science and technology strength. For many of them, the purpose of overseas mergers and acquisitions is to obtain the advanced technology they require. However, behind the attractive “technological meal”, there might not be satisfactorysituations. Because they operate in the market economy for a relative short period, it is difficult for some Zhejiang scientific and technological enterprises to grasp the trend of technological development. They also do not realize the intellectual property right protection clauses. Therefore, theiroverseas mergers and acquisitions are seldom successful. Whether Zhejiang scientific and technological enterprises can obtain the technology they want? Whether the technology obtained by overseas mergers and acquisitions can bring the expected gains for enterprises? These problems indicate the technological risks of Zhejiang scientific and technological enterprises in overseas mergers and acquisitions.C. Valuation riskThe senior managers of Zhejiang scientific and technological enterprises always know of technology, but have an insufficient understanding of financial knowledge. However, the valuation of the assets and liabilities of the merged enterprises is the key of a successful merger and acquisition, which is also a difficult issue in practice. Therefore, valuation has become a risk in the overseas mergers and acquisitions of Zhejiang scientific and technological enterprises which requires caution. To summarize, there are the following four reasons for the valuation risk: First, the asymmetry of the two parties’ information. Like China, foreign high-tech enterprises are also often non-listing companies. It is difficult for Zhejiang scientific and technological enterprises to know the object in overseas mergers and acquisitions. There can only see the surface of the assets and liabilities without a understanding of their security, legal disputes, redundancy, research and development ability, etc., which makes it difficult to judge the enterprises’ real asset value and profitability. Even for the listing companies with full disclosure, it is also necessary to find out whether they are in good financial status and whether there are strategic risks.Second, there are differences between domestic and international valuation method. Internationally, the cash flow method is usually used to evaluate the enterprise value while the net asset method is used domestically. The difference in valuation methods and model selection results in the valuation risk in the overseas mergers and acquisitions of Zhejiang scientific and technological enterprises, causing the price of some mergers is too high. Third, the internal competition. In the overseas mergers and acquisitions, Zhejiang enterprises always compete with each other. The target enterprise seizes the opportunity to raise the price, which makes the situation even worse. Fourth, the uncertainty of the economic trend. Although the financial crises provide a good opportunity for the overseas mergers and acquisitions, the valuation of the enterprises becomes more difficult and risky, especially for those enterprises with more financial assets and liabilities.IV. STRATEGY TO PREVENT RISKS IN OVERSEAS MERGERS AND ACQUISITIONS OF ZHEJIANG SCIENTIFIC AND TECHNOLOGICAL ENTERPRISESA. Strategy for Zhejiang scientific and technological enterprises to prevent cultural risksAfter the mergers and acquisitions, there might be conflicts among different cultures in the enterprises. Such conflicts just like “bombs” in the enterprise culture integration, which may cause the failure of the mergers and acquisitions if can not be settled properly. Facing the cultural shock, Zhejiang scientific and technological enterprises show adhere to the following three principles: First, cultural integration should emphasize amalgamation rather than conquest. Every enterprise culture originates from national culture, which can not be changed fully. Therefore, it is necessary to respect and tolerate each other allowing for minor differences andabsorbing the best to achieve the integration of multiple and unity. Second, the cultural integration should emphasize progress step by step rather than rash advance. The enterprise administrators should realize that the cultural integration is a long process. At the beginning, it might be objected by employees of the merged enterprise, and it takes time for all to accept it. If the enterprise rashly conducts reforms, there might be more misunderstandings and conflicts among employees causing unfavorable results. The cultural integration is one of the key issues to ensure the success of the mergers and acquisitions. Third, cultural integration should adopt different methods in different situations. Different employees are in different levels of the enterprise with different interest and understandings. Therefore, in cultural integration, the merging party should use different strategies against employees of different levels. For senior managers, the communication should focus on mutual trust, making them realize the good prospect and potential gains of the enterprise; for common employees, it is necessary to provide them with a full understanding of the crises in enterprise development as well as the necessity and importance of the integration to remove their doubts and objections.B. Strategy for Zhejiang scientific and technological enterprises to prevent technological risksThe rapid development of science and technology on one hand helps the growth of modern enterprises, and on the other hand brings great pressure. In order to improve the efficiency of technological development and maintain the strong innovative ability, some Zhejiang scientific and technological enterprises reduce the technological development cost by mergers and acquisitions. For Zhejiang scientific and technological enterprises, overseas mergers and acquisitions are indeed shortcut to obtain core technology, but there are also risks. The strategies to deal with thetechnological risks are as follows: first, it is necessary to prove the utility of the introduced technology. The new introduced technology should have corresponding equipment and technicians. If there is so sufficient hardware and software in the enterprise, the technology will be left unused. Therefore, before introducing technology, the enterprise should pay attention to the technology applicability, integrity and flexibility. Second, it is necessary to have a full analysis of the market prospect of the introduced technology. Zhejiang scientific and technological enterprises must know whether the target technology can be transformed into products earlier than the rivals to void that the new products are replaced before entering the market. Zhejiang scientific and technological enterprises should also carefully analyze the demand of international market to ensure that the new products transformed from the purchased technology are acceptable to the market.C. Strategy for Zhejiang scientific and technological enterprises to prevent valuation risksZhejiang scientific and technological enterprises can adopt many strategies to avoid valuation risks, and the following three strategies are the most important to overseas mergers and acquisitions. First, Zhejiang scientific and technological enterprises must find out the information of the target enterprise through multiple channels to avoid the information asymmetry; get support of the administration staff of the target enterprise who tend to cooperate in order to have more reliable information and know the potential value to the target enterprise assets. Cooperation with famous local consulting companies may effectively reduce the asset valuation risk. Obtaining information from clients of the merged enterprise may improve the accuracy of the information. Second, Zhejiang scientific and technological enterprises should not ignore the implicit cost, and should carefully calculate thecapital required by the mergers and acquisitions. Especially for those enterprises on edge of bankruptcy, Zhejiang scientific and technological enterprises must consider of position of creditors and reach agreement in respect of the settlement of debts before starting the merger and acquisition process. Finally, Zhejiang scientific and technological enterprises should enrich their negotiation knowledge and improve the negotiation ability. As the merging party, Zhejiang scientific and technological enterprises should choose the most favorable and reasonable method to evaluate the value of the target enterprise and persuade the opponents to accept the mergers to reduce the cost to the largest extent. In the negotiation of mergers and acquisitions, the enterprises should carefully treat the restrictive clauses added by the target enterprise in the merger and acquisition agreement to avoid further integration cost. In addition, when conducting overseas mergers and acquisitions, the enterprises should cooperate with each other to avoid competition with domestic enterprises, and the rise of price of the target enterprise causing unnecessary losses to the country.V. CONCLUSIONSWith the development of Chinese enterprises and implementation of the national “going-out” strategy, overseas mergers and acquisitions have become an important method for Zhejiang scientific and technological enterprises to expand and improve international competitiveness. However, because of various reasons, there are many difficulties for Zhejiang scientific and technological enterprises to have overseas mergers and acquisitions. On one hand, most of the mergers and acquisitions meet hindrance and risks, and some even fail; on the other hand, a few enterprises have an insufficient understanding of the overall risks, and the mergers and acquisitions finally fail. Therefore, it is important for Zhejiang scientific and technologicalenterprises to have control of the risks. It is necessary to build the prevention system of overseas mergers and acquisitions, reduce the blindness of mergers and acquisitions, and increase the success rate to improve the core competitiveness. Only by this can Zhejiang scientific and technological enterprises really “go out” and truly become large transnational corporations.ACKNOWLEDGMENTMy deepest gratitude goes foremost to Prof. Tang Haiyan and Prof. Hu Zuguang. Without their consistent and illuminating instructions, this thesis could not have reached its present form. This thesis was supported by the Construct Program of the Key Discipline of Shanghai Municipal Education Commission(No.J51702),Philosophy and Society Science Foundation of Zhejiang Province (No. 10CGGL01ZQ) and Natural Science Foundation of Zhejiang Province (No.Y60800REFERENCES[1] ZHOU Haiyan and CHENG Xinzhang,“On the Constitution of Risk Management System of Chinese Enterprises Overseas M&As, ”Proceedings of 2008 Conference Regional Economy and Sustainable Eevelopment, Allawah:M&D Forum Press,2008, pp. 563-566[2] Hu Feng, “A Research on the Risk Control on Overseas Merger and Acquisition in Promoting the Sustainable Development of the Chinese Enterprises, ”The Proceedings of the Euro-Asia Symposium on Environment and Corporate Social Responsibility (CSR), Berlin:Wissenschaftlicher Verlag Press. 2006, pp.281-285[3] Hu Feng, “Study on the Effects of Technology Spillovers From Mergers and Acquisitions of TNCs in China, ”Management Challenges in a Global World, New York: Alfred University Press, 2007, pp. 2433-2437[4] Hu Feng, “Study on the Effect of Mergers and Acquisitions of TNCs on Employment in China, Management Challenges in a Global World, ”New York: Alfred University Press, 2007, pp. 2438-2432[5] Hu Feng,“Study on the Regional Innovation System of Industrial Cluste,” Proceedings of the Ninth West Lake International Conference on Small & Medium Business(WLICSMB), Benjing: Communication University of China press, 2007, pp. 9-12[6] Hu Feng, “Study on the origin and Constitution of the Risks in Every Stage of Chinese Enterprises Overseas M&As,” Proceedings of The First International Workshop on Education Technology and Computer Science, IEEE: Computer Society Press,2009, pp. 403-406[7] Hao Jiao, Jiang Wei, and Yu Cui, “An empirical study on paths to develop dynamic capabilities: From the perspectives of entrepreneurial orientation and organizational learning. 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