Executing
transactions in China can be tough even for very large companies with
plenty of resources on hand there. For firms a few rungs down on the
global rankings, the challenges multiply.
Allen Kohan now works for a unit of Germany-based chemical giant
BASF AG, a company in the first category. But until recently he was
doing deals in China for a company in the second: Engelhard Corp.,
acquired by BASF for $5.6 billion in a deal that closed in June. As
director of corporate development for Engelhard, he played a key role
in the transactions that got the Iselin, N.J.-based surface and
materials-science company established there.
Although Engelhard was a Fortune 500 company with a long-established
Asia-Pacific division and operations in Japan and South Korea, it
didn't make its first investment in China until 1999. That deal was the
first of three Kohan closed over a six year period, making repeated
trips from New Jersey to do so. The total value of the investments was
less than $100 million, and just a fraction of the $1 billion-plus
worth of deals Kohan has executed for Engelhard. But the price tags
belie the strategic significance of the transactions and the
considerable learning involved.
The process began in the mid-1990s with high-level discussions
between senior Engelhard management and officials of Sinopec, China's
huge, state-owned energy and chemical company. Those relationships set
the stage for the 1999 deal, an environmental catalyst joint venture in
Shanghai formed with an existing Sinopec JV; the 2002 purchase of a
Shanxi province kaolin business from a company with combined private
and government ownership; and the 2005 purchase from a Sinopec
subsidiary in Nanjing of its syngas catalyst business.
Kohan recently discussed his China experiences with Corporate Dealmaker's Kenneth Klee. Excerpts:
Corporate Dealmaker: Let's start with that first JV for environmental catalysts. Why take that business to China? And why use a joint venture?
Kohan: We were following the automotive market, since a lot
of the OEMs -- GM, Ford, Volkswagen -- were setting up facilities
there. If you're not manufacturing in China, then you're at a
disadvantage financially once you get up to substantial volumes. JV
structures should be avoided if possible, but at that time, you more or
less had to have a partner. Our partner was there only to facilitate
our investment; they brought nothing, business-wise. We invested in the
facilities -- initially, a small pilot plant. It was our technology,
our sales and marketing know-how.
Tell me about the negotiations, starting with the people Engelhard brought to the table.
Well, there would be somebody from Engelhard's Asia Pacific unit.
Our internal counsel. Attorneys with local experience, some of them
with specialized knowledge in tax or environmental rules. On some
occasions, we needed accountants.
The negotiations proceeded with some difficulty. We did a lot of
learning, about how it takes much longer to transact a deal than one
would anticipate in a Western situation, about the formality of
negotiations -- how the order of seating in itself is very important.
And about the preeminence of relationships.
The discussions themselves are extended. With the need for
translation, you cover fewer parts of a contract in a session. There's
always backtracking, returning to issues you thought were settled.
Don't tell your counterparties you have a specific departure date,
because some of those issues are sure to be brought up at the last
minute.
We ended up with a 60% majority stake, and 18 months later, when the
foreign ownership rules changed, we bought out our partner. We went on
to open a larger facility in 2004. The market for automotive catalysts
is growing, and it's turning into a profitable business.
Your next deal was in Shanxi province, 360 miles southwest of Beijing. How did you end up out there?
That was our purchase of Shuozhou Anpeak Kaolin in 2002. This type
of kaolin is a byproduct of coal, which is mined in that area. There
are also government incentives to invest in the interior. We knew the
players through our involvement in the business, and we started with
another target, but it didn't work out. So we went for this one, a very
small-scale business, less than 10 years old, a private company
co-owned by a private entity and the local government.
What were the big issues?
Employment is a big, big objective. That's a concern in any
transaction. The company wants you to take as many people as they can
negotiate for, and far more than you would need in a comparable
operation elsewhere. The whole social and political context is
important. So we've learned to set up what we call an advisory
committee, which facilitates local relationships with our business.
The Engelhard Asia Pacific president is part of the advisory
committee, together with the head of the business, and the senior
person we were negotiating with. They establish relationships with
local officials. It's not formal or contractual, but it's a critical
group that helps very much in navigating local regulations. It's more
important than any contracts.
Your biggest deal was the purchase of Nanjing Catalyst from a unit of Sinopec in 2005. Was it complicated?
It took about a year, which is relatively quick if you're
negotiating with a state-related entity. It was complicated, though,
partly because it was a carve-out, and there were other entities that
we had to negotiate contractual relationships with.
And there was the inevitable backtracking -- for example, on selling
a certain set of buildings we had previously agreed to purchase. They
said, 'No, we're not going to sell it to you. We'll lease it to you, so
you'll be able to use it, but you won't own it. And by the way, our
lease terms are going to be outrageous.'
What do you do in that situation?
You ask for something in return. Not something directly affecting
the purchase price, because internally, within the seller's
organization, the selling price has been agreed. In this case we got
some laboratory assets that we didn't think we were going to be able to
access. Some office space. It has an element of haggling to it.
Can you talk a little about integrating these acquisitions?
There are regulatory issues, because the rules are going to be more
strictly enforced on a foreign owner. There are cultural issues; the
employees are used to an environment where there's not much emphasis on
individual performance and responsibility. Before closing, you need to
hire a good manager to run the business. We also brought a mentor in
from Engelhard to teach the manager how Western business works. But
perhaps the single most important guideline is to hire a comptroller
before the deal is consummated. This person should be able to speak
English and should understand Western accounting control standards --
how books are kept and how financial statements are put together. These
people are in high demand; they're not easy to find.
All in all, our integration costs were higher than expected. Many
people were making trips to China and staying longer. There was much
more to do in terms of organizing the business, transferring
technology, working with local officials, using outside support for
addressing environmental and legal issues.
You mention tech transfer. How do you protect intellectual property in your Chinese operations?
Basically, one has to assume that there will be no IP protection;
we're reluctant to send our latest technology there. We try to develop
technology and know-how that will be unique to China and couldn't be
used elsewhere. We also parcel pieces of the technology to many
individuals, so that no one at the operation knows the total picture.
Also, to protect your technology you have to continue your
development efforts. If your competitor learned something about your
technology that you did three years ago, then you're already on to
newer technology today. This strategy is really the only successful
defense.
So how would you sum up the difference between making a deal in China and making one in the West?
In China, you don't move in a straight line. You zig and zag.
Eventually you arrive at a place that's different than where you
thought you were going, and you arrive there differently. Hopefully the
deal is still worthwhile. CD
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