Investment banking due diligence in China

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How do I perform Due Diligence in China?

M&A Advisory due diligence in China and Investment Banking Real Estate due diligence in China require more than just valuation and financial skills.  However, most foreign banks, REITS, Hedge Funds and investors greatly underestimate the challenges, pitfalls and ramifications of poor due diligence in China.

M&A due diligence in China is an enormous challenge due to the fact that despite the plethora of M&A deals no two are alike.  A German manufacturing firm that contacted Efficient Equity for due diligence, told us a telling story:  In 2005, they were contacted by a potential joint partner or takeover candidate.  Discussions moved along rapidly and the German side felt it was time to see the production facilities and meet the Chinese management.  The president of the German firm and 3 top executives came to the location to meet top management for the local firm.  They viewed the production facilities, which were much more advanced than expected.  Everyone was happy.  That evening, they went to dinner and, during the meal, the president of the Chinese side asked to see a 500 Euro note as he had never seen one before.  Immediately the German president pulled one out and gave it to him.  The president was very grateful and admonished him that he would frame it in his office as a sign of friendship between the two firms.  The night ended hazily at a KTV and the German company picked up the tab.  The next morning the management team arrived at the factory as specified the previous evening.  However, to their astonishment, the factory had a different name and the previous men were no where to be found.  The company had been fooled for the simple purpose of a free dinner, evening out and 500 Euros.  Although we researched several takeover candidates for them, they never trusted local firms ever again and did not follow through with future firms.  Thus they missed out on a very good strategic partnership which we feel would have benefited them greatly.  Although I never heard this story again, the risks in China are real and varied.  Efficient Equity does much more than a simple DCF for every M&A due diligence in China.  In fact we don’t even start the financials until all angles have been thoroughly researched from the ground up.  Much like a detective agency than a finance firm at the outset.  We know how to get the information you need to start the process of financially analyzing the takeover candidate.

After the deal, it’s players, the assets, and pertinent historical are unearthed, we move to the next step of examining strategic objectives of each firm.  This also requires stealth skills to get to the true objectives of your local counterpart. Often the parties strategic objectives are much further apart than realized at the outset. We help to shed light on this prior to beginning the process of analyzing both the financials or said target but also, through our legal team of both foreign and Chinese lawyers, of delving into the, often, unclear legal aspects of the deal.  Our aim is to present the deal to our clients in a worst case scenario and to point out future unseen risks.  Our goal is not to close the deal but to shed light on it’s true aspects many of which are often more complex and entail more risk than our clients originally anticipated.  Our clients often feel we are too negative on the deal at the beginning but appreciate our true due diligence in the end.  All our current clients have been recommended by word of mouth and we do no advertising currently.

1 COMMENT

  1. Morgan Stanley realized a pre-tax gain of about $700 million from selling CICC. Now partnering with China Fortune Securities. Mergers can be profitable in China.

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