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Today’s business “dragons”—particularly the state-owned Chinese natural resources companies pursuing outbound M&As—are expanding rapidly.
This article outlines five recommendations to improve the likelihood that their seeds of international expansion will bear fruit as they power toward achieving high performance.
China’s demand for natural resources is soaring, with dependence on foreign oil and natural gas expected to reach 60 percent and 30 percent, respectively, in 2013. In response, Chinese companies are actively looking to secure foreign raw materials, assets, technologies and capabilities to drive exploration and production at home and abroad. In 2012, alone, Chinese companies completed seven of the 10 largest M&As globally, by value. Four of these deals occurred in the natural resources sector.
Given China’s rising consumption, economic growth, government support and other factors, Accenture expects Chinese outbound M&A activity to continue in the three sectors we use to define “natural resources”: metals and mining, oil and gas, and alternative energy.
However, many Chinese companies—particularly the state-owned enterprises (SOEs) that have dominated the mega-deal landscape over the past five years—continue to pursue a strategy of international expansion with minimal integration across their business portfolios. Knowledge transfer and headquarter-reporting requirements, for example, remain the primary post-acquisition focus, with less emphasis placed on developing an integration road map that can help the acquirer create business value and build capabilities through operational integration.
Energy security will remain a concern for China in the foreseeable future. The latest Chinese Five-Year Plan calls for the country to secure new sources of energy, develop state-of-the-art infrastructure, and create new generation capacity across the entire fuel mix—from fossil fuels to nuclear to renewables. While China has already made significant progress in outbound M&A, we are observing three emerging trends that we believe will fuel the next wave of Chinese M&A in natural resources:
Acquisition of new capabilities, technologies and intellectual capital. Chinese acquirers are increasingly using M&A as a tool to secure new capabilities, technologies and intellectual capital. This is already apparent across all sub-sectors.
Growth in non-conventionals. Chinese acquirers are actively targeting non-conventional sectors, a trend that illustrates China’s efforts to diversify its expertise and the country’s domestic energy mix away from traditional coal, into unconventional energy sources such as shale gas.
Attraction to North America, Europe and Africa. Chinese acquirers are changing their geographic focus. In the past, Chinese outbound M&A deals were concentrated in Asia. In recent years, investment has moved to North America, Europe and Africa. North America has become, by far, the top destination in terms of dollars invested, according to Thomson Reuters.
Accenture has identified five steps that China’s natural resources companies can follow to maximize business value from foreign acquisitions as they seek to attain high performance:
Align the integration roadmap with the objectives for (and type of) acquisition. The absence of an integration roadmap or framework aligned to the acquisition’s objectives can result in benefits not being fully realized; in some cases, value can be destroyed.
Proactively manage talent selection and retention. This is particularly important for Chinese companies that are seeking resource capabilities globally. An approach should be adopted that minimizes attrition, leverages the acquired company’s talent to promote its strategy in a geographic region, and helps build core capabilities across the dragon’s global organization.
Establish a strong governance structure for the integration. It can support the integration’s objectives and help translate the dragon’s strategic vision into tactical actions. It can also help transition the newly acquired company to a different operating model by organizing integration teams around the future structure.
Use a structured approach to identify and address cultural barriers. Cultural differences routinely top the list of issues that executives feel can interfere with successful M&A transactions.
Maintain a focus on delivering synergies. As synergies are a key driver for most deals, it is important to establish distinct synergy-management roles and responsibilities.
Dhruv Sarda is a managing director with Accenture Management Consulting, Strategy & Sustainability. He is a leader in the firm’s M&A practice and has extensive experience advising clients on corporate strategy and cross-border M&A, particularly in the natural resources sector. Sarda is based in London.
Michael Ding is the senior managing director of Accenture’s Resources Group in Greater China. He has more than 20 years of experience in the electric power and energy industries, with expertise in corporate strategy, performance optimization, change management and business transformation. He is based in Shanghai.
Jeffrey Berry is a manager with Accenture Management Consulting, Strategy & Sustainability. He is part of Accenture’s Global M&A practice and has advised several clients on M&A and corporate strategy in North America, Europe and Asia. He is based in London.
September 20, 2013
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