Purchasing Squeezed Enterprises to Expand the Overseas M&A Market

Recently， the MA market shows a new trend. One important new development is that the domestic enterprises purchase squeezed enterprises in foreign countries. Particularly， when the European debt crisis arises， many a enterprises offers attractive prices. Jia Dianan， lawyer from Baker and Mckenzie told the reporter from China’s Foreign Trade magazine that lots of Chinese enterprises， in particular those in the auto spare part and machinery manufacturing domains begin to purchase assets or shares in Europe on a large scale. As an expert， he delt with many cases focusing on China enterprises purchasing squeezed companies， what should Chinese companies pay attention to? He shared us his professional suggestions.

“First of all， we should pay attention to the bankruptcy risk for the tobe-purchased enterprises， which has offered profound experience and learn- ings to the domestic enterprises particularly in Europe. About seven or eight years ago， on behalf of Shanghai Automotive Industry Corporation (SAIC)， I took over Rover， an auto enterprise that the domestic enterprise acquired quite early in overseas countries. An earlier MA case was that on behalf of SAIC I purchased SsangYong. At that time， these enterprises were on the verge of bankruptcy. SAIC proposed to offer a sum of capital to help these enterprises out. In many cases， from a win-win perspective， we may want to save these enterprises. Under such a circumstance， the domestic enterprises have to be very cautious — how and why to save， will it work and can it undertake the risks?” When he recalled the case， he still remembered clearly， and said，“At that time， I definitely rejected to immediately offer a sum of capital to save the enterprise. Instead， I decisively proposed to buy its intellectual property， which serves as the core and the most important for the auto enterprise. Eventually， the executives of SAIC adopted my suggestions to quickly buy its intellectual property. This is a very successful case.”

Jia mentioned another difference case with the same problem. Another domestic enterprise encountered great problems when purchased Saab， a Swedish enterprise. But this time， why did we pay a big sum of capital in the form of advance payment when the target company was on the verge of bankruptcy? He explained to the reporter， since the enterprise has initiated liquidation procedures， it is a problem that whether the invested capital can be recovered. Therefore， we should first consider whether there exists risk for the enterprise to go bankruptcy. When there does exist bankruptcy risk， we should consider purchasing equity as soon as possible instead of buying stock rights. Even the contract is signed， the time limit of the contract should be taken into consideration. As a long delay may cause trouble， actions should be taken immediately and it had better implement “cash on delivery”.

Another crucial factor for purchasing a to-be-bankrupt enterprise is the price of assets. He said， “Sometimes， we’re anxious to get things on the cheap. Any major country has its own procedures. During some time before the enterprise goes bankruptcy， no matter in 6 months or 1 year， if the price is obviously lower than the market price or even lower， the buyer and seller may conspire to infringe the creditor’s rights by conducting transactions against business rules. The legality of such transactions may be overturned by the court or the creditor committee. As a result， we had better also pay attention to the prices of the transactions and then make reasonable judgment on the prices instead of just preferring cheaper price.”

At the end of the interview， he suggested that in the process of buying a to-be-bankrupt enterprise， the creditor’s attitude is also important， which should be handled carefully. The key for purchasing one property lies in the interests of the creditors， as its stockholders have been already insolvent and their interests are almost zero or hardly to be recovered. Consequently， the creditor holds the final say. When we were purchasing the to-be-bankrupt enterprises in the Middle East and Russia， those who we made contact with were the creditors and who played a crucial role were also the creditors.