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Chinese Banks Need to Be Selective about Cross-Border M&A Deals, Says Report by The Boston Consulting Group,  a List of 69 Questions Suggested to Banks that Can Ask to Gauge Their Preparedness for Foreign Deals

Chinese Banks Have Good Reason to Venture Abroad but Face a Range of Challenges as They Pursue Cross-Border Deals

BEIJING, September 17, 2008—Chinese banks have been pursuing larger, more ambitious M&A deals. Many deals have involved taking stakes in foreign institutions, according to a report by The Boston Consulting Group (BCG). The report, titled Venturing Abroad: Chinese Banks and Cross-Border M&A, is being released today.

From 1993 through 2005, Chinese banks made an average of about one cross-border acquisition per year. Most deals were valued at under $20 million. Since then, Chinese banks have made 11 cross-border M&A deals. Five of these were worth at least $1 billion.

"Chinese banks face a range of challenges as they pursue overseas M&A deals," said coauthor Tjun Tang, a partner in BCG's Hong Kong office, "but they are moving inexorably toward a more international profile. Their size alone makes them capable of influencing markets, particularly if they can harness the momentum of China's global challengers—dynamic companies that are heading abroad.

"To build strong international positions, however, Chinese banks still need to develop core skills and capabilities," Tang said. "Selective M&A deals can help accelerate this process."

There also are opportunities for foreign banks in partnering with their globalizing peers from China. Foreign banks could look for opportunities to provide Chinese banks with the presence to serve their globalizing customer base.  In turn the cash-rich Chinese banks can help foreign banks weather the current financial crisis. "Chinese banks need to look beyond potential financial gain," said coauthor Holger Michaelis, a partner in BCG's Beijing office. "They need to look for ways to acquire new capabilities, enhance their offerings, and leverage their emerging-markets skills."

Western banks, particularly those that have been hit hard by the crisis, might consider selling business lines as a way to free up capital and refocus on core objectives. "Chinese banks have both the capital and the incentive to make such purchases," Michaelis said. "They are not direct competitors—at least not yet—and therefore present a better option for foreign banks seeking to divest business lines."

The Challenges of Cross-Border M&A

Growth is the common denominator for cross-border M&A, but the report also cites other reasons for these deals, such as deploying excess funding, going global, acquiring capabilities, and diversifying the business.

"Chinese banks have good reason to pursue cross-border deals," said coauthor Frankie Leung, a partner reporting BCG's Hong Kong office. "But some investors and analysts believe they should concentrate on opportunities closer to home, given the country's strong growth. They've also questioned whether Chinese banks have a clear strategy—along with the skills and resources—for venturing abroad."

"Mergers and acquisitions are inherently risky and complex," Leung said. "Cross-border deals tend to pose even greater challenges than domestic deals." The report describes the steps that Chinese banks can take to build and execute a strategy for cross-border M&A:

• Follow a clear and convincing rationale for outbound M&A
• Start small and build M&A capabilities
• Ensure deal structure and degree of integration support deal objective
• Identify approaches to add value to the target company
• Retain and empower key local management talent
• Engage in pro-active communication to target company staff, investors and the public

The report is the result of an in-depth study that involved extensive interviews with leading Chinese banks and regulatory officials—along with financial investors, investment banks, and other market participants, both inside and outside China.

To receive a copy of the report or arrange an interview with one of the authors, please contact Gu li at +86 21 2306 4000 or gu.li@bcg.com.

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