Can China Innovate through Mergers & Acquisitions?

July 28, 2016

China has plenty of financial muscle, but its shrewdest investors know innovation can't be bought by simply snapping up cutting-edge firms.

"The easy part is buying," Ou Wang told the Duke International Forum, held recently at Duke Kunshan University. "The difficult part is the post-merger integration."

Wang is managing director and the head of the private equity investment department for the China Investment Corporation, which manages assets of more than $800 billion on behalf of the state. Innovation means different things in different countries, he said.

In Silicon Valley, innovation is all about cutting edge technology, Wang said. But in Germany, innovation focuses on craftsmanship and automation.

"Small-to-medium German companies, often they only do one or two things, and they excel in that," he said. "They do it generation after generation and they keep innovating new ways to make it better every day. That's cutting-edge innovation in itself."

Doing business abroad can be tricky for Chinese investors, Wang said, because of the political and cultural differences at play. Wang, who graduated from the Daytime MBA program at Duke's Fuqua School of Business in 1998, said M&A is ultimately a people business.

"You have to be able to understand their culture, you have to know their needs," he said. "You need the personal touch. It's a people business, there is no universal formula anywhere. You have to know who you are dealing with and what they want."

Jeffrey Li said that process takes time, which is why his strategy as general manager of Tencent Mergers & Acquisitions — an arm of the largest internet company in Asia by market value — is to begin with a small stake in the company.

"We spend lots of time and energy to design incentive plans with target companies, and try to make sure our interests are highly aligned with them," Li said.

Li, a 2004 Fuqua Daytime MBA grad, said acquiring companies is about preserving what works.

"We don't try to change a company in any way," he said. "We just try to leverage their expertise."

Li said innovation doesn't always translate between markets.

"It's highly uncertain, especially in the internet industry which is highly cultural," he said. "I don't see too many universal models out there that you can easily just replicate, or even buy."

Li said mistakes are inevitable in the M&A market, but should be seen as learning experiences rather than warnings.

"You just try to capture the opportunity," he said. "The biggest loss is not to capture it. With innovation, the creative potential is much deeper than what you see now. The most stupid thing is that you do nothing, you try to keep your money, you try to keep your asset."

Despite the challenges for international acquisitions, Li said China is well placed to innovate within its borders because of competition within a young, talented and motivated labor force.

"In China the competition is so fierce," he said. "Everyone is cutthroat, trying to compete with each other. A survivor of the Chinese market has a much higher capability in other areas, and the potential to build a much bigger enterprise and success in the global market in the future."

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