Monday, June 29, 2009

Learning Experience 3 - 4

Day 4

Waiting at the airport for my flight back to Singapore. Our day tr

The lawyer is selected, the audit team selected and the due diligence is set in motion.

Success of a trip is when the client who is paying you is happy with your work.

Now the next thing to happen of the due diligence process are the queries that will be raised, the answer that is needed and finally the price or valuation. That is when the fun begins. For this project I am glad to say that we have an agreed price, now is whether it is justified in the eye of the buyer.

For every six or seven deals that I follow through, one will come to fruition. Hopefully this is the one…..

The End

PS Flight delayed because one passenger on incoming flight has high temperature and suspected of H1N1 flu…… how one flu can crippled the airline business worldwide.

Sunday, June 28, 2009

Learning Experience China 3 - 3

Day 3

For a buyer acquiring a company in a foreign country, the two professional they need to contact is a good lawyer and a good accountant. These two professional plays a major part of the acquisition process.

A piece of advice, if you ever want to get a professional service provider on compliance work in China ALWAYS get a local professional. This is especially so in China.

I have come to the conclusion that many foreign companies acquiring a local company uses lawyers and accountant from their own country to provide the service.

In my personal view, is that these foreign professional will still go to the local to get help, so why are you paying twice.... might as well come direct. In China especially, in the early days all accountants and lawyers works for the State and there was not many in private practice.

As such most of these lawyers have very good contacts and network. China being such a big country and if the acquisition involves a small province, the small province lawyer is required.
They have the connections and the local knowledge to help you.

Now for consultancy work, not involving compliance regulatory requirements then it is different; you need someone you can trust to manage the local.

An example is to do with the Singapore authorized capital and paid up capital and China’s total investment and paid up capital. The difference is that in Singapore, the company can register a $2 paid up and $100,000 authorized where in China the rules are different. The total investment has to reflect the business transaction of the business and the working of the paid up based on 70% of the total investment. A careless mistake by a Singapore accountant causes his client’s application for conversion to be rejected.

Let’s talk about professional fee. Over the years I have come to gauge the different type of professional services and the charge out rate or fee. Interestingly the consultancy fee in China has escalated over the last twenty years since I started working in the China market. A legal fee for a local lawyer in the 80’s on a per hour basis was 200RMB and today the same lawyer friend is charging me 900RMB per hour, what a jump. A simple due diligence (let me qualified that it is a simple Due D), the fee including miscellaneous is budget about US$30 – 50K.

Back to the case. The client after meeting with several lawyers and accountants is deciding on the next steps. What criteria do the client need to observe?

To be continued….

Saturday, June 27, 2009

Learning Experience China 3 - 2

Day 2

A due diligence is an audit, verifying and checking what you want to buy versus what you have been told or shown. It is the investigation of information, a process of people management and the technique of observation.

In due diligence, you are always given a set of data either in the raw state or in a “decorated” state. What I term as “decorated’ state has to do with the presentation of the data. In some cases, the presentation is so good that the fact is hidden and investigation becomes tedious. Data can be manipulated.

People management is important to the success of a good diligence. Finding the right people to talk to and willing to provide you the necessary information is not so straight forward in many due diligences.

Technique of observations comes from experience. Over the years this part of the due diligence has help me in negotiating many deals and always in our favour. Like a project in China, where I was told that the company has US$X turnover, but when we look at the store room where the receipts are kept, we noticed that for a company with that kind of turnover and the volume of trade has issued very little receipt taking into account the nature of their business is low value products. In China receipt is an important aspect of doing business in China. There was another case of an Indian catering company who told me his business turnover is US$Y and wanting to sell the business for a very high value. I conclude that what he is asking for is realistic pricing as his account is below what is its true value. I went to his warehouse where he kept all his equipment for catering and it is impossible to do a low value business given the amount of catering equipment in the store. The lesson is to be observant.

This is email has to sent out from a different channel and a day late. This is because, China has block off the blog sites and also You Tube sites

To be continued….

Friday, June 26, 2009

Learning Experience China 3 - 1

Day 1
Sitting at Changi Airport again. Waiting to board the plane for Shanghai.

It has been a while since I last flew, the reason has to do with some alphanumeric character … H1N1, I am not so worried about catching it but having to stay in some country for seven days under quarantine Just doesn't sound like fun :-)

On learning experience for this trip, let’s start with the financial crisis and China.

In my earlier blog, I spoke about my visit to China in Nov 08 and witnessing the closure of several factories in the midst of the financial crisis. I wrote about the row of factories, several were locked and closed with statement stating that operation has seized and also the long queue of workers line up outside one factory with some of the workers carrying placards and shouting for their back wages. In another factory, I noticed another queue of workers going into a factory to collect some money given out by the local government agency.

The scene reminds me of the days in England and the Coal Miners strike in the early 1980s when I was working in Sheffield, England. Mass of people was out of job at that time. I never thought that I will see this situation in China.

This is an update of the earlier visit. The factory where the workers were collecting the money is next to my client’s factory and I got talking to the factory manager of the defunct factory. The money is from the local government about RMB 600 per workers. At that time, I got talking to some of the workers and jokingly, one suggests that combining their money they can start a small hawker stall. One laugh while the other companion thought it was a good idea.

Now I return to China and things are slightly better, The Chinese implementation of the stimulus package is swift. There is more confidence at the ground level. The queues are gone. Interestingly I was told that several MNC shut for their Chinese new year break…… one months early. Can you image that business is so bad that they can afford to shut down early and release the workers.

The general impression I got from this whole episode tells me that this crisis is really bad. I need no analyst to give me figures and statistics, nothing is better than seeing it at ground zero.

I am however confident that the Chinese economy will ride this “tsunami” very well. Remember the workers who wanted to start their hawker stall. Well I met one of them on this trip.

With the combine receipt of the three workers (1800 RMB) they started a small hawker stall (illegally) and very happy about it. They work the midnight to morning shift for their stall just to avoid being caught by the police. The Chinese are generally very resilient and entrepreneurial. I believe the impact will make them looks inward rather than outward for their growth.

Back to the purpose of my trip, I am going to Shanghai to carry out a due diligence project.

In my business there are two type of incoming work for acquisition. The first type is when somebody wants me to find another somebody to either buy or sell their business, while the second type is when the somebody who found the other somebody to buy and sell their business and I am just the facilitators J

I prefer the second type of business. Frankly 70% of my work is from the revenue in the second categories and also I get a retainer up front and not wait for success basis.

This is the acquisition of a local company by a foreign companies.

To be continued…