The Executive Interview: Mick Adams, Director, Somerley Investment Consulting (Shanghai) Ltd

A_MG_1962Mick Adams, a former professional engineer, came to China in 2002, and has been working for Somerley in Shanghai since 2009. Established in Hong Kong in 1984, Somerley also has a representative office in Beijing. A leading independent investment bank, they offer a full range of financial advisory services. Adams was recently elected as Chair of the Chamber’s Private Equity and Strategic M&A Working Group.

When and why did you make the switch from engineering to corporate finance?

I made a switch to become a more business-focussed person after being a consultant engineer for ten years. I felt that I wanted to be more involved in business management generally rather than a technical specialist. I did an MBA at INSEAD, and then returned to the engineering industry, but in a project-development, project-finance role. From that time forward, which would have been 1990, I was very much in a management role and heavily involved in the financing of major projects.

Having originally come to Shanghai with Gammon Construction, in 2006, I decided to set up my own consulting company advising on market entry, and generally doing business in China. I ended up doing some consulting work for Somerley, who at that stage just had an office in Beijing not Shanghai. Somerley had a number of people working for them who were previous colleagues of mine. We got on well and when they decided to open up an office in Shanghai I came on board to do that for them.

Can you tell us about some of the recent deals that Somerley has been involved in?

In a China sense we advise on cross-border investment flows, typically in M&A, or fund-raising activities. Three of the deals that we have completed in the last year give a good flavour of what we do.

We assisted an Italian company that had a 75 per cent joint venture in China, near Tianjin, which it wanted to exit. The company was in financial difficulties in Europe and the joint venture was also not performing well. They took us on to find a buyer for their 75 per cent. Within a fairly short space of time we had identified a Chinese company that was interested in buying out their share, and ultimately in buying out the whole thing. The local joint-venture partner was a state-owned enterprise, which, if we’d involved them, would have slowed down the deal considerably. So the deal was structured whereby the Chinese company came in, and our client’s share first.

In another deal, very early this year we helped to raise USD 175 million of capital from overseas investors for aforeign-owned company that has invested in domestically-operated hospitals in China. The capital raised is to allow them to acquire other hospitals in China.

Also, last year, with our US-based strategic partners, Harris Williams & Co, we helped the owners of an Israeli medical laser business sell their company, Alma Lasers, to Fosun in Shanghai for around USD 220 million. Harris Williams was the lead adviser on the deal, and we assisted them in with liaising with potential Chinese buyers and actually brought Fosun into the deal. We do a lot of work with Harris Williams, who operate throughout the US and also have offices in London and Frankfurt. They specialise in helping the owners of mid-sized companies—particularly private equity groups—exit their investments, and we expect to see growing interest in their deals from Chinese buyers moving forward.

Following the government’s announcement last year to expand private healthcare to relieve some of the pressure from the public hospitals, is this kind of investment activity likely to increase?

Yes, we think so. It’s a very hot sector at the moment. Clearly that announcement had a very big impact. There’s been a lot of interest in investing in healthcare in China for some time, but there have been all sorts of regulations that have made it difficult. That announcement increased the level of interest. There was a major IPO done in Hong Kong at the back end of last year—the Phoenix Hospitals deal—which has increased the appetite of investors to get involved in the sector. We were able to ride on that wave with the fund raising deal I’ve just mentioned.

The medical equipment sector is hot too. Apart from Alma Lasers, we were also involved last year in advising Trauson, a Chinese manufacturer of orthopaedic implants that was listed in Hong Kong, when it was taken over by Stryker from the US in a USD 760 million deal.

Are you seeing more of the kind of deals where companies are looking to exit China?

The deal I described to you earlier, where the company was looking to get out of their joint venture, was unusual for us at the time because it was not something that we’d really been much asked to do in the past. But now we’re actually working on another deal that is similar. It’s for a European company that has decided that certain of its China operations are no longer core to the direction it is now headed, and it has asked us to find a buyer for them.

Is looking at these kind of deals a good way of measuring the confidence, or lack of it, of companies in the China market?

You’ve got to be a bit careful drawing such conclusions. The current engagement I’ve just described is driven more by our client’s global strategy than its attitude to China. Indeed it is committed to grow its other businesses in China. In another deal we discussed with a client, but ultimately didn’t advise on, they had acquired a business in China as part of a wider acquisition, but were looking to sell the China business because it didn’t fit with their overall strategy. Also, as China’s economy develops and matures, it is inevitable that foreign companies operating here will need to adjust their strategies in ways that could drive not only further investment in M&A, but also strategic disposals. Having said that, we’re aware of other instances where companies are looking to exit businesses in China because they are not performing as well as desired. In one particular case we have discussed with a client recently, they too are looking to get out of a joint venture but are struggling to find ways to do so because of objections from their joint-venture partner, which is making it very difficult.

When Chinese companies are looking for outbound investments in Europe, which sectors are most attractive for them to invest in?

It is very rare to see an outbound deal that is not driven by one or more of the following objectives for the Chinese investor: achieving greater resource security, becoming more competitive and expanding presence in the domestic market, expanding businesses internationally, and asset diversification to reduce risk.

In Europe, the relevant drivers tend to be either raising competitiveness and expanding market presence or asset diversification. Therefore, there is a lot of interest in acquiring European advanced manufacturing capabilities and consumer brands.

On the asset diversification side, you see the likes of China Investment Corporation (CIC) and the China Three Gorges Corporation, really I think acting as tools of government policy to diversify the portfolio of foreign assets held by the government. CIC bought into Heathrow Airport, and they’re investing in other infrastructure projects in the UK. Three Gorges bought into the grid operator in Portugal and have done other deals in that area. It’s all about government looking to get a better risk adjusted return on its overseas investment, rather than having excess foreign currency just sitting there in bonds.

So they’re looking for the kind of investments that you’d consider stable?

Yes, long-term, low-risk investment. So there’s a lot of that going on in Europe, and those assets, as a result of the financial crisis, have been available at very decent prices. Countries like Portugal have been forced to sell off publically-owned assets as a part of the austerity measures that they have had to adopt.

We also see Chinese, private companies—typically these would be companies where the founder still has a very large interest—looking to invest overseas to diversify their wealth, or diversify the risk of the exposure of their business to the market in China. I think there is concern amongst local business people about the future of the economy in China, and for them it makes sense to get money offshore and into other economies. It could be businesses or property or whatever, but I think it is the driver for more industrial M&A as well.

What are the main problems that European firms face when they carry out M&A in China? Is the lack of transparency still a big issue?

Transparency is still a huge issue. Getting to the bottom of what the performance of a company really is, what liabilities that company has, what assets it owns is always a challenge. You can generally tell quite quickly whether it’s too much of a challenge trying to do the deal or if it’s something you just have to work your way through.

What things would lead you to conclude that a certain deal is not worth pursuing?

How readily, or not, the information is available in the first place, how consistent that information is and how people respond to questions surrounding that information.

Are there certain things a firm could do to minimise risks?

Spend as much time as you can actually quantifying what those risks are. There are certain things you can do through contracts to minimise risks as well. You can also assign money to those risks and then try to withhold it through the deal structure to give you some protection against those risks coming through. Those are ways to deal with things that you actually know about.

It’s very difficult to deal with things you don’t actually know about and can’t anticipate happening in the future, but clearly the more you can incentivise the people who have made what you’re buying a success in the past, to continue to make it a success, the better off you’re likely to be.

Also, it is essential to hire professional advisors who know what they’re doing to act on your behalf, who have dealt with these kind of deals in the past, and who have the proper procedures in place for handling them.

Despite the amount of experience and success that Somerley has had, is it just a constant learning process?

Yes, I think it’s one of the things that characterises China, you’ve never seen everything. There is always something new that comes up to surprise you. You also need to keep on top of the constantly changing regulatory environment.

Has Somerley seen an increase in activity due to the inception of the China (Shanghai) Pilot Free Trade Zone?

I don’t think that is has led to an increase in activity, certainly nothing measurable, but I think that it is an encouraging development for M&A, particularly in two areas. First is the introduction of the Negative List, If it is actually followed through on and if the number of industries that are on it is significantly reduced over time, as is the stated intention. This could open up a lot of extra industries to foreign companies and potentially lead them to acquire businesses that are not available to them at the moment.

Then, in terms of outbound M&A, the Free Trade Zone makes it easier for domestic companies to invest overseas. If you’re a company established inside the Zone you don’t need to go through the same lengthy approval process as a company incorporated elsewhere in China, to buy a company offshore. I was talking to one of our competitors quite recently and they’ve had a deal where the Chinese buyer deliberately set up an entity inside the Free Trade Zone to make an acquisition, and it all happened very smoothly and quickly.

In the past, we’ve seen deals not go through with Chinese buyers because the seller was not prepared to wait for the approval process to take place and/or take the risk that the needed approval would ultimately not be obtained. So, if it’s now possible for a Chinese buyer to remove these concerns, more deals should get done.