Chinese SOE’s Cross-border Buyout Of Top Brand

Cross-border acquisition of target that owns world-famous brand has been a hot choice for Chinese SOEs in recent years.Besides traditional motivations for cross-border deals that include market-seeking,efficiency-seeking,resource-seeking and so on,nowadays Chinese SOEs,taken ChemChina as an example,also considers the deal as a financial investment as it promises not to interfere Pirelli’s internal control as the pre-condition of the agreement.This paper,taking ChemChina acquiring top tyre brand Pirelli as an example,will deeply analyze the motivations of the acquirer,and once both parties have the interest how to minimize the deal completion risk internally and externally.What’s more,in order to obtain a fair value of the target’s brand under the M&A context,the author modifies the standalone brand valuation method and use a three-step DCF model to properly estimate the theoretical target’s price,the price containing brand effect,and the price containing both brand effect and acquisition synergy.The article mainly draws the following conclusions.Firstly,regarding the acquisition motivation,for SOEs that have interest in world-famous brand but have difficulty in obtaining total control,an additional angle is to treat the target as not only complementary business partners,but also a financial investment with the condition that the target has well-performed financial status and historical performance and its brand is likely to support the company’s organic growth.Secondly,minimization of the deal completion risk can be conducted through two ways: a)internal risk control: designing delicate deal structure,properly estimating the deal consideration,negotiating on the price,added-value arrangement and further operation;b)external risk control: staying in line with the country’s long-term industrial layout may reduce the political risk and selecting target from the vertical integration angle may induce less pressure on anti-trust review risk.Thirdly,brand value in M&A context can be properly estimated based on three steps: a)DCF base model on the basis of historical data;b)adjusted DCF model with top brand price premium effect in China added-in;c)adjusted DCF model with both brand and synergy effect added-in,and the value gap indicates the estimated brand value.This paper both contributes to academic studies in this area,and provides implication for SOEs in target selection,risk control,brand valuation and purchasing price estimation.