The financial crisis dealt a heavy blow to the auto market.

According to statistics, last year’s auto sales from the big three US automakers dropped 20%~30%, while in Europe, the auto output of BMW AG, Daimler AG and Renault S.A. fell 2.8%~4.3%. General Motors, Ford and Chrysler slipped 22%, 20% and 30% respectively. However, sales volume in December, of 2008 for General Motors and Ford witnessed a 32% fall on average in their auto sales volume, while Chrysler was less than half that during the same month of the previous year.

Though the European auto market has not suffered severely, auto sales dropped from 16.9 million the previous year to 15.4 million in 2008, a decrease of 8.2% annually, due to economic doldrums and decreasing demand. BMW AG sales fell 4.3% to 1.4 million last year.

Meanwhile, automakers in Japan and South Korea were also hit hard.

Historically, automakers, after a financial crisis, take the mergers and acquisitions road, (“M&A”) with an eye on expansion. However, since the onset of the financial crisis in 2008, the past big names in M&A have been fading out, while Chinese automakers are beginning to show up.

Overseas M&A by Chinese automakers

The Chinese Government, from the inception of the financial crisis, has taken effective and reasonable macroeconomic adjustment measures. Thus, Chinese automakers have not been very affected by the crisis. On the contrary, some strong enterprises have begun with overseas M&A.

The Sichuan Tengzhong Heavy Industrial Machinery Company Ltd. (“Tengzhong”) acquired Hummer. After three months of tough negotiations, the two parties announced on October 9, 2009 that General Motors Corp. had finalized a deal to sell its high-end all-terrain Hummer truck unit to Tengzhong. According to US media reports, the purchase price was in the neighborhood of USD150 million. Under the terms of the deal, Tengzhong would acquire the Hummer trademark, as well as specific patent license necessary for the manufacture of Hummer vehicles. The buyer would also assume existing dealer agreements relative to Hummer's dealership network.

Objectively, neither party to the sale received everything they sought. However, more than 3,000 US jobs relating to sales and manufacturing was secured, and General Motors unloaded the heavy burden of Hummer for a fresh start.

As for the Chinese enterprise, Tengzhong, will acquire the Hummer trademarks and trade names, as well as specific rights under patent license agreements necessary for the manufacture of Hummer vehicles. The buyer will also assume existing dealer agreements relating to Hummer’s dealership network. According to publicly announced specifics, the value the purchaser obtained is not that clear but, acquisition of specific IP license rights necessary for the manufacture of Hummer vehicles seems to have left room for possible localization of Hummer vehicles. However, how the high-end brand of Hummer can make larger profits under a low-end brand remains unknown.

While the acquisition of Hummer by Tengzhong is far from complete, the purchase of Volvo by the Zhejiang Geely Holding Group (“Geely”) has also emerged quickly as a focus of overseas acquisitions. The low-end Geely with merely USD 500 million in net market value would mobilize money five times its market value to acquire Volvo. Extensive doubts arose immediately after the news was released. Will the high-cost operation of Volvo place an unbearably heavy burden on Geely? Will the low-end Geely destroy the image of Volvo? Where does the huge amount of acquisition money come from?

The acquisitions of both Hummer and Volvo are merely an ordinary course of business by enterprises. Zhang Wenkui, a researcher with the Enterprise Economic Research Institute of the Development Research Centre of the State Council said “at present, Chinese enterprises have developed from the stage of large-scale expansion to the stage of technology with emphasis on both quality and quantity, namely, the high-level stage; while automakers in developed countries have evolved from the high-level stage to the scale maintenance stage. Foreign automakers have high level of technology, branding and management, but they need to maintain the scale at present. Neither Hummer nor Volvo has problems in technology and branding, but in incapability of maintaining the scale. Through acquisition, Chinese enterprises may upgrade their branding, management and operation levels. A foreign party may also enter the Chinese market and get a share of the cake that grows from China’s economic growth and market expansion. The two fit like a hand and a glove.”

Chinese enterprises should put their emphasis on acquisition of assets instead of mere acquisition of stocks in their overseas acquisitions due to risks that flow from the financial crisis. Enterprises that encounter financial difficulties occasioned by the financial crisis and go through bankrupt possess technologies, brands, sales networks and other intangible assets which shall be an emphasis of any acquisition by Chinese enterprises. That does not mean that IP acquisition shall cover “everything”, enterprises shall be highly cautious so that the highly paid IP shall not be idled and even place a burden on enterprises in their development.

On the other hand, judging from past overseas acquisitions by Chinese enterprises, the overall price under the acquisition agreement does not cover all the risks, the ensuing cost of management and operation shall be a key factor in the final success of overseas acquisitions. As for the purchaser of Hummer, the room for profit is closely related with all the ensuing risks involved.

IP acquisition and application in M&A

IP acquisition refers to acts of an enterprise purchasing directly patents, trademarks, trade secrets and copyrights of its competitors or other enterprises. It can be classified into patent acquisition, brand acquisition, and so forth, on the basis of different objects to be acquired. Patent acquisition is part of an aggressive patent strategy. Purchase of patented technologies of other enterprises may, on the one hand, reduce the economic cost, time in research and development (R&D) by themselves, eliminate risks of failure in R&D, expand new technological domain and launch technological upgrades. Also, patented technologies acquired may be licensed for profits or strengthen bargaining power in negotiations with competitors. Brands, including products brands and company brands, serve as intelligence assets in management and intangible assets in accounting. Brand acquisition is an operational mode in the enterprise strategy. Successful brand acquisitions cannot only eliminate competitors and take over the market of the enterprise acquired, but also save the cost of nurturing brands, perfecting brand strategies and realizing the goal of strategic transformation in an effective and speedy manner. Business secrets cover proprietary technologies and operation secrets. Proprietary technologies are technological secrets that are particular to the enterprise and are not filed for patent protection. Operation secrets mainly refer to enterprise’s information on clients and marketing networks. Be it technology acquisition or brand acquisition, the ultimate goal is to obtain the sales market of the target enterprise, while the marketing networks, the key player in marketing, are, in no doubt, the key of the IP acquisition, even the primary goal. Copyright is not a key point in ordinary IP acquisitions by enterprises. However, for software enterprises and network enterprises, copyright is equal to patent for technology-oriented enterprises and is thus its core IP, fully proven by the enormous economic profits generated by the software giant Microsoft. In the meanwhile, “domain names, trademarks and enterprise names are equally valuable commercially. Domain names are important symbols of enterprises on the Internet and important tools for enterprises to compete in the information era.”

Make a correct self-appraisal before any acquisition. First, enterprises should make a detailed and comprehensive investigation into their surrounding exterior environment, including stability of operation climate, whether there is government policy support and whether there is compliance with the relevant government industry policies. Second, an investigation should be made into the enterprise’s financial status, to check whether the capital turnover rate is reasonable and whether any financing is practicable. In the mean time, attention should also be paid to whether the enterprises’ own manufacturing capacity, technological level, labor quality and other factors is able to merge into target IP in a highly efficient manner.

Based on the correct self-appraisal as the prerequisite, enterprises should make a comprehensive investigation and value appraisal into the target IP.

Firstly, an investigation includes the following four points: the first is confirmation whether the IP is true and legally valid, whether the ownership is clear and whether the economic acts are legally effective. The second is confirmation of classification of the IP. The third aspect is confirmation of the validity duration of the IP and whether it is within the legal protection period. The fourth is an investigation into provisions relating to the acquisition in the jurisdiction or country where the seller enterprise is domiciled, which is also very important.

Secondly, the key step of acquisition is value appraisal of the target IP. Almost every company which wishes to develop desires to acquire innovative technology IP at certain stages of development. However, the purchaser always finds it more difficult to appraise value of an innovation than confirmation of value of any other assets. Companies which obtain technologies through acquisition may find afterwards that the ownership they acquired is far from satisfactory than expected. Therefore, appraisal of target IP has become the key step during the course of the acquisition. Factors which evidently affect the IP value as enterprise assets include: acquisition capital of the IP, economic benefits that arise from the IP, duration of use, market supply and demand, opportunity cost, level of technology maturity, factors involving contents of transfers, evolving trend and speed of the IP, and price levels of the same IP in the same industry.

To sum up, completion of an M&A by an enterprise does not necessarily mean final success, but requires the enterprise to work hard in later operations to ensure a good merger between market management, development and services, and other relevant resources, and employment of technology staff. If we see enterprise M&A as a war, the key to success in the war is how to make use of the weapon of IP in a highly efficient and reasonable manner.

About the author:

Wang Zhengzhi, an attorney at Beijing Globe Law Firm.

(Translated by Wang Hongjun )