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Pitfalls amid the plenty

By Howard Chen (China Daily)
Updated: 2009-02-23 07:59

Chinese direct investment in US companies has rarely had such a large potential upside as it does in this current economic climate. The US recession presents significant opportunities for Chinese companies looking to invest in cutting-edge technology and talent. But despite the many opportunities, there will be several pitfalls that must be avoided.

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One potential pitfall is the failure to recognize that investment in US companies is all about money. Chinese investors need to focus on the return on investment (ROI), and not just the initial price tag. It is better to spend more on a business that is undervalued and can offer a high ROI, than to spend less for an investment that has little to no ROI.

When acquiring a company, it is also important to be mindful of the professional talent that comes as part of the deal. Companies may think they are picking up major talent in an acquisition, only to find that the best employees jump ship and join a competitor - a common occurrence during a merger. This problem can be avoided by clearly articulating and acting on a vision that resonates with the workforce.

It is also vital for a company to understand the industry. It is critical to understand how the business itself works, how the industry works in the US and any weaknesses . It is also important for the company to integrate into the industry by building allies among the suppliers, vendors and service providers that will make the investment profitable. At the end of the day, companies operating in the US should learn to think and behave like a US company for maximizing ROI.

Past foreign acquisition and investment in the US has shown many successes and failures. Chinese companies have succeeded when they have shown not only a deep understanding of the financial details of their investment, but have also managed the talent and industry issues that impact ROI. At a time when so many good US companies are undervalued, it is in the best interest of Chinese companies to choose their investments wisely and to take the time to consider the many risks and rewards ahead of them.

 [The author Howard Chen is a partner in the San Francisco law firm of K&L Gates.]