If you are negotiating deals in China, you must read the piece on Taizinai Dairy and the Western investment banks in Caijing’s online edition: http://english.caijing.com.cn/2008-12-11/110037270.html
Quick & dirty rendition: Western investors win a pyrrhic battle for control of a zombie China dairy business with huge undisclosed liabilities and no market, lose upwards of US$ 170 mil– and get laughed at.
The best minds in big-time international finance bought the wrong asset for the wrong price from the wrong people at the wrong time. These NY investment banks may have lost a fortune and turned themselves into laughing stocks in the process — but at least we can learn from their humiliation. And that’s something.
Here’s a bit of Caijing’s take:
Actis, Morgan Stanley and Goldman Sachs sank a combined US$ 73 million into Taizinai in 2006, a decade after Li Tuchun started the business with a yoghurt drink that gradually became popular across China. They added another US$ 30 million in November. The foreign investors also helped win a 500 million yuan loan from a consortium of six international banks led by Citigroup in September 2007.
Turning investor heads was a Taizinai report of pre-2006 annual growth rates of 50 percent and 2006 sales of about 1 billion yuan. The financial data also supported the company’s prediction that it would become the first Chinese dairy to list on a U.S. stock exchange.
Behind the Books
What Taizinai’s accounting books apparently failed to explain was that the dairy had been struggling to compete against several other popular makers of milk products including Yili and Mengniu, two of the country’s largest dairies, which won larger markets shares in major cities and developed their own yoghurt drinks.
And questions about the company’s financial data surfaced shortly after the foreign investors arrived.
You read the article and see if you can find examples of the following:
- Lack of basic market research. (Why were they able to report growth numbers? What were their competitors doing? How was their market responding?
- Lack of due diligence. (Yes, I know it’s hard to do, but that’s why it’s so important. These investors must have noticed problems when they failed to prepare the IPO documents back in 2006. Instead, they ended up buying lots of ugly, open-ended liabilities that any decent accountant with China experience would have seen.)
- Not knowing when to walk away. (How about 1 second after the accountants refused to turn over 3 years of financials? This deal started smelling bad at least 2 years ago.)
- Unclear or disparate goals. (The investors were never on the same page with senior management.)
- Wrong variables. (The Western investors clearly thought that a minority position on the board protected their interests, and they sacrificed a lot to get their seats. Didn’t end up doing them much good.)
This case smells of lots of ego and greed, but all of the classic China negotiation blunders are there. Read it now for free, or learn it the hard way in the future.