Financial Risk Management For Chinese Enterprises In Cross-border M&A

With China’s sustained economic development in recent years, "Cross-border mergers and acquisitions" have become an important way for Chinese enterprises to expand market share and enhance their international influence. However, most Chinese enterprises have not had the experience of overseas mergers and acquisitions, thus overlooking financial risk that may arises. Because of this, they could not take effective preventive measures, leading to failures of mergers and acquisitions. This paper focuses on financial risk arising from cross-border M&A and analyzes the causes of these risks so that we could take preventive measures. This has important implications to help our Chinese enterprises enhance the identification and prevention of financial risks in cross-border M&A.This article first defines the concept of cross-border M&A, carrying out the scientific classification of cross-border M&A. Second, the article discusses the motivation for Chinese enterprises and introduces the development of cross-border M&A in order to indicate the theoretical study of cross-border M&A is advanced with times. Then, the paper describes the definition of the financial risks as well as the characteristics of financial risk durig cross-border M&A.The financial risk of M&A is divided into different kinds according to preparation phase, implementation phase and integration phase. The financial risk in preparation phase are strategic decision risk and valuation risk. The main risk during the implementation phase are foreign exchange risk, financing risk and payment risk. The financial risk in integration phase are liquidity risk, earnings risk and operational risk. Through the analysis of financial risk at different stages in M&A, the article discusses the factors affecting the process of financing, payment and pricing in cross-border M&A and provides effective preventive measures in order to optimize costs and benefits for all stakeholders.The article uses cross-border M&A between Geely’s Group and Volvo as a case study and analyzes the financial risk in preparation phase, implementation phase and integration phase. The financial risk during preparation phase is whether Geely Group has a clear strategy and reasonable valuation methods. Geely Group’s prevention measures include a comprehensive analysis of operational and financial condition of Ford, Volvo and itself. At the same time Geely Group hired a team of international investment bank for comprehensive assessment on the Volvo.The financial risk in implementation phase include currency fluctuation impact on the price paid, dilution problems from private placement and liquidity risk arising from large cash payments. Measures taken include selecting appropriate trade time, using special purpose entities for transaction structure and making reasonable arrangements for funding. The financial risk for Geely Group in integration phase are liquidity risk, earnings risk and operational risk. Measures taken include cost control through transactions internalization, distinguishing between high and low brand, establishing decision-making mechanism for project investment and so on. Geely Group successful experience to deal with the financial risk is of great significance for Chinese companies.The innovation of this paper is the combination of Geely’s case and traditional financial risk theory. Through dividing financial risk into different stages and providing relevant effective measures, the authors hope to take a lesson from cross-border M&A between Geely’s Group and Volvo and enhance Chinese enterprises’ability to withstand financial risks.