System Archetype Analysis on Corporate Restructuring
BoXu, Bing Xia
Business School
Shanghai Institute of Foreign Trade
Room 209, Building4, 620 Gubei Road
Shanghai 200336
P. R. China
Tel: 0086-21-6259-2742 / Fax: 0086-21-6259-8118
Bo Xu: Brianxu@ sohu.com
Bing Xia: J ulietxia@ yahoo.com.cn
Abstract
With the advancing of China’s reform and opening, Corporate Restructuring
(CR), including M&A, spin-offs, and LBO, appeared in China in 1980s. From 1997,
Mergers and Acquisitions (M&A), especially “M&A concerning listed companies”
become significant economic phenomenon on China’s new developing Securities
Market. There is obviously difference in detail operation of M&A between China and
westem developed countries. The merger market based on incomplete market
economy is full of complexity in China. Proprietorship, multi-motives for M&A,
assets reorganization, synergy gained from combined companies and uncertainty and
mobility of policy bring much risk to M&A.
With the emphasis on illustrating the importance and complexity of assets
rearrangement and synergy creation, the thesis use System Archetype to analyze and
explain the features unique to CR in reform era and the strategic plan underlying
them.
The thesis begins with the review of three developing stages of Corporate
Restructuring in China, focusing on the characteristics and problems of CR, especially
CR concerning listed companies on China’s newly developed Securities Market.
Using System Archetype I-“Shifting Burden”, the thesis highlights the causes and
results of Cash Trading or Strategic CR, as well as the difference and relationship
between them, with the attempt to curb Cash Trading and promote Strategic CR. The
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fourth part describes the strategic process of strategic CR, assets rearrangement and
synergy creation with the System Archetype II-“Limits to Grows”. Motivated by
strategic development and based on performance improvement, the strategic CR
promotes the efficiency of companies through successful assets rearrangement and
synergy creation and maximizes the value of listed companies on Securities Market in
China.
Background of Corporate restructuring (CR) in China
Corporation Restructuring, especially M&A, as the transaction of enterprise
assets or the property right, are not merely one of the ways that an enterprise expands,
but a major factor contributing to the evolution of enterprise strategy. Enterprise
strategy sets the conditions and forms of M&A, determines the rearrangement and
efficiency of assets, and thus affects the synergy gained from M&A.
At present, China is undergoing economic system reform and transition from
planning economy to market economy. Traditional M&A theories and practice, based
on the complete market economy, cannot be directly used to explain CR in China’s
incomplete market economy. Considering the evolution of enterprise reform and
strategy development, CR in China should be investigated in the background of
incomplete market economy as advanced enterprise performance. CR reflects
enterprises’ interests and demands in specific systems and reveals their strategic
reaction to current regulations.
In June 1984, Baoding Textile Machine Factory and Baoding Boiler Factory
separately took over Baoding Knitting Machine Factory and Baoding Air-blower
Factory by means of taking over all the assets and liabilities of the targets firms.
From then on, CR has been experiencing three stages in China. During 1980s,
the early stage of CR, most State-Owned Enterprises (SOE), having no sense of
modern company, are merely manufacturing units in Plan Economy, so CR between
them always intervened by Government or Administration, which initiated the M&A
in China. According to statistics, there are 6226 enterprises took over 6966 enterprises
in 1980s and most of them are “Strong Annexing Weak” (Well-perform Enterprise
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takeover ill-perform one) with administration intervention. Moreover, government,
owning or managing most assets of SOEs, always involved or even took part in the
CR. With the intentions of eliminating the number of loss enterprises and shifting
financial burden, the government fosters the M&A, especially the kind of “Strong
Annex Weak”.
In the second stage, from 1992 to 1997, there are more companies involving in
the CR in China’s Equity Market. This tide of M&A aroused with the background of
the deepening company system reform and developing of Securities Market. In 1990s,
the boom of China’s Securities Market provided a wonderful chance for the corporate
restructuring and assets reorganizing. The Secondary Equity Market, Shanghai Stock
Exchange, established in 1991, promoted the development of M&A. However, there
were two problems in that stage. Firstly, the M&A mainly were limited in the shares
transfer and just partly involved in assets transfer, so most mergers didn’t restructure
the business in any sense. Secondly, the general problem of how can the acquire
company and the target one fit to each other remained no answer. Both the dissention
in intemal management and the government intervention attributed to those problems.
Moreover, some main stockholders operated illegally and make use of the listed
company as “drawer machine”. As a result of all these factors, M&A in this stage
were rarely successful, so just formed waves of “Stock-Trading” in Securities Market.
In 1997, the 15th National Congress of the Communist Party of China
emphasized the superiority of the shareholding system in Market Economy. So the CR
accomplished on Secondary Equity Market developed quickly and came into a
brand-new stage. Up to the now, the M&A concerning listed company emerge in an
endless stream. According to the statistics, there are about 40 percent listed companies
reorganizing assets from 1997, with 110 M&A in 1997, 422 M&A in 1998 and 437
M&A in 1999, as shown in table below.
Control-right Internal Assets
Year Expanding Spin-offs Total
Transfer Reorganization
1997 | 23 66 18 3 110
1998 | 78 196 91 Si 422
1999 | 81 178 137 41 437
Data from Shanghai Securities News
Problems of CR in China
At present, the main problems of CR in china appeared as below:
1. Although there are plenty of CR appeared successful in stock market and most
acquire companies assert their M&A as “Strong Annex Strong”, in fact most M&A in
China are “Strong Combine Weak”.
2. The listed companies’ performance after CR isn’t consistent. Because of the
positive correlation between market response and company performance, the
phenomenon of “Profit in first year, break-even in second year and loss in third year”
is prevailing. It means that most corporate restructuring don’t intend to promote
company’s management efficiency, but aim to eam the stock investment profit from
the up and down prices during the M&A period.
3. Most listed companies transferring control rights to others always perform
non-consistently. There are three main motives for transferring the control rights of
listed companies:
(1) The poor-quality assets of listed companies can hardly make enough profit,
which is required for further seasoned issues. The former controller has no valuable
assets to input to the listed company, while the acquire company with well-performed
assets takeover the controlling rights to realize the stock issuing on the Capital Market
for further cash flow from financing though M&A.
(2) The new controller is strong enough to expand the business range of listed
company horizontally and vertically so as to expand oneself and eliminate the
competitors.
(3) The intervention or manipulation from govemment, esp. from local
government often occurred in CR. For instance, state assets were sometimes donated
to ill-performance listed companies for its existence.
4. Some listed companies undergo corporate restructuring continuously.
According to the statistics from Intemet, from 1997 to Nov. 30, 2000, there are 400 or
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so companies undergoing 770 corporate restructuring in China. That means, averagely,
one listed company has done CR twice. Moreover, among these companies there are
25 companies have heen restructuring their assets continually in three years. There are
numerous reasons for the increasing number of these successive corporate
restructuring.
Some listed companies want to promote their assets quality and strengthen the
development tendency by successive restructuring. Other ill-performance companies
want to keep their right of seasoned issues and avoid becoming ST (Special Treated)
or even being removed out of the Stock Market, so these kinds of CR, in fact, just
insert cash and profit into the company and can’t improve the assets quality and
company performance. The basic resolution to the problems of ill-performance or
almost bankrupted enterprises will be researching and seeking the very reason of the
ill-performance, then taking root-oriented method such as providing capital,
technology or management.
System Archetype I-“ Shifting Burden”: Cash Trading or Strategic CR
Jay maintain that the cause of many pressing public issues from urban decay to
global ecological threat lay in the very well intentioned policies designed to alleviate
them. A standard “Shifting Burden” performs as follow: When people confront with
the problems, they tend to stress the symptom and adopt symptomatic solution, while
ignore the real cause underlying the problem and avoid fundamental solution, which
usually involves time delay and takes a relatively longer period to effect. Most
people tend to take the symptomatic solution, which seems easier and quicker. In this
system, policymaker is lured into interventions that focused on obvious symptoms not
underlying causes, which produced short-term benefit but long-term malaise, and
fostered the need of still more symptomatic interventions. The structure of “Shifting
Burden” explains why a lot of well-intentioned resolutions make the problem getting
worse in the long run, while their quick-effect still have strong attempt. The
result-oriented method alleviates the problem pressure, while they also reduce the
chance of resolving the problem thoroughly.
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In China the “Shifting Burden” SR explain why some Corporate Restructuring
become Cash Trading, while strategic CR isn’t adopted.
\
Ill Performance she Effect
Dyay J
Strategic CR ld
To those ill-performance enterprises, corporate restructuring is one of the most
Cash Trading
significant methods to promote assets quality and company performance as well.
There are two kinds of CR: Cash Trading and Strategic CR. Involved in Cash Trading,
the listed corporation sells shares or even control rights for cash inflow so as to
promote performance for keeping the rights of seasoned issues. While the Strategic
CR usually transits large part of the assets of target company to acquire company or
combines both assets of the two companies so as to improves corporate performance
through strategic development.
Cash Trading in China
Cash Trading can improve performance quickly, but bring much risk and
undermine the corporate ability of developing through assets reorganization and
Synergy Creation. Many CR in China’s Equity Markets are merely Cash-Trading now,
which inserts cash inflow and restates Finance Report only. There are many means of
Cash Trading, some companies trade shares for cash, such as Shanchangling
Company took over a sum of shares from one shareholder in Nov. 10, 2000, then sold
it several days later and earned over RMB 70 million.
From 1999, listed companies acquired to raise Appropriate Allowance for
Receivables and Investments according to policy of Ministry of Finance. However,
some listed companies play new tricks and the Return Inwards are used as origin of
profit by sold out these deducted Receivables and Investments for original value. ST
(Special Treated for ill-performance) Baozhuang Company eamed RMB 48 million
just by selling out an item of share which has been raised total allowance.
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Another way is the big shareholder directly donates assets to listed company. ST
Jinli Company and ST Baozhuang Company separately enjoy donated assets valued
RMB 220 million and RMB 189 million, so as to increase the Net Asset and well
prepared for issuing new stocks.
Though the means that the enterprise carries on the Cash Trading can be various,
the purposes of them are same -- meeting the basic standards for keeping listing and
seasoned issuing. Cash Trading is conducted without company diagnose before M&A
and assets reorganization after M&A. In the process of CR, acquire companies don’t
pay attentions to the listed company's own quality, but are interested in the
qualification of seasoned issuing. And the long-term fundamental goals of strategic
CR are always reduced. Cash Trading promotes company performance in short term,
while the performance tums to worse again two or three years later.
If the acquire company has no long plan for the future running, it will deal with
the listed company as “cash-drawer’. The assets won't be reorganized and
management won’ t be improved, so the corporate restructuring fails finally. However,
if the acquire company has strategic plan for continuous operation, it will make great
efforts to carry on assets reorganization and try every means to improve management
and performance.
System Archetype II-Limits to Growth: Synergy Creation
The basic principal underlined by SA-Limits to Growth is that growth can’t be
pushed, but achieved by removing the factors limiting growth. In each of these
structure, the limit gradually becomes more and more powerful. A fter its initial boom,
the growth mysteriously levels off owing to the compensation feedback. Eventually,
growth may slow so much that the reinforcing spiral may tum around and run in
reverse. Limits to growth structures often frustrate organizational changes, strategic
CR in here, which seem to be gaining ground at first, then run out of stream.
Synergy
As one of the 26S signMficant wathods Bo promote asc ity and company
performance Resvneaei is cation during MRNA fmproves the corporate
NOU Nae
performance significantly. However, the conformity conflict caused by assets
reorganization and companies’ conformity, one part of strategic CR, is becoming
acute so as to offset the performance improvement achieved.
From the illustration, we can realize that achieving performance advancing form
Strategic CR must deal with the Conformity Conflict. While corporate conformity
means strategy conformity, business conformity, system conformity, Human
Resources conformity and culture conformity. With the purpose of promoting the
efficiency and performance of companies through strategic CR and successful assets
reorganization, how to create synergy so as to remove conformity conflict is a main
topic to be researched.
Conclusion
Recent years, the China Securities Regulatory Commission and the State Economic and
Trade Commission jointly promulgated many laws and regulations concemed the listed Company
Govemance, Information Disclosure and M&A conceming listed companies. The policies and
environment are very important in promoting the efficiency and performance of
companies through strategic CR and successful assets reorganization, and creating
synergy so as to remove conformity conflict.
Through the analysis of “Shifting Burden”, we can see that the independence of
listed company is very important to curb cash trading. Using “Limits to Growth”, we
realized that creating synergy is a systematic project needing a well-functioned policy
system and environment.
The listed company shall sigh a written agreement with the affiliated persons for
the affiliated transactions. The listed company shall take effective measures to prevent
the affiliated persons from interfering in the operation of the companies and impairing
its interests. The assets invested by the controlling shareholders in the listed company
shall be independent, complete and clear.
The listed company shall establish the independent director system according to
the relevant regulations. The independent directors shall be independent from the
company and its main shareholders. They shall not assume other posts in the listed
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company. They shall fulfill their responsibilities and shall not be influence by the
main shareholders, the actual controllers and other units or individuals related to the
listed company.
Enforcement of such laws and regulations will create a better environment for
Corporation Restructuring, especially M&A of listed companies in China’s
developing Securities Market.
References
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