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"We need to be in control of the situation like a pilot, and also like a psychologist, spend time communicating with the founders, solving their psychological problems, and helping them let go of their burdens," said Chen Hong.

Interview｜"Chinese Entrepreneurs" reporter Ren Yafei Kong Yuexin

Text｜"Chinese Entrepreneurs" reporter Ren Yafei

Editor: Ma Jiying

Source of header image｜Interviewee

Many entrepreneurs regard going public as a dream. However, in the past two years, the decrease in primary market investment, the narrowing of channels to enter the secondary market, the pressure from LPs and more complex market changes have made some investors and entrepreneurs begin to disenchant with IPOs and seek more diversified exit methods.

The best way to exit now may be through mergers and acquisitions. “In the past two years, China’s M&A market has not been enthusiastic due to the desire to go public and the lack of M&A atmosphere.But recently China's M&A market has become active."Chen Hong, Chairman and CEO of Hanergy Investment Group, told China Entrepreneur.

There are many reasons: the IPO market is not active; a large number of PE and VC funds are about to expire and urgently need to transfer some of their start-up project shares; China's first generation of entrepreneurs have reached retirement age and are facing succession issues, etc. In Chen Hong's view, this phenomenon has gradually increased in recent years, and it has also brought new opportunities to the M&A market.

However, Chen Hong also mentioned many times thatThe M&A market is still in its early stages."In China, about 1 trillion yuan of funds are invested in the primary market every year, of which 70% to 80% are growth investments. In mature markets, growth investments only account for 15% to 20%, and the remaining 70% are mergers and acquisitions." But in Chen Hong's view, this is an opportunity. "Optimists see the low base, so the future is bright."

Hanergy Investment has managed several major M&A cases in the Internet field: the merger of 58 and Ganji, Ctrip's acquisition of Qunar, Tencent's acquisition of Shanda Literature, Alibaba's acquisition of Ele.me, ByteDance's acquisition of Baike Mingyi, etc.

In Chen Hong's view, mergers and acquisitions are like flying a plane."We need to be in control of the situation like a pilot, but also like a psychologist, spend time communicating with the founders, solving their psychological problems, and helping them let go of their burdens."

Chen Hong also encouraged current entrepreneurs, if they have dreams, not to worry too much about the current economic situation, but to seize opportunities. In his view, entrepreneurs will always exist, and truly outstanding entrepreneurs often start their businesses when the economic environment is the worst. But he also suggested that once you decide to start a business, don't have illusions, cherish financing, and make sure you stay at the table forever.

The following is the conversation between China Entrepreneur and Chen Hong, with some deletions:

The M&A market is still in its early stages

Chinese Entrepreneurs:Since last year, corporate mergers and acquisitions have become a hot topic in the industry. In your opinion, what changes have taken place in the M&A market in the past two years?

Source: Visual China

Chen Hong:The global M&A transaction volume is about 3.5 trillion US dollars per year, and the US is about 1.5 trillion US dollars per year. China's M&A transaction volume is relatively small, more than 1 trillion yuan. Focusing on the technology field, the global M&A transaction volume is about 1.5 trillion US dollars per year. China accounts for about 10% to 20% of the entire technology M&A market, which is relatively small.So in the past two years, I have always had a feeling of "the wolf is coming".

In the past two years, China's M&A market enthusiasm has not been high due to the desire to go public and the lack of an M&A atmosphere.

But starting this year, the market situation has changed. First, the IPO market is not very active, causing companies to seek other exit methods. Second, a large number of PE and VC funds are approaching maturity and are in urgent need of transferring some of their investment shares in start-up projects. Third, China's first-generation entrepreneurs have reached retirement age, but the second generation is unwilling to take over, so they may choose to sell the company in exchange for cash for wealth management. Fourth, some companies have become more focused, either conducting mergers and acquisitions in their core areas or starting to sell non-core businesses.

Recently, the country has also begun to encourage and support mergers and acquisitions, and promote small and scattered enterprises to become stronger through mergers and acquisitions. Therefore, China's merger and acquisition market has also become active recently.

I have always believedChina's M&A market is still in a relatively early stageIn this situation, some people may be pessimistic and think that the market is too small, but optimists see that the base is low, so the future is bright.

Chinese Entrepreneurs:Some investors have said that "the primary market basically no longer exists". What do you think of this? What impact will it have on enterprises?

Chen Hong:Half a bottle of water, do you think it is half full or half empty? From the perspective of market-oriented funds, they are indeed facing great pressure. Take the US dollar fund as an example.Foreign LPs' investment in China has dropped sharply, and GPs are also very inactive in China. They are currently mainly in a defensive state, focusing on maintaining the companies in which they have invested.The recent economic development has also led some private entrepreneurs to stop investing as LPs. But in addition, many government funds are still investing for strategic needs. Therefore, there are still transactions in the primary market, but it is true that there are fewer investments compared to the past.

This actually has a big impact on us. The VC (venture capital) and PE (private equity) industries have a great driving force on the entire economy. These institutions play a vital role in the primary market. They not only help entrepreneurs realize their dreams, grow their companies, create jobs for society, but also promote GDP growth. If the VC and PE industries are no longer active, the entire entrepreneurial environment will be negatively affected. In particular, new quality productivity companies need capital help in the early stages of their growth.

Chinese Entrepreneurs:How does Hanergy respond to this challenge?

Chen Hong:In the past two or three years, we have focused on a lot of growth opportunities, invested in some excellent companies, helped them grow, and also gained profits from them.

However, as the pace of growth investment and venture capital slows down,We found that mergers and acquisitions have become particularly important in the investment banking sector.Our PE team has also begun to focus on mergers and acquisitions. We have also carried out relevant mergers and acquisitions in vertical industries, helping companies become stronger through the power of capital.

In China, about 1 trillion RMB of funds are invested in the primary market every year, of which 70% to 80% are growth investments. In mature markets, growth investments only account for 15% to 20%, and the remaining 70% are mergers and acquisitions.China's buyout funds are still in a very early stage.

Chinese Entrepreneurs:Considering the complex situation in the primary market, how does Hanergy help customers adjust their investment and financing strategies to adapt to the current capital market environment?

Chen Hong:Some domestic enterprises have done quite well in vertical industries, with business scale of about RMB 300 million to 400 million and net profit of about RMB 50 million, but they may not be able to go public. So we considered whether we could intervene with capital, buy the shares of shareholders who wanted to exit, merge the shareholders who were willing to stay with several similar enterprises, and form a company with a scale of RMB 1 billion and a net profit of RMB 200 million. We found that this approach is actually feasible.

For example, Frame Media, which we previously integrated, was sold to Focus Media after the integration.Focus Media is a typical example of a company that achieved a market value of hundreds of billions through mergers and acquisitions.Within three years, we achieved a revenue of 1.3 billion and a net profit of 700 million, which is a return of hundreds of times.

So I think the fund can do two things now: first, to make investors get returns, and at the same time help these small companies integrate resources to avoid excessive competition that will lead to no one making money in the end. Secondly, we are also paying attention to some companies. For example, many old shareholders want to exit. This company may have been listed, but the company's trading volume is not large. Then can we buy more shares, enter the board of directors, and use our understanding of the industry to empower these companies? I believe that these listed companies will have better liquidity in the future. In the long run, I also believe that the Hong Kong market will improve.

Another way is to allocate funds. For example, many leading listed companies want to do mergers and acquisitions, but there are many restrictions and insufficient funds. Hanergy can help them with allocation of funds. When they have financing in the future, they can issue new shares or directly buy our shares.

I often emphasize thatFinding valuation troughs is our top priority because only in this way can we reap rewards in the future. But at the same time, we should not be intimidated by short-term liquidity issues.

Mergers and acquisitions are like flying a plane

Chinese Entrepreneurs:Hanergy has started to transform and focus on M&A since this year. Can you share the strategic thinking behind this? What is the biggest challenge you face?

Source: China Data Center

Chen Hong:I don't think we are transforming, but in the past two or three years, due to the overall environment of the primary market, we needed to do some private equity financing. Now we are more focused, mainly focusing on the digital economy and healthcare fields, and focusing on mergers and acquisitions and large complex transactions.

This also poses some new challenges to us.Mergers and acquisitions require deep expertise and emotional intelligence, just like pilots require long-term training and practical experience. In contrast, private equity financing may be more like driving a car, which is relatively easy.

So I think if you want to do a good job in mergers and acquisitions, you must first find the right talent. We are still recruiting.

Second, we need to increase our contacts with decision makers of large buyers. Unlike financing, M&A needs to be driven from the top. Our advantage is that we have had contacts with managers of all major technology companies in China in the past.

Third, we need to acquire M&A expertise. We need to train our employees to enhance their professional capabilities.

I believe this process is long.Mergers and acquisitions are like flying a plane. We need to control the situation like a pilot, and also like a psychologist, spend time communicating with the founders, solving their psychological problems, and helping them let go of their burdens.

Why do we insist on doing this now? I think China's M&A market is a very important channel for primary market exit. There are only a few hundred new listed companies every year, but there may be thousands or even tens of thousands of companies exiting through M&A.

Chinese Entrepreneurs:What are Hanergy’s screening criteria for M&A talent?

Chen Hong:First of all, this person must have strong financial knowledge and model building skills. The scale of transactions we deal with is usually very large, and even a small mistake may result in a loss of tens of millions.

Secondly, you must have strong communication and persuasion skills.The issues are complex during the merger and acquisition process, especially when two companies of similar size merge.In this case, the first problem to be solved is who will serve as the chairman and CEO. In such a complex situation, you will not be able to communicate and coordinate. Then there is valuation. These companies often think they are better than each other, so they will have very high valuation requirements for the company, which is also very complicated to deal with.

But only when these problems are properly solved can the merger and acquisition proceed smoothly, otherwise all the previous work will be in vain. Our goal is also to find talents who can help solve these problems to promote the success of the merger and acquisition transaction.

Chinese Entrepreneurs:For enterprises and institutions, with IPO exit channels limited, has there been a clear trend in recent years toward seeking mergers and acquisitions as an exit strategy?

Chen Hong:From the perspective of the primary market, many investment institutions are seeking exit opportunities. This is mainly because the IPO market has not been very active in recent years. The term of primary market funds may be longer for US dollar funds, while RMB funds are usually "3+2", "4+2" or "5+2", with the longest term being only 7 years. Therefore, after the RMB fund expires, LPs will put pressure on them to recover their funds as soon as possible.This forms a "stress chain".

Due to capital needs, LPs require the fund to return their investment as soon as possible, and the fund then puts pressure on the invested enterprise to repurchase its shares. In the end, the pressure is directly passed on to the enterprise. If the enterprise has sufficient funds, it can still cope with it, but if the funds are tight, the problem becomes complicated.

In this case, mergers and acquisitions are one of the solutions. If a company is acquired by a strategic investor, the proceeds can be used to distribute to all parties, thus solving the exit problem. But for entrepreneurs or CEOs, this means that they will become part of another organization, and this situation is indeed very common.

In addition, the government encourages state-owned enterprises to become stronger and bigger, and private enterprises also want to become stronger and bigger, which leads them to take the initiative to acquire some companies. These factors combined, I think the transaction volume has increased somewhat,However, due to the decline in market value, the transaction volume has declined slightly.

Mergers and acquisitions are just the beginning; the most difficult challenge lies in integration

Chinese Entrepreneurs:Someone once mentioned that “shareholder absence” is the core of M&A opportunities. How do you understand this view?

Chen Hong:Any business must have someone who is in charge.The amount of equity is not the most important thing; what matters is whether or not this person exists.

Because if there is no clear manager, the enterprise may become inactive. At this time, the M&A fund has the opportunity to enter and become the new owner of the enterprise, responsible for leading the development of the enterprise. Of course, it can also choose to introduce professional managers.

However, in China, the system of professional managers is not mature enough. Therefore, we prefer to cooperate with entrepreneurs with dreams, through management buyout (MBO) or other means, to jointly strengthen and expand the enterprise.

Chinese Entrepreneurs:How does Hanergy identify and exploit such opportunities in practice? What experiences and lessons can you share?

Chen Hong:We have indeed participated in many M&A cases, especially in the investment banking field, and we have been involved in many large transactions in China's new economy. For example, in Framework Media, we are the largest shareholder.

In addition to holding shares, we also participated in some companies, such as the privatization of United Family Healthcare and Best Logistics. In these cases, we are not just investors, but also organized our own team and formed our own strategy. However, these companies where the owner is not absent will also have higher requirements for us.We also prefer to work with companies that have owners because we are able to provide strategic, resource and financial support.

First, in the M&A industry, if two companies want to merge, whether it is a fund buying a company or two competitors merging, it is impossible for two people to be the boss at the same time. This situation is unrealistic.We must give up such fantasies.

Second, we must work hard during the integration process. M&A is just the beginning, and the most difficult challenge lies in integration. So from the moment of integration, leaders must strengthen a unified corporate culture and ensure that everyone understands that they are now one team and one brand. I think this concept must be communicated clearly.

Third, it is best not to separate the two companies too far apart, because the communication cost is high and the cultures may be different, which makes it difficult to integrate them.

Why was Frame Media so successful in its mergers and acquisitions? First, I bought assets. You may be gone, but I still have them. Second, I bought a scale effect. It is easier to sell advertisements when the scale is large. So I think before doing a merger and acquisition, you must think clearly about why you want to do this merger and acquisition. Is it to gain market share or to acquire products? Second, is it suitable? Third, can it be integrated? Before these issues are thought through,Even if the price is cheap, don't make mergers and acquisitions lightly.

Chinese Entrepreneurs:In the M&A market, which type of M&A opportunities does Hanergy prefer? Does it value industry integration more, or seek synergy effects from cross-industry M&A?

Chen Hong:I don't like cross-industry mergers and acquisitions. In a market as huge as China, if a company does well in the field it is good at, it is already very impressive. Why spend time doing something that you are not sure of?

I would suggest,If a company has sufficient funds and resources, it should focus on building its own ecosystem or vertical industrial chain.More than a decade ago, some listed companies acquired gaming companies due to the popularity of the gaming market, but many mergers and acquisitions ultimately failed because they were unable to manage these cross-field businesses.

Chinese Entrepreneurs:In the face of the current capital market situation, what advice do you have for young people or start-ups that want to enter the primary market?

Chen Hong:It is true that the current investment environment is not very good. We also hope that the market will recover soon and provide unimpeded channels for investment and fund exit.

Entrepreneurs will always exist. The truly great entrepreneurs often start their businesses when the economic environment is the worst.

So my first advice is that if you have a dream, don't worry too much about the current economic situation and seize the opportunity.There are several advantages to starting a business now:It is easier to recruit excellent talents; the cost is relatively low, both in terms of labor costs and rental costs; there may not be many competitors. As long as you have firm beliefs and can judge the future, you will have a chance to succeed.

The second suggestion is,Once you decide to start a business, you can't have any illusions.Don't think that if you do a good job, the money will come to your account. This is impossible. In this case, you should cherish your financing, make steady progress, and ensure that you always stay at the table. When the market picks up and the investment environment improves, you may become the first winner.