A Chinese Technology Company for Sale

Case background:

QI-TECH, a Chinese manufacturer of precision Coordinate Measurement Machines, is a joint venture established by Indiver BV, a Dutch aircraft engine manufacturer and a Chinese state-owned enterprise QQMF. Looking for a strategic exit, Indiver BV, which holds 50% of QI-TECH, must negotiate a sale with its Chinese partner and a potential buyer, Brown & Sharpe. For this purpose Roger Kollbrunner, the Business Development Manager at Indivers BV, has to develop a viable deal structure and negotiation strategy.

Questions:

What are the objectives of different parties on the sellers’ side? Specifically, what are the objectives of Indivers? Of QI-TECH’s local management? Of QQMF? Of Roger Kollbrunner?

Below we state different parties’ objectives:

Indivers initially expected at least a 20% annualized return on the investment in QI-TECH. However, QI-TECH currently failed to deliver adequate return (11%) and Indivers lacked the capabilities to further support its technology level and marketing network. Therefore, they are looking for a strategic exit to retrieve capital yet find another good-fit partner for QI-TECH.

QI-TECH’s local management was looking for a future partner that understands Chinese management style and can get along well with them. They worried the new partner might impose their foreign management style particularly with the loss of stakes of QQMF.

QQMF were seeking for further support in technology, marketing know-how and capital from their new partner, in order to improve their operation efficiency and financial outlook. This was because, according to the guidelines of the Communist Party’s latest 5-year plan, Beijing could force a major restructuring or shutdown on QQMF if performance is unfavorable.

The sale is part of Roger Kollbrunner’s job in managing some portfolio of Indivers to achieve higher overall financial return. He decided to sell QI-TECH to exit and find a stronger CMM partner with stronger CMM technology base and marketing network.

What is the value of Indivers’ stake in QI-TECH?

Indivers held a 50% stake in QI-TECH, i.e. 50% of its book value in 1998, $3.266m, which is equivalent to $1.133m.

What negotiation strategy should Kollbrunner and Li pursue in their negotiations with Brown & Sharpe (the potential buyer)? What price should they ask for?

They should pursue an interest-based bargaining, i.e. maintain a cooperative attitude and strive to create mutually beneficial outcomes. Since the two parties have different objectives toward joint venture, they should listen to each other’s expectations on issues like ownership transfer, technology transfer, manufacturing and marketing assistance as well as management style adopted before deciding on the sales price. It would be unwise to use soft or hard negotiation as both sides’ bargaining powers are comparable and pleasant partnership is desired.

The valuation of the company should be double of its book value, i.e. $6.466m. The price is set as high due to the significant market growth rate of Chinese CMM industry. This brought about many potential buyers and favored the price to go up. Also, it is obvious Brown & Sharpe desired to become the market leader in China and exploit the advantage of low manufacturing costs in China and QI-TECH is the best candidate for them. This gave them the pressure to close the deal. Moreover, the Chinese government would probably oppose to a deal without fair return. As a result, Brown & Sharpe would be very careful in the negotiation process and thus Indivers were able to reach for a higher price and also attempt to create more values before closing the deals.

What concerns might Phil James, VP of Brown & Sharpe’s CMM division, have? How can the seller mitigate these concerns?

Phil James may concern about:

The portion of stakes purchased. A more-than-half stake would give Brown & Sharpe a larger presence in QI-TECH and greater managerial control.

Whether Indivers would still hold some stakes in Qi-tech for two years’ time. If Indivers withdrew immediately, Brown & Sharpe may find it risky and difficult to collaborate with QQMF.

The risks of government intervention before privatization.

Kollbrunner and Li should expect these potential concerns and seek for opinions from Indivers, QQMF and the Chinese government before the negotiation. More importantly, they should have remained open for many rounds of negotiation before reaching the deal so as to clearly address to both parties’ concern and reach for feasible win-win solutions.

What should Roger Kollbrunner do next?

After preparing for the valuation and negotiations issues, there are seven steps to close a deal:

Open to listen to each other’s concerns.

Support the concerns by vision and evidence.

Seek understanding and possibility from one another.

Indicate the readiness to work together.

Assemble potential trades after addressing to all major parties’ concerns.

Reach final agreement.

Follow up to make sure what is agreed happens.

6. What general lessons regarding the management of joint ventures in entrepreneurial settings can you draw from this case?

There are three related lessons I could draw from the case:

First, cultural difference can pose great problems in communication and collaboration in a joint venture. In this case, an attempt to attract a strategic investor had failed primarily because of lack of cultural sensitivity by the U.S. firm to negotiating processes in China. Hence, staff should be well-equipped with the cultural awareness to avoid miscommunication.

Second, as a joint-venture partner, one should collectively support the other’s weaknesses. For instance, Indivers had actively provided overseas trainings to QI-TECH staff in order to lay new foundations in its administration, marketing and product development. This undoubtedly helped much for QI-TECH to manage a turnaround in 1997 and hold a unique position in the Chinese market. In return, this allowed greater financial return for Indivers and possibility for an exit strategy.

Last but not least, there are times when an exit decision could bring greater benefits to the overall well-being of the joint venture. For example, Indivers realized that it did require professional knowledge and technology advancement from Brown & Sharpe, the CMM world market leader, for QI-TECH to gain greater competitiveness. Hence, by selling some stakes to a competent player for its participation, the joint venture could develop more successfully and realized larger returns and market share.