Reference 1 – a timely negotiation

Background

This project concerns a leading European producer of speciality ceramics, refractory products and flow control systems (e.g. lining materials, slide gate system, crucibles) for the steel, ferrous, non-ferrous and glass industries with more than 60 companies worldwide.

One of its subsidiaries in the US, making specialty ceramics, was to be merged into a joint-venture with a subsidiary of a state owned enterprise in China.

The challenge

Dealing with state-owned enterprises in China is complicated and time-consuming. The positive side is that state owned enterprises have the support of the party (communist) so they can get funding easily and at a very low interest rate.

The Chinese were after the technology and the know-how of making refractory products. On the other hand, the European company was trying to sell its US subsidiary to divert specialty ceramics from the core business. A deal needed to be reached.

The solution

Negotiations were carried out taking into consideration the risks arising from breaches of contract. Appropriate precautions were built into the structure of the joint-venture:

1. Location of the establishment (enforceable legal system and tax treaty issue),
2. Majority of ownership (for management control);
3. Technological transfer (in a controlled way to avoid technology leakage);
4. Assets evaluation of both subsidiaries with impartiality (third party);
5. Due diligence on tax, legal, financial, commercial and market;
6. Revenue transfer to the parent company in Europe (tax and legal issue);

1. Exit strategy.

   As a result of the negotiations, the European company received 1/3 of its market value in cash and >50% of ownership of the joint venture, so that the management control was retained. The technology transfer was scheduled to be handed over gradually as collateral of the deal.

   As the refractory business is considered a cyclical business in the US, the deal was made in a year when the revenue had reached the cycle peak. The timing was therefore of tremendous importance for this deal.