Despite some high-profile deals falling through, China's corporate giants are hunting for more foreign assets. CC's Kathy Honeywood, Tim Wang and Stephen Harder examine what the next M&A wave will look like

When Aluminum Corporation of China (Chinalco) bought 12% of Rio Tinto in February 2008, the world sat up and took notice. The company had succeeded in acquiring a major stake in a global industrial player, a move that other Chinese companies had tried but many had failed.

Just 18 months later, Chinalco was to provide another lesson for Chinese acquirers, as its proposal for an extended partnership with Rio foundered amid recovering commodity prices and global political attention.

However, Chinalco's experience has not been wasted on Chinese companies – nor has it discouraged them. Recent research shows that the lessons learned from the first wave of Chinese outbound investment are being built into the plans of the next generation of investors.

A Brave New World: The Climate for Chinese Investment Overseas, a report by the Economist Intelligence Unit (EIU) sponsored by Clifford Chance, Accenture and China Investment Corporation, interviewed large Chinese companies with experience – both successful and unsuccessful – of investment abroad, as well as foreign participants and advisers to Chinese deals overseas.

The report found that Chinese companies were keenly aware of the greater challenges they face when identifying, negotiating, promoting and integrating new ventures into their existing businesses if they are to succeed in the long term. Chinese companies invested more than $187bn (£130bn) overseas in the past decade, and overseas investment held up in 2009, with nearly 300 cross-border deals completed.

Blessed with healthy currency reserves throughout the global financial crisis, the country remained one of the most active asset shoppers in the reshaping global marketplace.

The EIU report showed that this investment will continue – two-thirds of Chinese companies surveyed intended to make investments overseas in the next three years. Securing resources was the motivation behind 45% of deals between 2004 and 2005, with energy and natural resources expected to remain the focus for the second wave of acquisitions.

New trends are also emerging, though, with deals increasingly seen as a way to expand into new markets and to acquire technology and research and development that will strengthen domestic industries.

While investment remains on track, the second wave understands that its approach to the deal, from structure, negotiation and promotion to post-closure integration, needs to change. In terms of structure, those interviewed by the EIU were more likely to vary the types of future deals they sought, with more joint ventures, alliances and minority stakes expected.

Multiple investments of minority stakes in different companies in different countries also give Chinese companies the chance to learn about management and technology in different markets – without necessarily triggering foreign investment review or the political pressure associated with control stakes.

Combined with joint ventures, alliances as well as long-term supply and offtake contracts or technology contracts, minority ownership stakes can provide flexibility and diverse strategic options in the future.

It is important to carry out early due diligence on the legal and regulatory status of the target. Chinese companies have often underestimated the importance of pensions, union relations, competition and intellectual property in the US and Europe.

Chinese companies are also now aware that poor communication of their business strategies, company background and intentions post-merger is a hindrance to successful deals in more media-friendly markets. Investors will need to engage with a much wider range of audiences in their target countries; from employees and shareholders to governments, media and lobby groups.

This is especially true of China's state-owned enterprises (SOEs), where the connection between company and state is often misunderstood overseas. Investors will need to be ready to explain the commercial independence and business goals of Chinese SOEs and to address the common misunderstanding that the commercial actions of Chinese SOEs are determined by the central Government – a misunderstanding that can be fatal to a deal.

As world markets recover, Chinese companies will also find more competitors re-emerging, particularly in the growth markets of Asia, Africa and South America. International companies often have strong in-house legal teams and close relationships with outside legal counsel and other advisers, which enables them to move quickly on legal issues and documentation.

Chinese companies will need to build the same standard of in-house and external adviser teams to enable them to move quickly in commercial situations. Of those surveyed by the EIU, 82% cited lack of management experience in outbound investment as the biggest challenge for Chinese companies – a finding that applied as much to post-deal integration as the deal process itself. The second wave will need to build a negotiating team and a future management team with the right blend of cultural and language skills and M&A experience.

Lastly, the breadth and scale of assistance that Chinese companies will require from professional advisers to succeed in this second wave of outbound investment should not be underestimated. Professional advisers need a knowledge of both foreign and Chinese practices, and an ability to advise Chinese companies in both the English and Chinese languages.

Kathy Honeywood is a partner at Clifford Chance and led the firm's team advising Chinalco on its investments in Rio Tinto. Tim Wang is a Beijing-based partner. Stephen Harder is Clifford Chance's Beijing and Shanghai managing partner.