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Sharing the reins crucial for thriving enterprises

A new mega-merger between China's two largest software outsourcing firms could lay the foundation for a new global powerhouse in the lucrative IT services sector, marking the second major corporate marriage in China this year between two industry leaders.

These kinds of marriages are sorely needed to clean up fragmented high-tech sectors marred by rampant competition, but to make that happen many of China's most vibrant entrepreneurial companies need to lose their mom-and-pop mentality and learn to act more like the major corporations they aspire to become.

Last week's mega-merger saw HiSoft and VanceInfo, China's largest publicly traded software outsourcing firms, announce a marriage of equals that would create a company with $670 million in annual revenue and $875 million in market capitalization. The deal comes as Youku and Tudou, China's top two video sharing websites, also get set to complete their own mega-merger to create another undisputed sector leader.

These kinds of deals are sorely needed in a wide range of sectors that have produced some of China's most promising entrepreneurial companies. Such tie-ups would not only create major new giants capable of competing globally, but would also rationalize fragmented industries now fraught with cut-throat competition. Yet such mergers have largely failed to materialize, leaving sectors like solar energy and e-commerce mired in red ink due to fierce competition.

Mergers and acquisitions (M&A) in any of these sectors would vastly help to improve the situation, but resistance to deals has been strong for several reasons. Historically, many of China's top private companies were founded by entrepreneurial individuals who refuse to cede control and instead choose to run their firms like personal fiefdoms, often to the detriment of other shareholders and the companies themselves.

Many companies in capital-intensive sectors like solar and chip manufacturing also count local governments among their major stakeholders. Such shareholders are also often reluctant to cede control, worrying that doing so could cost their local economies, valuable jobs and other economic benefits.

These special Chinese obstacles often leave foreign investors scratching their heads, wondering why many companies that would clearly benefit from mergers choose instead to remain independent. Executives of the few companies that pursue M&A often have western backgrounds, and indeed most top officials at HiSoft, VanceInfo, Youku and Tudou have lived and studied in the West and worked for major Western firms.

Less worldly Chinese executives need to take a lesson from their more global peers and start thinking more seriously about corporate marriages that can benefit their companies and shareholders over the longer term, even if it means ceding control of the companies they founded. If they don't, the result could be a continuation of the current state of fragmentation and cut-throat competition that ultimately creates lots of losers and no winners.

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