Western sellers could do more to understand Chinese buyers - China M&A Forum

Restrictions on capital outflows mean Chinese outbound investment has not replicated the highs of 2016 but some companies still have the desire and means to make acquisitions. Yun Zhou, a partner at law firm Zhong Lun, suggested that this regulatory issue had made sellers wary of dealing with Chinese buyers, resulting in “unreasonable” deal terms.

This dynamic has arguably been most visible in sensitive industries such as semiconductors where sellers typically include substantial break fees in agreements, sometimes linking them to specific regulatory approvals. Last year, Fairchild Semiconductor International went so far as to reject a Chinese bid, stating the regulatory risk was too great, before selling to a US firm at a lower valuation.

“Some Western sellers would rather take a bid from a Western buyer that is lower valuation to what a Chinese buyer has offered because there are no issues with regulatory approvals and financing,” said Samson Lo, managing director and head of M&A for Asia at UBS. “We have to keep that in mind in an auction process. Price is not the only factor in winning a deal.”

The down payments for China outbound deals can be as much as 10% of the overall transaction cost – and this is not returned if regulatory approval fails to come through. In most cases, though, that number is merely the starting point in a negotiation and steps can be taken to make sellers more comfortable with Chinese buyers.

“As advisors, we often have to educate sellers. We run them through the Chinese regulatory process – how approvals work, where you file, how you file, whether it is done physically or online – and that helps,” said Bagrin Angelov, an executive director at China International Capital Corporation (CICC).

In certain cases, sellers have been advised to appoint Chinese counsel so they understand what is achievable under Chinese law. A 5% deposit, for example, might require a different level of approval, making a request that seems prudent to a seller unpalatable to a buyer.

It is also possible to reach a compromise on terms simply by engaging with the target company and bringing an element of transparency to the process. “If you spend time with the management of the target company and earn their trust, it can help,” Angelov said. “When management understands there is a solid buyer in place they can pass that on to the shareholders or sellers.”

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