Chinese investors are increasingly targeting American corporations for purchase. Between 2010 and 2016, Chinese investment in U.S. companies increased more than 900%.[1] This rapid expansion did cool somewhat in 2017, though, as Chinese buyers announced only $44.5 billion in acquisitions, compared with $101.9 billion in 2016.[2]
Last year’s downturn can be explained in part by the present U.S. administration’s “America First” position, manifested by its watchdog, the Committee on Foreign Investment in the United States (CFIUS), which scrutinizes offshore deals for adverse impact, especially in the realm of national security.
Another factor in the decrease in Chinese offers for American companies in 2017 was the Chinese government attempting to control the amount of capital flowing out of the country. It wanted to make sure the money flows to sectors matching official priorities, such as technology and petrochemical innovators. This new environment is likely to prove easier for state-owned companies to navigate than private firms.[3] However, state ownership, financing, or control is often intentionally obscured.
An illustration of the U.S. government’s hardened stance was the rejection of the proposed $1.3 billion acquisition of U.S. based chipmaker Lattice Semiconductor Corp. by a Chinese-backed private equity firm last September. This past January, CFIUS also blocked the $1.2 billion sale of MoneyGram to Ant Financial, a group controlled by Chinese multi-billionaire Jack Ma. In both decisions, the administration cited national security concerns, and in the case of Lattice Semiconductor, the Chinese buyer was said to be largely funded and controlled by the Chinese government.
In a relative departure from the past, the CFIUS is taking specific issue with the often opaque ownership structure of Chinese investment groups seeking capital investment in the U.S. Complex or circuitous shareholder structuring is raising concerns like no other time before. Such methodology reasonably leads to suspicions of over-leveraging or shielding of undue control by the Chinese government.
For the savvy American stakeholder, wasting valuable time and resources to explore a purchase offer by a Chinese suitor, only to have the deal derailed by U.S. government action, is unacceptable. The added aftermath of lowered stock value for the erstwhile acquisition target can be overly injurious. It is impingent upon management to proactively avoid such outcomes.
Moreover, it is important for executives to be on guard for “fishing expeditions” masquerading as purchase offers. Getting a foot in the door of a company could be a pretext to gain access to trade secrets or intellectual property. Adequate due diligence should precede any exchange of critical data or visits by representatives of the purchaser.
In this atmosphere of opposition from U.S. authorities and opportunism of the Chinese, it is essential to independently and fully define the purchaser before going too deep into the process. At ResultQuest, we have developed enduring relationships with exceptional specialists throughout China, which enables us to arm our clients with actionable intelligence about foreign investors seeking a stake in their business. Call us at 713/781-9040 for help in making an informed decision about prospective Chinese buyers and their agents.
[1] http://www.industryweek.com/economy/should-we-allow-chinese-buy-any-us-company-they-want; (January 9, 2018)
[2] https://biglawbusiness.com/chinese-purchases-of-u-s-companies-plunged-56-percent-in-2017/; (January 2, 2018)
[3] https://www.cnbc.com/2017/07/25/chinese-conglomerate-hna-group-reveals-ownership-structure.html