Chinese ADR Buyouts in Progress (Update)

Prices of many pending buyouts of US listed Chinese companies fell sharply in May after Chinese regulators expressed concern over relisting these businesses in China through reverse mergers.  Reverse mergers provided a path by which a company could be trading in the domestic market in less than one year instead of potentially waiting 3-4 years to complete the restructuring required for regulatory approval of a traditional IPO.  Some of the problems raised by reverse mergers are:

  • Unhealthy speculation.  Mainland Chinese investment funds promised subscribers unrealistic short term gains (even 5X) from money pooled to fund buyouts like Qihoo
  • Drain on liquidity.  Local investors feared that supply from a wave of relistings of large companies like Qihoo and Wanda Properties (privatization offer in Hong Kong) would depress the Shanghai/Shenzhen markets
  • Profiteering.  A conservative shift in government policy making sees the role of the stock market as providing financing to real businesses.  High profits from the financial arbitrage of offshore vs onshore valuations are an undesirable drain on economic resources.  This mindset has roots in Confucian categorization of society into four classes with merchants and traders being the lowest because they produced nothing of value.

Over the summer it was reported that closing of some buyouts like Qihoo was delayed by new foreign exchange controls and the potential returns from relisting may be limited by caps on the P/E ratios for IPOs and offerings related to reverse mergers.  However many of the economic benefits from privatization are still available:

  • Better investor support and higher valuations in domestic market
  • Simpler and more efficient corporate structures
  • Improved corporate visibility and reputation

Since the April review of buyouts 14 deals closed although the tougher domestic environment led to some lengthy delays between shareholder approval and closing.


Companies withdrew 3 offers

Progress was made on three previously pending offers:

Despite the uncertain outlook for potential relistings and conversion of RMB-based financing, several new buyout offers have come in recent months:

Offers for 16 companies remain outstanding.


Important factors to keep in mind in judging the likelihood that individual deals will be completed:

  • Hiring of advisors demonstrates a commitment of management time and money towards completing a transaction
  • Backing from strong financial and strategic partners provides validation of the rationale for a buyout and funding for completion
  • Low absolute valuation or relative to HK/China listings provides an incentive for completing a transaction



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