Chinese buyers make big concessions to seal global deals
Published 02/03/2016 | 02:30
Chinese companies are giving major concessions, including offering to pay record break-up fees and accept minority stakes in US mergers and acquisition deals, in an attempt to assuage concerns of potential overseas partners about regulatory snags scuttling the deals.
The unprecedented concessions come as China pursues deals abroad to offset slowing economic growth at home and a weakening currency.
They also come as US scrutiny of Chinese-initiated M&A remains high, making its partners uneasy and forcing several deals to be abandoned.
"These are unusual behaviours and just show that the Chinese want to get the deals done," said one Hong Kong-based technology banker, who declined to be identified because the person was not authorised to speak to the media.
The stakes for China are particularly high in the technology sector as Beijing seeks to become a global semiconductor powerhouse, relying mainly on offshore M&As to achieve its goal.
The biggest concerns are about the Committee on Foreign Investment in the United States (CFIUS), an interagency panel that scrutinises deals for national security concerns.
CFIUS, which comprises 16 US government departments or agencies, does not publish its decisions or its reasoning for them.
Reflecting CFIUS worries, China's HNA agreed to a pay hefty $400m to to shareholders in a reverse termination fees it its $6bn purchase of electronics distributor Ingram Micro was blocked.
This was the first time any material break-up fee was introduced in a US deal covering CFIUS, bankers familiar with the matter said.
The usual break-up fee is about 1.5pc of a deal's value, but HNA agreed to pay 6.6pc.
And China Resources Microelectronics and Hua Capital agreed to pay a total of $200m in termination fees, or 8pc of the deal value, if a bid to buy Fairchild Semiconductor International fell down.
The previous largest CFIUS-related termination fee was $30m when commodity trader Glencore offered $6.2bn to buy Viterra in 2012.
China's goal to become a global semiconductor powerhouse has meant prized US tech assets are a focus of its overseas deals.
The value of China's announced outbound M&A into the United States has already hit a record $23bn this year, more than double that of the whole of 2015, according to Thomson Reuters data.
But in a sober reminder of the US regulatory hurdles, deals worth $10bn involving US targets have been pulled just this year alone.
That includes China's Unisplendour Corp's $3.78bn investment in US hard-disk maker Western Digital Corp.
And, for a third straight year in 2014, China was the country whose planned US acquisitions and investments were the most scrutinized by regulators in the United States for security implications, according to a report by CFIUS.
To mitigate the extra scrutiny, Chinese companies are seeking joint ventures as opposed to an outright purchase, bankers said.
"People are definitely talking about doing more non-control deals," said James Lidbury, a partner with law firm Ropes & Gray.
Another way to minimise scrutiny is to aim for mid-sized deals and focus on less sensitive sectors, M&A bankers said.