In China, however, the exuberance for leverage has not so far reached corporate takeovers. It is one thing for the government partially to divest its holdings in state owned enterprises. It is another for it to acquiesce in the change in control of Chinese companies. This article will examine, in relation to listed companies: (a) the reasons in favor of at least some types of takeovers by foreign entities, and; (b) the methods by which such takeovers can utilize leverage to enhance the acquirerÆs incentives.
Ambivalence to Takeovers
A domestic corporate takeover lacks appeal to the Chinese policy-makers, since no asset is created. Indeed, where the company is state-owned, simply to give the government funds in exchange for control of the company begs (in the view of the government) the questions of: (a) how to reform the company, and (b) how to define the governmentÆs ongoing role in the economy.
However, one case where this might happen is financial institutions, where conflicts exist between the purely financial motives of those whose residual income is placed in financial institutions and the fiscal (or less salutary) motivations of the central and local governments that own such institutions. Although, for example, the Guangdong Development Bank (ôGDBö) transaction could not be approved as a takeover, there is nothing to say this situation could not change in the future. This is likely to be an iterative process, as the provision of credit is a highly sensitive industry.
A second area where takeovers may be welcome is companies in distress (which, for purposes of leveraged takeovers, have positive book net worth). The majority shareholders of the target company are likely to be various governmental entities, and the motivations of such shareholders are not those typically prevalent in Western economies. A fundamental disagreement with management cannot yet readily be solved in China by proxy battles, derivative suits or takeovers, as (a) for the foreseeable future it is these governmental entities that will be left carrying the can for the failed management of significant enterprises, whether as stockholders or otherwise, and (b) there are not quite yet sufficient managerial pools to support an active takeover market. So, particularly in light of the cramdown provisions of the new Bankruptcy Law distressed investing and workouts may well take on new meaning.
Domestic sponsors are being set up, both within existing bank groups as private equity arms, and as start-up LBO firms using the new, tax-favoured Partnership Law provisions. Whilst this article discusses foreign-organized acquirers, there is a spectrum of other ownership possibilities which the Chinese government is likely to consider, including taking co-investment positions (either at the investee or investor level).
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