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Cold comfort

11 April 2016 By Rachel Morarjee

Chinese acquirers need to reassure foreign targets. After Chinese insurer Anbang abandoned a $14 billion takeover of U.S. hotelier Starwood, overseas targets will think harder about pursuing deals with Chinese buyers.

One obvious remedy is agreeing to pay some of the deal’s value to the target should the bid fail, for example if U.S. or Chinese regulators withhold approval. These fees can be substantial: recent “reverse break fees” have ranged from 3 to 9 percent, lawyers at Clearly Gottlieb reckon, and state-backed ChemChina could pay a 7 percent penalty if the $43 billion purchase of Switzerland’s Syngenta fails. For break fees to be a convincing inducement, they also need to be held in escrow in foreign banks.

Roping in familiar Western partners, such as private equity groups or Wall Street banks, is another way to soothe targets.

Disclosure helps too. The more comfortable targets can get on the buyer’s ownership structure, governance, and official support for the transaction, the better. Same goes for deal financing. However, support from Chinese state banks can come with caveats. Buried in the small print can be a requirement that any payment is approved by the bank’s internal credit committee.



Ultimately, though, Chinese buyers can’t offer any cast-iron guarantees of completion: state decision-making at home is opaque, and foreign political and regulatory reactions can be hard to predict too. They can counter this by making offers too high to ignore. That is what Zoomlion, the heavy machinery firm, has done with Terex, offering to pay more than double the U.S. crane-maker’s undisturbed share price. But the higher the premium paid, the more difficult it will be to create value for the acquirer.

Target boards should still be willing to listen. Thus far the odds of success have been quite good. True, since 2010 China Inc. has withdrawn almost $70 billion of overseas deals. But it has completed more than $300 billion of transactions in the same period, Thomson Reuters data shows.


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