Acquisitive China firms lift due diligence sector
FOREIGN takeover bids by little-known Chinese companies, from real estate firms to a vacuum-cleaner maker, are driving a surge in the due diligence industry as their targets and even rival suitors seek to answer the question, “Who are these guys?”
Facing a slowing economy at home, Chinese businesses are hunting for nonyuan assets abroad despite little foreign buyout experience. Chinese outbound merger and acquisitions (M&A) activity has more than doubled in two years, hitting a record $120bn in total deal value so far in 2016, according to Thomson Reuters data.
Presented with offers from unfamiliar Chinese firms, sellers are kicking the tyres thoroughly to check on credibility and financing. Closer inspection may or may not be reassuring.
“There are question marks around some of the Chinese names,” said Bill Sims, MD at Stroz Friedberg (Asia), a global risk and investigations firm.
“There is an issue of compliance. People want to know, where is all this money coming from? How is it being sourced? Are they going to pull out of the deals last minute?”
When global private equity firm KKR put high-end German coffee machine maker WMF on the sale block in January, four Chinese bidders emerged, including vacuum-cleaner maker KingClean Electric.
New to the global M&A scene, KingClean bid about €1.67bn for WMF and only narrowly lost out to France’s Groupe SEB, a person with direct knowledge of the process told Reuters.
Another “left field buyer” was real estate firm Thaihot Group, which beat out nearly two dozen bidders, including global and Asian firms, to buy the insurance unit of Dah Sing Financial Holdings, in Hong Kong’s most expensive insurance M&A deal.
Thaihot paid seven times price-tobook value to buy the business, while Chinese insurers on average trade at about 1.3 times, according to Thomson Reuters data.
In early February, Chinese property developer Yinyi Real Estate Group bought Belgian automotive transmission maker Punch Power for an undisclosed amount, beating a Chinese car parts maker, despite Yinyi’s limited car parts experience.
“The due diligence industry has seen a boom in business in recent years as new and unknown bidders emerge out of China,” said Andrew Vaughan Winterbottom, a Hong Kong-based associate at global risk consultancy The Risk Advisory Group.
“Our clients are interested in identifying a bidder’s source of funds, understanding whether they have links to the government, or are affiliated with larger state-run firms that have been investigated by Chinese anticorruption authorities.”
That sense of caution was underscored in late March when China’s Anbang Insurance Group and partners abruptly dropped a $14bn offer for Starwood Hotels Resorts Worldwide.
“Given that we are seeing more untested buyers asserting themselves in the global M&A landscape, it is becoming more of a ‘seller beware’ environment,” said Mayooran Elalingam, Deutsche Bank’s head of Asia Pacific M&A.
Seller skittishness could slow the pace of Chinese outbound M&A growth. China International Capital Corp, the country’s biggest investment bank, last month projected outbound deals to hit $150bn this year.
“So there is some hesitancy and you may see a slowdown in the near term. But overall the trend is positive and the Chinese are making a big push and eventually the sellers will get more comfortable to the Chinese way,” Sims added.
One head of M&A at a Wall Street bank said: “You don’t want to underestimate the power of a new buyer just because you haven’t heard that name before.”