According to a report by Mergermarket, the boom in offshore investment by Chinese enterprises since the beginning of the year has continued apace, establishing a new record for the total value of transactions at US$131.1 billion, an increase of 225.3 percent compared to last year; and the value of M&A transactions stood at US$204.5 billion, a decrease of 27.2 percent compared to last year. With the uncertainties raised by the UK vote on Brexit and the American presidential election, M&A activity may see a drop in the second half of the year.
However, with the adjustment in the domestic economic structure, and looking at the statistics on various types of transactions, it can be seen that the tendency for Chinese entrepreneurs to go for overseas acquisitions in technology fields is increasingly obvious, with the most active investment destinations being the US and Europe, particularly those regions where high-tech industries such as communications, media, etc., are well developed.
Among the typical transactions that have been made public in the last year are Lenovo’s acquisition of the IBM X86 server business for US$2.3 billion and its acquisition of Motorola Mobility Holdings, Inc. from Google for US$2.91 billion; Tsinghua Unigroup’s US$910 million acquisition of RDA; and Huawei Technologies Co., Ltd.’s pivot to Europe where it bought out Neul, a UK internet-of-things company, for US$25 million, and acquired an equity interest in the UK’s XMOS for US$28 million.
In addition to the offshore tax planning and anti-trust reviews that are usually involved in acquisitions, such transactions present other commonly encountered issues that require close attention.
Importance of financing arrangements. In investments and acquisitions in technology fields, instances where the acquirer or the target is a listed company or where there are multiple parties competing for the transaction are common, the requirements in respect of the timing for putting up the transaction moneys become one of the major challenges faced by Chinese acquirers. The strict controls imposed on the outward remittance of funds caused by the downward pressures on the currency beginning in the second half of 2015 have also increased the difficulties faced by certain private enterprises when making payment in large offshore investment transactions.
Where the acquirer’s own funds are insufficient, opting for leverage is more beneficial financially or the acquisition target is a listed company, the Chinese investor should clearly describe the financing arrangement when disclosing the transaction to third parties, and its advisory team needs to design and launch such arrangement as soon as possible. For example, in the offshore acquisition project of a domestic listed company, the listed company planned to make its preparations for the acquisition through a private placement on the domestic market. However, due to the uncertainty in the time required for completion of the domestic approval procedures for the private placement, as well as the uncertainty in the anticipated time required for the outward remittance of the proceeds, we, as the acquisition advisers, additionally assisted the listed company in negotiations for bringing in private investment from an offshore buyout fund, bank M&A loans and bridge financing support.
Intellectual property (IP) investigation of utmost importance. In recent years the overseas IP strategies of Chinese investors have grown rapidly, with some achieving product upgrading and a global presence by acquiring advanced technologies and high-tech companies. In such deals, due diligence on the target company’s IP, employees and remuneration and benefits by the acquisition advisory team is particularly important. Chinese investors will usually place great importance on an investigation of trademarks and patents but fail to require an investigation of non-patented know-how. We would recommend that an analysis of the patentability of such know-how be conducted and, depending on the degree of importance of such know-how, a decision made on a general review or an in-depth review.
Pressure of a review by the Committee on Foreign Investment in the United States (CFIUS). A CFIUS review of the foreign investor’s acquisition agreement may be triggered where an acquirer controlled by a foreign government is involved or a major infrastructure or technology project is involved. At the early preparatory stage for an acquisition transaction, the acquisition advisers need to communicate with the Chinese acquirer with respect to the CFIUS review so as to determine whether the conduct of a security review is required and to assist it in preparing for and actively responding to the same. A CFIUS review may not only result in showing that the Chinese acquirer is insufficiently prepared, but, sometimes, the complex requirements of such a review and potential existing prejudices will additionally cause the seller to refuse a certain potential acquirer out of fear of an extended review.
As early as 1990, the acquisition of MamCo by China National Aero-Technology Import & Export Corporation was directly vetoed by the US president, and the US presidential election currently being contested in the second half of 2016 is being seen by certain entrepreneurs as a potential major obstacle to high-tech enterprise acquisition projects. Chinese acquisitions in the US that have been opposed by CFIUS recently include the acquisition of Fidelity & Guaranty Life by Anbang Insurance Group, the application by Tsinghua Unigroup to acquire Western Digital Corp, etc.
Confidentiality and public disclosure. If either the acquirer or target in an acquisition transaction is a listed company, the parties will place extra weight on confidentiality and their information disclosure obligations before their respective regulators from the moment they reach intent on the acquisition transaction. In one offshore acquisition of a high-tech software enterprise in which we were involved, the parties, due to the fact that they were both listed companies, additionally paid particular attention to maintaining consistency in the timing of their respective information disclosures and disclosure approaches.
Furthermore, many transactions that involve a CFIUS review involve investments and acquisitions by Chinese enterprises in fields that are considered sensitive in the US, particularly those in such high-tech fields as telecommunication operations, communication equipment, satellite remote sensing and mapping, etc. Given the sensitivity of national security reviews, the advisory team, considering the interests of the client, will recommend abiding by the principles of strict confidentiality and keeping a low profile, so as to avoid having public reports of the transaction affecting the normal operations of the client.
Subsequent integration stage. Once the cross-border transaction is completed, such issues as the return structure design, connected transactions and transfer pricing will require attention in the course of localizing foreign technologies to take advantage of the huge potential domestic market, in addition to such issues as compliant operation and taxes.
Piao Yu is a senior partner in the corporate M&A practice group of Tian Yuan Law Firm. She can be contacted on +86 10 5776 3888 or by email at firstname.lastname@example.org