M&A in China are expected to enter a new stage of development with regulations implemented October 8 aimed at streamlining approval procedures

10.10.2013 17:20

New M&A Rules Bring Cautious Optimism

Industry analysts hope to see pickup in speed for regulatory approvals but raise concerns over certain preconditions for qualified companies

By staff reporters Liu Ran and Zheng Fei

(Beijing) – Mergers & acquisitions in the country are expected to enter a new stage of development with regulations implemented October 8 aimed at streamlining approval procedures. The policy allows qualified listed companies planning an M&A to skip a long list of compliance checks to receive fast-track approval from the China Securities Regulatory Commission (CSRC).The preconditions consist of requirements for the companies’ creditworthiness, securities firms hired as consultants and the type of industry concerned in the deal. An M&A proposal must meet all three requirements simultaneously to qualify for speedy regulatory clearance. Those that do not involve additional stock sales can waive the reviews altogether.

Other M&A proposals that fall short of the requirements have to either go through the complete set of review and approval procedures or face tougher examinations if the applicant companies’ or securities firms’ credentials are flawed.

A CSRC official said the change is aimed at separating the good companies from the bad, as high quality companies should not be stuck on a lengthy waiting list just like the poor ones.

It is also meant to “enhance the professionalism of institutions in the field of M&A services,” he said.

This is particularly important at a time when the M&A market has seen rapid expansion on the heels of an IPO freeze instituted last year. Since last December, the CSRC has not let a single company to go public in the Shenzhen or Shanghai stock exchanges. This has forced many private equity and venture capital investors to look for alternative exit channels.

Meanwhile, data from information provider Zero2IPO shows that 654 M&As took place in the country from January to August, with a combined transaction value of US$ 48.7 billion, a 50 percent increase from the same period of last year.

Without commission fees from underwriting IPOs, securities firms have become more reliant on M&A services for profit, an investment banker of Everbright Securities said.

This explains why most securities firms are paying extra attention to how their M&A abilities are rated by the Securities Association of China under the new policy. Despite an overall welcoming attitude towards a leaner approval process, many argue that the current evaluation criteria do not measure performance scientifically.

A sub-index that accounts for 30 percent of the final evaluation outcome, for example, depends entirely on the number of M&As a securities firm has worked on.

But the majority of M&As in the country were either capital injections by large shareholders or for the purpose of back-door listing, which do not require the same set of skills as a typical M&A in developed countries would, an executive in charge of a securities firm’s M&A business said.

“These businesses, however large their number is, do not reflect a securities firm’s match-making abilities as an intermediary in M&As,” he said.

There are also questions over the CSRC’s delineation of industries that may receive preferential treatment under the new M&A policy.

The nine industries are: automobile manufacturing, steel, cement, ships, electrolytic aluminum, rare earths, digital information, pharmaceuticals and agricultural commercialization.

This merits doubt because six of those industries have been suffering severe excess capacity and thus do not have much M&A opportunity, an investment banker said.

Under current economic conditions, even large listed companies find it hard to acquire other businesses. So the new regulation can at best make it easier to complete transactions but is of little use promoting M&As in many fields, he said.

A financial analyst who works closely with steel producers echoed the view. As far as steel production is concerned, he said, the biggest problem impeding M&As is not regulations but chronic industrial weakness.

In addition, many companies in areas including steel, cars, cement and ships are owned or controlled by local governments, which can bend market rules in favor of their own interests, the analyst said. In such case, a new regulation does not make things any different, he said.

Some other analysts voiced optimism over the designated industry list. The digital information industry, among others, will benefit hugely from the new policy, because it is currently at a stage where investor confidence is high and companies are well-financed to expand through M&As, HwaBao Securities’ analyst Liu Zhi said. He also cited several recent acquisitions by leading players in the mobile-game industry as examples of the market’s potential.

Pharmaceutical companies stand to benefit as well, according to Feng Suqiang, managing director of Zero2IPOVenture, a venture capital investment company.

Most M&As by listed companies in other industries require large amounts of capital and have to be funded by private placement of shares. This is often not the case with pharmaceutical companies, he said.

Many pharmaceutical companies are worth buying simply for the licenses they hold. Such acquisitions are often small in value and can be financed with just cash, thus waiving the requirement for reviews altogether, he said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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