China Buyouts Raise Concern as Stocks Soar Before Offers
AutoNavi Holdings Ltd. (AMAP) became the second Chinese company in two weeks to see its shares surge in the days leading up to a takeover announcement, raising concern among investors that details of transactions are being leaked.
American depositary receipts of AutoNavi, an online map-content provider, jumped 13 percent over Feb. 6 and Feb. 7, the most among the biggest Chinese stocks traded in New York, before Alibaba Group Holding Ltd. offered to buy the shares this week. Shanda Games Ltd. (GAME), an operator of online games, soared 34 percent in the seven days prior to saying on Jan. 27 that it plans to take its company private.
The pre-buyout rallies add to investor concern that the market for Chinese shares trading in the U.S. lacks transparency as short sellers including Carson Block say companies are overstating earnings while U.S. regulators bar accounting firms from conducting audits in the Asian nation. At least 35 Chinese companies have announced buyout deals to withdraw their U.S. listings since early 2011 in part because those concerns depressed their stock valuations.
These stock gains create “distrust within the markets,” Timothy Ghriskey, chief investment officer at New York-based Solaris Group LLC, which manages about $1.5 billion in assets, said in a phone interview. “It doesn’t generally bode well for markets where that occurs regularly.”
John Nester, a spokesman for the Securities and Exchange Commission, declined to comment in an e-mail yesterday. E-mails to AutoNavi’s external public relations managers at Ogilvy Financial seeking comment weren’t immediately returned, and Alibaba’s corporate communications manager Florence Shih declined to comment in an e-mail.
Tip Fleming, a spokesman for Shanda Games, declined to comment on the stock gains when contacted by Bloomberg News. Nancy Condon, a spokeswoman for the Financial Industry Regulatory Authority, declined to comment in an e-mail.
The SEC said yesterday that two Hong Kong-based asset management firms agreed to pay almost $11 million to settle claims related to improper trades made before China-based Cnooc Ltd. (CEO) announced it would acquire Canadian energy firm Nexen Inc. The acquisition was completed in February of last year.
While concern about Chinese companies in New York mounted over the past four years, the Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. has returned 43 percent, outperforming the benchmark equity gauge in Shanghai, which lost 13 percent in dollar terms. The China-US measure advanced 2.7 percent to 99.94 in New York yesterday.
ADRs of Beijing-based AutoNavi surged 24 percent on Feb. 10, the most on record, after Alibaba, China’s biggest e-commerce company, offered $21 for each AutoNavi ADR to take it private. AutoNavi slipped 0.3 percent to $20.50 yesterday in New York.
The offer, valuing AutoNavi at about $1.6 billion, has been submitted to AutoNavi’s board and is subject to reaching a definitive agreement, Alibaba said. Hangzhou-based Alibaba invested $294 million in May for a stake in AutoNavi.
Shanghai-based Shanda Games posted a seven-day jump, the longest rally on record, before saying Jan. 27 it received an acquisition offer by its parent Shanda Interactive Entertainment Ltd. and an affiliate of Primavera Capital Ltd., a private-equity firm. The buyout group proposed to pay a 22 percent premium to the Jan. 24 closing price to take it private.
Total call option volume on Shanda surged 15-fold on Jan. 24 to 5,538, the highest level since August, data compiled by Bloomberg showed. Shanda added 0.8 percent to a two-week high of $6.50 yesterday.
The China-US gauge sank in the two weeks following a U.S. ruling on Jan. 22 that suspended Chinese affiliates of the largest four accounting firms from conducting audits on U.S.- listed companies for six months.
NQ Mobile Inc., an Internet security company based in Beijing, was accused in October by Muddy Waters LLC, founded by Block, of inflating sales. NQ denied the allegations and said in November its independent special committee retained the law firm Shearman & Sterling LLP to review Muddy Waters’s report.
The Public Company Accounting Oversight Board expects to reach this year an agreement under which U.S. regulators would be able to inspect audit work done in China, Chairman James R. Doty said Feb. 5. The prospective accord would end a three-year standoff for audits of China-based firms listed in the U.S.
“If the stocks are surging prior to merger announcement, particularly in the U.S., my guess is those would be targeted by the SEC and or Finra from an insider trading perspective,” Malcolm E. Polley, president of Stewart Capital Mutual Funds based in Indiana, Pennsylvania, said by phone yesterday. His firm manages $1.2 billion in assets.
Shanda Interactive, Shanda Games’s parent, said in a Jan. 30 filing it owned 409,087,000 shares in the gaming unit, or 76.3 percent of total outstanding shares. Its stake hasn’t changed since the company’s last filing of 2012 annual report. Primavera, based in Hong Kong, said it didn’t own shares in Shanda Games in a Feb. 5 filing.
“When you are dealing with a Chinese M&A, it may be more challenging to keep information private because you’ve got overseas communications,” Eric Brock, who helps oversee $4.4 billion as a portfolio manager at Clough Capital Partners, said in a phone interview Feb. 6. “I doubt that the many people who are involved in the transaction have incentives to leak it.”
The Shanghai Composite Index (SHCOMP) rose 0.3 percent to 2,109.96 at the close today, climbing for a fourth day.
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