(Chinese) Money Can't Buy Love
Money isn't everything in bidding wars -- at least not when the suitor has Chinese ties.
Affymetrix, a maker of genetic-analysis technology, on Monday rebuffed a $1.6 billion takeover proposal from Origin Technologies, choosing to stick with a previously agreed-to deal with Thermo Fisher at a lower price. Origin, an entity newly formed by a group of former executives for the specific purpose of buying Affymetrix, then withdrew its offer.
The extra $3 a share dangled by the interloper just wasn't enough to compensate for the uncertainty surrounding its bid. Origin's plan to get financing help from Chinese private equity firm SummitView Capital would have required approval from regulators in that country and a review by the Committee on Foreign Investment in the U.S., Affymetrix says. (CFIUS, as the agency is known, has the power to block deals it considers detrimental to U.S. interests.)
It's just the latest proof that buyers with Chinese connections must operate under a different set of rules to surmount the higher hurdles they face in bidding standoffs.
Big premiums and all-cash offers are a must, especially when the buyer is attempting to gate-crash an existing deal. Origin followed this part of the playbook: Its latest $17-a-share offer was an 85 percent premium to Affymetrix's unaffected share price and a 21 percent bump to what Thermo Fisher had offered. But Chinese suitors also need to offer significant breakup fees to protect targets against regulatory risks, as my Gadfly colleague Nisha Gopalan has noted. It's in that respect that Origin fell short.
Origin was willing to increase the reverse-termination fee to $100 million, which is nothing to sneeze at relative to the overall transaction size. But Affymetrix says the buyer wasn't willing to pay that money should CFIUS reject the deal. Huh? Isn't that a big part of the reason to have a reverse termination fee in the first place?
For its part, Origin says that Affymetrix gave it only one business day's notice to transfer hundreds of millions of dollars from an international firm into a U.S. escrow account -- an "unrealistic demand" -- and that it disagreed with the assessment of the risks. That's fair enough, but Origin engaged in preliminary discussions with Affymetrix as far back as last fall. It perhaps should have been better prepared for this pushback.
While it's true that many Chinese buyers sail through the CFIUS process, deals involving China ties get an extra dose of scrutiny and targets expect to be properly motivated to take on that extra regulatory risk. Plus, it's an election year and the burst of Chinese acquisitiveness this year has politicians on edge, spurring increased calls for a tough review.
Origin should have learned a lesson from the example of state-owned China Resources and Hua Capital Management, whose proposal to buy Fairchild Semiconductor fell apart after the buyers refused to pay an enhanced breakup fee. Several other transactions, including Western Digital's planned stake sale to Tsinghua Unisplendour and Philips's proposal to sell its lighting-components business to a group led by China's GO Scale Capital, have fallen apart recently in the face of a CFIUS challenge.
U.S. Representative Jackie Speier had already asked for scrutiny of Origin's bid, citing Affymetrix's contracts with federal agencies and private equity backer SummitView's ties to the Chinese government. It's not clear whether that's grounds enough for regulators to seek to block a transaction, but there's nevertheless a legitimate regulatory risk here that at the very least could have spelled a prolonged review process -- a prospect made all the more unappealing by the fact that Thermo Fisher is ready to close its deal this week. 1
Normally the onus is on the target company to get the most money possible for its shareholders, but absent stronger regulatory guarantees, Affymetrix probably did the prudent thing by locking in the $1.3 billion deal it has with Thermo Fisher. The big question is whether shareholders will feel the same way when they vote on the deal this week. Thermo Fisher certainly doesn't have to offer more money at this point, but the $55 billion life-science equipment company has room to do so, and an extra dollar or two per share may be just the act of goodwill Affymetrix shareholders need to stand by the deal.
Starwood Hotels faces a similar dilemma as it decides between a deal with Marriott and a higher offer from Chinese challenger Anbang Insurance.
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