Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

"Deep doubts, deep wisdom; small doubts, little wisdom."

So goes the Chinese proverb, and investors who followed this advice when sizing up China's Anbang Insurance were vindicated when it suddenly bowed out of the bidding for Starwood Hotels on Thursday.  

Investors also tend to paint with broad strokes when it comes to markets and companies they're less familiar with, so it would be natural for their knee-jerk reaction to be increased skepticism of all deals involving China. And there are a lot of them

Deal Graveyard
A sampling of major Chinese takeovers of European or U.S. targets that have collapsed.
Source: Bloomberg
When the Chinese buyer was part of a consortium, the leading bidder is listed.

But let's not forget that the largest acquisition of the year so far is one with a Chinese suitor (ChemChina's $46 billion takeover agreement with Switzerland's Syngenta), and that it may have little in common with the other two situations. Investors' best hope of sifting through these situations is to look closely at which industries these buyers operate in, what their strategic motivations are and how they're getting the funds. 

Anbang is an insurance company that, like many Chinese corporations, is looking to park its money someplace with consistent, attractive returns. It picked hotels. ChemChina, on the other hand, plays in the same sector as its target, Syngenta, and the state-backed company has strategic goals to reduce its dependence on petrochemical and petroleum products by adding agrochemicals. A purchase of the world's largest pesticide maker also gels nicely with Chinese President Xi Jinping's efforts to make the country more agriculturally self-sufficient as he grapples with the demands of China's rising middle class and the evaporation of farmland amid a construction explosion.

That puts ChemChina, as a state-owned enterprise, in a much better position to pay for a huge, all-cash transaction, despite an already leveraged balance sheet. The price is rich, at about 19 times Syngenta's Ebitda last year, but the government isn't likely to tighten the purse strings for a deal this strategically important to its agenda. Indeed, financing plans are already well underway. 

That's not to say this deal and the other Chinese cross-border transactions are without hurdles -- there are regulatory risks, and lawmakers have called on the Committee on Foreign Investment in the U.S. to scrutinize ChemChina's plan. But this was already well known back when the deal was announced, and Syngenta has traded at a spread to the offer price for this reason, as any deal -- not just Chinese ones -- requiring government approvals typically do. 

There's also Zoomlion Heavy Industry,  another interloper, which made a competing bid for Terex, the U.S. crane business that had agreed to a deal with Finland's Konecranes. Like ChemChina, Zoomlion isn't an unnatural suitor here. But also like ChemChina, the Chinese construction-equipment company faces obstacles. Zoomlion is grappling with profit struggles at home amid a supply glut and its historical challenges with ballooning accounts receivables raise questions about what this deal will mean for vendors. We also don't have the full details on its plans for financing the transaction. That said, Zoomlion is partially owned by the government in the Hunan province of China, which may help it get loans if this industry is deemed a priority like agriculture is.

China Syndrome
Here's how shares of the companies Chinese buyers targeted have fared this year:
Source: Bloomberg

With Anbang-Starwood, something started to smell funny in the final round of the bidding war. Even though Starwood admitted that Anbang had the better offer on paper, the hotelier continued to recommend the Marriott merger as it tried to work out a binding deal with the Chinese insurer and its financial partners J.C. Flowers and Primavera Capital. Days of radio silence followed until Starwood's lawyers got a curt e-mail informing them the whole thing was off. It's still not clear why Anbang withdrew -- whether it was regulatory concerns both at home and in the U.S., financing challenges or even political pushback.  There's still a lot about Anbang we don't know.

Anbang's withdrawal came just days after Origin Technologies, another bidder with Chinese ties and some degree of opacity, lost out on a deal with American DNA-testing company Affymetrix. Like Anbang, Origin offered a higher bid than the eventual winner,  Thermo Fisher. But Affymetrix said Origin, formed by a group of the company's former executives and backed by a Chinese investment firm, needed approval by regulators in China to get third-party financing, and that U.S. regulators might scrutinize the offer as well. 

A few years ago, a wave of reverse mergers by Chinese businesses seeking U.S. listings ended pretty badly, with short sellers calling out the shoddy ones, creating a mass selloff. Not all of it was warranted. What that taught us, though, is that not all Chinese buyers are created equal. Is it prudent to have doubts? Yes, but some of these deals will go through.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net