CHINESE life sciences entrepreneur Zhou Wei submitted a US$1.5 billion bid for U.S. gene testing firm Affymetrix last month — topping a US$1.3 billion agreed acquisition by Thermo Fisher Scientific Inc. A few days later, he got an unusual deadline.
Affymetrix’s CEO Frank Witney called Zhou, a former Affymetrix executive who had partnered with SummitView Capital on his offer. Witney gave him five days to put the full purchase price and the breakup fee that would be owed Thermo Fisher in an escrow account.
Suitors of U.S. firms don’t typically face such demands. But Affymetrix’s board of directors decided that, because Zhou’s consortium had no significant U.S. assets, the firm would have little recourse if the deal fell through.
Zhou’s investment bankers responded that only the consortium’s break-up fee of US$100 million could be escrowed and that would take weeks. Affymetrix decided to stick with Thermo Fisher.
The deliberations, described in regulatory filings, underscore the challenges many Chinese buyers face in convincing U.S. firms to make a deal, especially when competing against a U.S. firm.
Traditionally, the biggest hurdle has been the Committee on Foreign Investment in the United States (CFIUS), a government panel that scrutinizes deals for national security threats.
But as Chinese acquisitions picked up this year, U.S. dealmakers also are paying attention to financing and regulatory risk from China.
The biggest illustration of that risk was China-based Anbang Insurance Group Co.’s surprise withdrawal last month of its US$14 billion bid for Starwood Hotels & Resorts Worldwide Inc., which had trumped a rival offer from Marriott International Inc.
U.S. companies want to make sure that Chinese suitors have approval of key Chinese agencies, such as the Ministry of Commerce (MOFCOM), and that financing is reliable.
“If the buyer faces uncertainty over their financing or approval from the MOFCOM, their bid won’t be competitive without a substantial reverse break-up fee,” said Robert Profusek, head of mergers and acquisitions at law firm Jones Day.
When Chinese aviation and shipping conglomerate HNA Group clinched a deal in February to buy U.S. electronics distributor Ingram Micro Inc. for about US$6 billion, it agreed to deposit US$400 million in an escrow account payable to Ingram Micro should the deal fail to receive regulatory or antitrust approval.
This “reverse termination” fee of 6.6 percent of the deal’s value illustrates the higher reassurance demands for Chinese buyers. By comparison, U.S. acquirers typically offer about 3 percent.
When Chinese suitors attempt to acquire U.S. companies that have competing offers, it can be difficult to get them to abandon a pending agreement.
For example, Chinese crane maker Zoomlion Heavy Industry Science and Technology Co. has spent six months trying to convince U.S. peer Terex Corp. to abandon its merger agreement with Finland’s Konecranes for its bid.
Still, there is a logic to moving in on pending deals, dealmakers say. Some Chinese buyers, lacking the resources and confidence to make their own offers, piggyback on diligence performed by others.
When negotiating in a less competitive environment, Chinese firms have driven hard bargains. Richard Handler, CEO of investment bank Jefferies LLC, which has advised 10 U.S. firms in sales to Chinese, said that his investment bankers and clients have found Chinese buyers to be “tough negotiators.”
When a Chinese consortium led by ink cartridge chip maker Apex Technology Co. reached a deal last week to buy Lexmark International Inc. for US$3.6 billion, it secured it with a termination fee of US$150 million — 4 percent of the deal’s value — through a letter of credit from the New York branch of Bank of China, rather than an escrow.
Lexmark had been exploring a sale for more than six months and was unhappy with previous acquisition offers, said sources close to the firm. So, it was in a weaker negotiating position than U.S. firms demanding full escrow.
There is little evidence Chinese acquirers are paying more on average. Thomson Reuters has tracked 66 deals involving U.S. acquirers and buyers this year. The average ratio of deal value to 12-month earnings before interest, tax, depreciation and amortization on those deals was 11.3. For six Chinese purchases, it was 9.9. (SD-Agencies)
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