The Risks of International Mergers and Acquisitions

By | May 25, 2016
3599123_thumbnail

Here at CNBizCheck, we are constantly researching business transactions between China and the international market. What really sparked our interest was today’s Wall Street Journal post about U.S. companies being acquired out by Chinese companies. The fact of this reality is that there are more perceived risks when doing business with China, and this fact has effected business in a big way. We hope everyone involved in China takes necessary precautions in protecting themselves from fraud, government intervention, accidents, cultural misunderstanding, etc.

Recently, a large number of Chinese companies have begun looking toward U.S. acquisition targets. In light of this fact, American companies have begun to take measure to protect themselves and their assets from the uncertainty surrounding such international cross-borders deals. Naturally, any deal between two entities of two separate countries is risky, but with the reality of China, it is easy to see why many companies are hesitant. For example, the U.S. computer distributor Ingram Micro Inc. during the procedures of acquisition from a Chinese company received a $400 million deposit in an escrow account located outside of China. The company will collect this sum if the buyer (a unit of HNA Group, a Chinese business conglomerate) consummates the transaction. “Normally such fees are common in mergers like this, but demanding a cash deposit is unusual” says Vipal Monga, writer for CFO Journal.

For many years now, American companies have grown cautious toward Chinese buyers after numerous accounts of botched deals. These deals are not strictly due to bad business practices, as many have been force canceled by the U.S. government on grounds of national security. This explains the reasoning behind companies targeted in recent Chinese takeovers have asked for escrow accounts or letters of credit to guarantee deal financing or breakup-fee payment. In this way, the fees they demand could be twice as high as in other deals because of perceived risk. The HNA agreed payment equals about 6.7% of the Ingram deal’s $6 billion value, compared with 2-4 percent more common in most non-Chinese deals.

Chinese takeovers are on the rise. The global value of deals announced by Chinese buyers of non-Chinese companies totaled a record $119 billion as of Monday, more than the $107 billion for all of 2015, according to Dealogic. Some Chinese companies are beginning to balk at paying reverse breakup fees, in case CFIUS blocks their deals. In the auction of Ingram Micro, two other Chinese bidders refused to pay a reverse termination fee, which was partly why their bids didn’t succeed, according to a Securities and Exchange Commission filing.

 

Leave a Reply

Your email address will not be published. Required fields are marked *