Anbang's Starwood bid

Anbang's Starwood bid: Foiled deal symptomatic of China's flawed M&A ambitions

BEIJING • Chinese firms might be on an unprecedented overseas buying spree but Anbang Insurance's failed bid to acquire Starwood Hotels & Resorts - the latest in a string of deals that have fallen through - highlights how they might have yet to emerge as credible, global corporate players despite their deep pockets.

From semiconductors to real estate, China's voracious appetite for Western firms has led to its outbound cross-border merger and acquisition (M&A) deals topping US$101 billion (S$137 billion) in the first quarter alone, nearly eclipsing last year's full-year record of US$110 billion, says a Reuters report.

State-backed chemical company ChemChina, for instance, acquired Swiss agribusiness group Syngenta with a knockout offer of US$43 billion in February, at a roughly 20 per cent premium to its then market value, making it the biggest Chinese takeover of a foreign firm so far.

The latest group of Chinese buyers consists of savvy private firms investing in companies whose products would cater to the diverse needs of the country's growing middle class, extending beyond the state giants that historically dominated dealmaking with a focus on securing sensitive new technologies and commodities. But these new global deals are still hitting roadblocks.

A record US$47.5 billion of takeover bids by Chinese firms, for instance, failed last year as M&A activity soared, the highest level since 2009, according to Bloomberg.

Most recently, in a dramatic turn of events last week, Anbang unexpectedly withdrew from its US$14 billion bid to acquire hotelier Starwood, the owner of the upscale Sheraton, Westin and St Regis brands. While the insurer cited only "various market considerations", talk in the market was that Chinese regulators would have blocked the deal as it would have placed the firm's overseas investments above a threshold of 15 per cent of its assets.

Be that as it may, the deal's high-profile implosion is a setback to China's wider ambitions to be seen as a credible M&A partner even as Beijing has urged its domestic firms to gain expertise and market share through foreign deals as its US$10 trillion economy slows.

"The... so far unexplained withdrawal does not only have a deleterious effect on Anbang's reputation to close major deals, but has also sown a seed of doubt in the minds of corporate boards around the world about Chinese firms' motives and ability to carry out mega M&As," says Warwick Business School's Professor Kamel Mellahi, who does research on Chinese businesses.


Already, Chinese companies are facing growing levels of scrutiny.

Politics is at play here, with investments from China having long received more scrutiny than others in Washington, and Beijing often voicing concerns that its firms are unfairly targeted.

However, the opaque ownership structure of some Chinese firms and their lack of financial transparency have also raised red flags in global dealmaking.

Anbang, for instance, is made up of 37 holding firms with a 97 per cent stake in the insurer while two Chinese state firms own the remainder, according to British daily The Telegraph. This makes it hard to know who the firm's real owner is.

Deals have thus been scuttled while Chinese companies also tend to have to overpay for assets to compensate for the uncertainty of whether transactions will close, or offer a hefty break fee to assuage the sellers' concerns.

Last month, for instance, American DNA-testing firm Affymetrix rejected a US$1.5 billion offer by Origin Technologies, whose backer is a Chinese investment firm, citing financing and regulatory risks, even though Origin offered more money than an existing deal.

Mr Carson Wen, a counsel at law firm Jones Day, says Chinese state enterprises also face the disadvantage of having their corporate managers rather than M&A professionals negotiate deals.

"The skill sets required for outbound M&A are very different from those that are needed for factory operations or product marketing, (although) the Chinese are now learning to make better use of investment banks, lawyers and other professional advisers," he adds.

Improving their transparency and strengthening their corporate governance, such as by introducing international and independent directors, can allow Chinese companies to be seen as more serious and sophisticated bidders.

But their origins as China-based companies will still pose a problem for them, say analysts.

"Chinese firms are domiciled in a country where its government is communist. Regardless of how they improve their management and governance, they'll always face certain Western prejudice and suspicion," says Dr Friedrich Wu from the S. Rajaratnam School of International Studies in Singapore.


Chinese firms should also relook their broader strategy if they truly want to go global. Rather than grabbing "trophy" assets without considering if they have the know-how to turn around, integrate and grow these acquisitions, they should look more towards organic growth and synergies instead.

Synergistic acquisitions can augment organic growth, help overseas expansion, and build global brands, says Dr Wu, who studies the globalisation of the Chinese economy and its firms. Examples of good M&As involving Chinese firms include deals between white goods maker Haier and American electronics firm GE Appliance, and between ChemChina and Syngenta.

"But non-synergistic acquisitions are mostly motivated by corporate hubris and vanity. They add nothing to build companies' brand power and recognition," adds Dr Wu.

Anbang's purchase of Waldorf Astoria Hotel in 2014, for instance, is a prime example of that. Without the expertise to manage the hotel, the insurer had to ink a management deal with Hilton, he notes. "I have not known a single firm that can build a global iconic brand by M&A. The Chinese are attempting to leapfrog. But trying to run before one can walk will just cause one to fumble repeatedly," says Dr Wu.

Still, with few countries today with firms ready, willing and able to write large cheques, there is a real opportunity for China - with its deep pockets and huge appetite - to emerge as a choice partner globally in M&A deals. To be able to take full advantage of that opportunity, Chinese firms now need to prove themselves as responsible and constructive owners.

A version of this article appeared in the print edition of The Straits Times on April 09, 2016, with the headline 'Foiled deal symptomatic of China's flawed M&A ambitions'. Print Edition | Subscribe