The booming mainland stock markets in the first half of this year lured a number of U.S.-listed Chinese tech companies to plan to go private in the overseas markets so they could relist domestically for higher valuations. However, due to the stock market plunge in July and August, several of these companies have had to reconsider, which has led to a lot of uncertainties about whether these plans will go forward.
Beijing-based iKang Healthcare Group Inc announced last week that it had received a nonbinding proposal to take the company private.
A consortium led by iKang's founder, Chairman and CEO Zhang Ligang and FV Investment Holdings has offered to purchase all of the Chinese preventive healthcare services provider's outstanding shares for $17.80 per American depositary share (ADS), a 20.76 percent premium to Friday's closing price. U.S. markets were closed on Monday for a national holiday.
With the announcement, iKang became just the latest U.S.-listed Chinese company to disclose plans to go private, joining the likes of security software maker Qihoo 360 Technology Co, -dating website Jiayuan.com International and social networking website Renren Inc.
So far this year, 29 Chinese tech companies listed in the U.S. have received buyout bids.
Yet iKang's announcement arrives at a time when the future of these buyout deals is anything but certain.
Since July, at least two Chinese tech companies have decided to back out of buyout plans, the Caixin magazine reported on its website on Wednesday. In addition, some buyout parties that have made acquisition offers are now reconsidering their proposals.
"As far as we know, buyout plans have been suspended at some U.S.-listed Chinese firms that prefer to wait and see how the market develops before making the final decisions, while others have slowed down the process," Zhang Xiang, an analyst with Beijing-based ChinaVenture Investment Consulting, told the Global Times on Sunday.
Buyout benefits
To understand why buyout groups have begun backing away from proposals to take U.S.-listed Chinese companies private, it is important to understand the factors that made these deals so attractive.
When the Chinese mainland stock markets were booming in the first half of this year, corporate valuations soared.
According to data from Beijing-based Zero2IPO Group, the average price-earnings ratio - a common gauge for measuring how expensive a stock is - for companies listed on ChiNext hit 68 times trailing earnings earlier this year.
Meanwhile, the U.S. counterparts of these companies were trading at 16 times trailing earnings on average during the same period.
For buyout groups, this gap presented a great opportunity if they could buy up all of a company's shares in the U.S. and then effectively sell them back to the public in China.
These buyout deals also benefit from a plan to reform China's IPO mechanism, said Dong Dengxin, director of the Financial Securities Institute at Wuhan University of Science and Technology.
"It pointed to a lower threshold for IPOs, which was also attractive to those tech companies," Dong told the Global Times on Sunday.
Unfortunately for the buyout groups, most of the financial benefits of these deals disappeared when the mainland stock markets began to tumble in mid-June.
Furthermore, the volatility in the global financial markets in the third quarter has left these Chinese tech companies in a quandary.
Take Qihoo 360. On June 17, the company disclosed a buyout proposal that offered to purchase all of its outstanding shares for $77 per ADS, a 6.72 percent premium to the share's closing price that day of $72.15.
But after the mainland markets tumbled, investors lost a lot of confidence in the U.S.-listed Chinese companies.
As of Friday, Qihoo 360's share price had plunged to $48.25, which puts the initial buyout offer at a 59.59 percent premium to the company's current stock price.
The consortium that initially offered $9 billion to buy out Qihoo 360 is now considering slashing the bid due to the plunge in the company's valuation, The Wall Street Journal reported on August 28, citing an unnamed person familiar with the matter.
Although Qihoo 360's Chairman and CEO Zhou Hongyi later denied the report on his Sina Weibo account, analysts generally believe a lower offer makes sense under the circumstances.
If the gap between the original bid and the stock price gets big enough, it is understandable that the buyout parties would be unwilling to overpay, said Zhang from ChinaVenture.
Because all such proposals are -nonbinding, buyout consortiums always have the right to change or cancel their plans.
There is now a lot of uncertainties about whether these companies will follow through on their plans or alter them to fit the new situation, either by lowering their buyout bids or shelving the plans until the global markets stabilize.
Of the 29 companies that disclosed buyout plans this year, 24 have yet to sign any binding agreements.
Other risks
Another major risk for companies that want to go private and get relisted domestically comes from the IPO suspension that Chinese regulators announced in July to help bolster mainland stocks.
Even if a company exits the U.S. market, it's unclear when it will be able to get listed on the mainland markets.
While Dong said listing on the New Third Board could be an option, Zhang noted that most such tech companies would prefer to get listed on the main boards or at least on the SME board, a sub-board of the Shenzhen Stock Exchange for small and medium-sized enterprises, which promise higher valuations and more financing.
"Because no one knows how long it will take for a privatized company to get relisted, the financing costs would be very high, and so would the risks," Zhang said.
"It is a hard decision to make. If a company chooses to give up on privatization, then all the brokerage fees and preparation would be wasted, and its stock price could also be affected by the failure," Zhang Wenze, deputy director of the investment department of the Denver-based private equity firm MountainView Capital, was quoted as saying by Caixin.
In some cases, a backdoor listing could also be an option, said Zhang from ChinaVenture.
For example, Focus Media Holding, a Chinese company that went private in the U.S. two years ago, announced on August 31 that it has found Shenzhen-listed communications equipment maker Hedy Holding as the new vehicle to help it get access to the mainland capital markets.
Further fundamentals
In the long run, the question of whether U.S.-listed Chinese companies will return home should be based on their judgment of the market and their strategic development needs, instead of short-term fluctuations in stock prices, analysts said.
"But the most fundamental reason why some companies want to get listed back home is the much tougher regulatory environment overseas. Moreover, Chinese companies are seen as easy targets for short sellers overseas," Dong said. "While in the A-share markets, listed companies are only subject to relatively loose regulations."
