It was the big story not so long ago. As of mid-June, 14 U.S.-traded China-based companies had received buyout offers valued at a collective $22.4 billion, according to Dealogic. The highest profile of the bunch was Internet services provider Qihoo 360, which, several weeks ago, announced it had received a buyout offer led by its chairman and CEO — one that would make it the “largest take-private deal of a U.S.-listed company,” said the WSJ.
The reason for all the take-private talk? China’s stock market, which has roared along for much of this year, thanks to a series of moves by the Chinese government, including cutting benchmark interest rates, reducing stock market transaction fees — even reconsidering its stance on what are called variable interest entity structures, which are used by China-based companies to list in the U.S. and are hard to unwind.
China, in short, wants its companies to come home.
“The government wants to build its own capital markets,” says Glenn Solomon, a managing partner of the cross-border venture firm GGV Capital who we talked with last week. “It wants to see capital stay in China and continue to be invested in China.”
The question is whether companies are smart to listen. While China’s stock market was up 50 percent for the year as of several weeks ago, it has been falling since.
Last week, the benchmark Shanghai Composite Index dropped 12 percent, and since June 12th, the market has fallen 28 percent driven largely by margin calls.
Even while the plunge has had little regional impact – the Hong Kong Stock Exchange has only come down slightly, along with other indices in Asia – such volatility likely has companies rethinking whether leaving the U.S. is as savvy as it seemed a short while ago.
Solomon seems to think it should remain an option, acknowledging that while there’s “definitely an arbitrage element to this trend,” there’s more afoot than a dozen or so companies looking to seize on a price difference between the markets.
Solomon, whose firm has stakes in numerous China-based, U.S.-listed companies, offers that, “When the Chinese government sets its mind to something, it’s extremely successful typically. And the government, which is very interested in seeing a vibrant market built locally, will continue to do what it can to ensure that such vibrancy persists.”
Still, delisting in the U.S. to go public a second time in China is not for the faint of heart.
In just the last few days, China has – not for the first time – suspended IPOs, without indicating when it might again allow companies to begin listing their new shares.
“China does this when the markets are kind of rough, so there’s not guarantee that a company looking to relist in China will get the kind of timing it wants,” observes Mike Feldman, a Hong Kong-based consultant who advises on cross-border technology investments from China to Israel. As he puts it, “Everything in China is, ‘Until further notice.’”
It’s also worth noting that these trends are highly cyclical.
Between 2007 and early 2010, for example, roughly 160 Chinese companies gained access to U.S. capital markets through reverse mergers, wherein a private company buys enough shares of a public firm to essentially become publicly traded.
Most were legitimate, but some turned out to be stock scams, prompting widespread thinking that Chinese companies wouldn’t be welcome in the U.S. again.
That changed in 2012, when online retailer VIPshop went public on the New York Stock Exchange. While investors approached the offering warily, the company, which enjoyed a market cap of $600 million at the time of its offering, has a nearly $12 billion market cap today.
It’s also worth keeping Focus Media in mind, an advertising company that left the NASDAQ in 2013 after a research firm, Muddy Waters, publicly called its accounting into question.
In early June, the company, which has been trying to list in China through a reverse merger, looked poised to enjoy a valuation of $7.38 billion through its back-door listing – or twice what it was valued when it was taken private two years ago.
By June 23rd, the chairman of the shell company had resigned amid an investigation into suspected securities laws violations.
“Everyone was looking to see how it worked out [for Focus] and they haven’t been able to re-list yet, and it’s been a couple of years,” says Feldman.
As with so much in China right now, he adds, “Nobody knows what comes next.”
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