Don't Acquire for the Sake of Acquisition

It may be the longest suspension of initial public offerings (IPOs) in the A-share market, which forces investors to turn to equity transactions, back-door listings, acquisitions and reorganization.

Statistics from Zero2IPO, a leading integrated service provider in the China venture capital and private equity industry, show that 654 mergers and acquisitions (M&As) took place in China by August this year, most of which were initiated by public companies, with a transaction value reaching $48.7 billion, up roughly 50 percent.

M&As should be encouraged, but the prerequisites are credit and being market-oriented. M&As began to thrive when an IPO comeback was not in sight, and some overseas IPO channels were blocked.

Better results would be yielded when venture capital and private equity exit through M&As than through IPOs, because initiators tend to be more professional and strict in deciding an M&A, and the premium of an M&A is far lower than that of an IPO. In M&A cases, parties concerned are always serious-minded in conducting investigations, in order to make sure that the deal is worth the money. The market will also react in a more rational way.

For example, when China's search engine Baidu acquired third-party app distributor 91 Wireless, the public didn't complain. On the contrary, people showed great interest in the industrial development path of the smart era and paid close attention to the distribution of industrial chains of new big players. China's enterprises, such as Huawei, ZTE and Geely, have also learned plenty through international M&As.

Attention has been paid to credit. One prerequisite for the deregulation of acquisition and reorganization is establishing credit records. If enterprises don't engage in cheating and insider trading and can help integrate the upstream and downstream industrial chains, supervisors and regulators are willing to let investors have a free hand.

To some extent, acquisition and reorganization have become a tool for money encirclement in China. In North America, the failure of back-door listing attempts by Chinese companies indicates deep mistrust from overseas markets. Since there is a strong demand for zombie companies from those that seek a listing, one such company can be worth as much as 1 billion yuan ($163 million), and the price doubles every three or four years. The more expensive a zombie company is, the more difficult it becomes to nurture a credit culture.

Some investors engage in stock price manipulation to transfer profits. If there is no clue of insider transactions and misconduct, it is difficult to catch unsavory investors.

What's worse is the government directs enterprises to become big through M&As but not strong. To nudge into the list of the world's top 500 companies, these enterprises overlook rates of return on capital. Inefficient big companies acquire lucrative small businesses. In this way, enterprises lose market efficiency.

On the other side, China's securities market, which is still in its infancy, should ensure that government interference is minimal and let the market do the work.

This is an edited excerpt of an article by Ye Tan, a financial commentator, published in National Business Daily

THE MARKETS

ZTE's Ambition

Chinese smartphone maker ZTE Corp. has plans to dominate the Philippine smartphone market through the creation of affordable handsets in the next three years.

The telecommunications giant has already become the world's fourth largest mobile phone manufacturer based on 2012 sales. But it has yet to be a big player in the Philippines, having only entered the Southeast Asian nation a year ago.

At present, the company has manufacturing plants in China, Venezuela and Kazakhstan, but is considering the Philippines as a manufacturing destination should its share in the competitive handset market increase there.

"Our phone is comparable to high-end handsets in the market. We don't compete in the unbranded category," MSI President and CEO Jimmy Go said.

Company managing director in Southeast Asia Jeff Zhou Fang said the company planned to increase smartphone usage in the Philippines to 50 percent from the current 20 percent with four new products.

Mobile Game Thrives

The First International Game Forum was launched in Beijing on October 10.

Sponsored by Chukong Technologies and Tencent Games, the forum attracted more than 800 guests from domestic and foreign mobile game research and development companies, investment institutions and the media.

Mobile games have experienced explosive growth in the past two years, apparently outpacing Web games, said Gao Li, Vice General Manager of Tencent's marketing department.

In his opening remarks, Li Jianwei, head of a relevant department under the Ministry of Culture, said mobile gaming is the most vibrant part of Internet culture.

NUMBERS

3.49 bln yuan

Profits from industrial enterprises above the designated size—principal business revenue of more than 20 million yuan ($3.15 million)—from January to August, a 12.8-percent increase

25

The number of industrial sectors that witnessed higher profits from January to August

70.1%

Growth rate in profits from the power and heat generation sector from January to August

Email us at: yushujun@bjreview.com