The Chinese do it in reverse

While big-ticket IPOs in New York and Hong Kong for Chinese banks and insurance companies may monopolise headlines, in recent years another class of Chinese company has been quietly tapping the international capital markets, reports Business Week.

Enterprises that don’t have the heft or profits for a splashy initial public offering are finding they can get a coveted overseas listing through a reverse merger.

How does it work?

According to Business Week, the Chinese business typically will be acquired by a US shell company (or special purpose acquisition vehicle - SPAC) that is worthless, except for one thing: it’s publicly traded. The American board then resigns, the Chinese board takes over, changes the company’s name, and issues new stock to hedge funds and other new investors, raising millions of dollars in fresh capital. One example is Sinovac Biotech, a Beijing-based maker of vaccines, which executed a reverse merger in 2003 and subsequently raised $12m.

For more and more Chinese companies, a reverse merger is faster and less onerous than an IPO, the magazine says. The process might take just a few months, according to Peter Zhou, managing director of American Union Securities, a New York firm which helped broker 10 such deals since 2005 and is currently working on another nine.

Some 150 Chinese companies have taken the reverse-merger route since 2005. “The Chinese are realizing that there’s a lot of money here,” Zhou told the magazine.

But not everyone is pleased with these developments. As one lawyer explained, few Chinese executives realise Americans generally shun such shells, as they typically trade over the counter. “Nobody follows them, there’s no market in the shares,” Neil Torpey, a Hong Kong-based lawyer said. “So after having gone through a lot of time and expense and effort, the underlying purposes aren’t realized.”

So why do Chinese companies bother? Business Week offers two reasons:

1. “They have few other options - small companies in the country’s rust belt or in industries that aren’t sexy are unlikely to draw the interest of the venture capital and private equity investors swarming over China. Plus there’s a two-year wait for a listing on the booming Shanghai or Shenzhen stock exchanges.”
2. “There’s less interference from investors. Reverse mergers are usually followed up with a private placement. The hedge funds that typically buy these shares are content to allow management to continue operating unfettered, whereas private-equity outfits would typically demand a greater say in decision-making, along with board seats.”

This entry was posted on Thursday, March 15th, 2007 at 8:56 and i