Mergers and acquisitions carry risks, especially those involving overseas transactions. For companies looking to undertake overseas M&A deals, a thorough due diligence—covering CFIUS, the target company itself, the market environment, and competitors—is absolutely essential. Only by conducting such a detailed assessment can companies enhance their chances of successfully completing the acquisition.

　　Since 2013, the world has already entered its sixth wave of mergers and acquisitions. Unlike the previous five waves, which were dominated by the West, this time... The core of the sixth wave of mergers and acquisitions is in China, and Chinese big buyers are the protagonists of this wave.

　　In recent years, we’ve seen “super Chinese buyers” such as ChemChina, Fosun, and Wanda “splurge billions” every year in the international M&A market, snapping up high-quality overseas assets. However, as Chinese companies go global, success is inevitably accompanied by failures. Today, Chen Shaojun will take you through some recent cases of failed overseas ventures—cases that ended in failure for various reasons.

     CFIUS is obstructing the process.

　　 For all Chinese enterprises seeking overseas mergers and acquisitions, the CFIUS (Committee on Foreign Investment in the United States) can be described as an obstacle that is hard to bypass.

　　According to U.S. law, foreign acquisitions of U.S. companies must not pose a threat to U.S. national security. The authority for national security reviews in the United States is specifically exercised by the Committee on Foreign Investment in the United States (CFIUS), which is authorized by the President.

　　However, the CFIUS national security review is characterized by vague and arbitrary standards, broad boundaries for industry-specific reviews, uncertain review methodologies, and opaque review procedures. Moreover, Chinese state-owned enterprises and state-owned capital typically receive “special treatment” under this framework. As a result, there are numerous cases in which overseas acquisitions have been put on hold due to CFIUS scrutiny.

CFIUS blocks Chinese consortium’s acquisition of Philips Lighting business.

　　On January 22, 2016, Philips announced that it had terminated its planned sale of lighting components and automotive lighting businesses to a Chinese consortium—including Jinsha River Venture Capital—due to concerns raised by U.S. regulators about the transaction. Philips stated that despite its best efforts to explain the deal, it ultimately failed to secure approval from CFIUS.

　　According to a report by The New York Times, the acquisition was rejected because Lumileds holds technology related to gallium nitride—a semiconductor material. CFIUS’s concerns likely stem from the Chinese-backed consortium’s strong interest in gallium nitride technology. However, Lumileds’ technology is used exclusively in the lighting sector; thus, CFIUS’s assertion that the gallium nitride technology acquired by the Chinese consortium upon its takeover of Lumileds would be linked to microchip applications in the defense industry seems overly alarmist.

　　It’s clear just how broadly CFIUS’s jurisdiction is!

Unisplendour terminates its 24-billion-yuan investment in Western Digital.

　　On February 23, 2016, Unisplendour Corporation (000938) issued an announcement stating that, as the proposed acquisition of Western Digital, a U.S. Nasdaq-listed company, required review by the Committee on Foreign Investment in the United States (CFIUS), and out of prudence, the company’s board of directors decided to terminate this transaction.

　　Originally, it was expected that after the transaction was completed, Tsinghua Unigroup would hold approximately 15% of Western Digital’s equity, becoming its largest shareholder and securing one seat on Western Digital’s board of directors. Although the underlying reasons may be more complex, it is indeed unusual for a major deal that has already been signed to come to an end with just such a brief announcement.

Xian Tong, concerned about failing the CFIUS review, rejected the higher bid from China Resources.

　　 On February 17, 2016, Fairchild Semiconductor issued a statement saying that, after consulting with legal and financial advisors, the company’s board of directors concluded that the takeover offer made by the Chinese consortium consisting of China Resources and Huachuang was not superior to the offer from ON Semiconductor.

　　The Xian Tong Board of Directors believes that if it accepts the offer from China Resources/Hua Chuang, both the company and its shareholders will face the risk that the transaction may fail to pass CFIUS review—so much so that even the $108 million reverse breakup fee would not be sufficient to cover the potential losses.

　　From the cases above, we can see that, CFIUS not only personally rejects potential merger and acquisition deals; moreover, out of concern about CFIUS, many overseas targets even proactively turn down takeover offers from Chinese investors.

     The external environment has undergone sudden and dramatic changes.

　　 As the saying goes, “Unexpected storms may arise in the sky,” and often, changes in the external environment can also cause potential M&A deals to fall through—take, for example, the following cases:

Market volatility forces Yiatong to bid farewell to its “Global 500” ranking.

　　 In August 2015, Yiatong (002183) issued an announcement stating that it was planning to acquire a listed company based overseas. The target company is a Fortune Global 500 enterprise and the deal represents a “major, unprecedented case.” At the time, Yiatong indicated that due to the large scale, broad scope, and complex procedures involved in the acquisition, as well as the substantial transaction amount, the company still needed to communicate and discuss the transaction plan with all relevant parties.

　　On October 20, 2015, Yiatong announced that during the trading suspension, the company had been in contact with several banks and overseas financial advisors regarding the merger and acquisition matters, and had preliminarily finalized arrangements for the acquisition financing and the overall M&A plan.

　　On February 19, 2016, Yiatong announced that, due to factors including significant market volatility, it had decided to terminate the overseas merger and acquisition deal involving a Fortune Global 500 company.

　　From now on, the overseas M&A deal that has been in the works for nearly half a year is finally over.

The plunge in oil prices has prompted Jin Ye Jewelry to halt its cross-industry acquisition of a U.S. oilfield.

　　 On December 15, 2014, Jinye Jewelry (000587) issued an announcement stating its decision to terminate the previously proposed private placement acquisition of the U.S. oilfield development company. The company explained that the sharp drop in international oil prices had made it impossible for the target company to meet the performance-based covenants.

　　Jinye Jewelry stated that when the company was planning to acquire oil assets, international oil prices had been consistently stable at around US$110 per barrel. However, recently, international oil prices have plummeted to about US$60 per barrel—a drop of more than 40%—and have yet to stabilize. As a result, the assessed value of the assets the company intends to acquire has undergone a significant change.

　　Crossing over from jewelry sales to oilfield acquisition doesn't seem as easy as one might imagine.

The political environment has led Shenghe Resources to terminate its acquisition of the Vietnamese company.

　　 On June 18, 2014, Shenghe Resources (600392) issued an announcement stating that the China-Vietnam South China Sea dispute has introduced uncertainties into Chinese enterprises' investments in Vietnam. Its subsidiary, Leshan Shenghe Rare Earth Co., Ltd., decided to terminate its acquisition of a 40% stake in Vietnam He Youxin New Materials Investment Co., Ltd.

　　During that period, Vietnam experienced incidents of vandalism against Chinese-funded enterprises, and the South China Sea dispute between China and Vietnam intensified, sparking concerns among businesses about investing in Vietnam. With Shenghe Resources now terminating its acquisition plan, the company has temporarily slowed down the pace of its external M&A expansion.

　　 In the process of overseas mergers and acquisitions, companies should also make “compulsory study” of thoroughly assessing political and other risks in the target country.

     Part ways due to disagreements over the subject matter.

　　Even when the external environment is calm and stable, numerous disagreements that arise in the later stages of negotiations with the target entity often lead to the acquisition being abruptly halted.

A major disagreement over transaction timing leads to the termination of the merger and acquisition.

　　On November 2, 2015, Changliang Technology (300348) issued an announcement stating that the proposed acquisition of a Singapore-based company had been terminated.

　　Due to significant disagreements between the two parties regarding the timing of transaction completion, the company found it extremely difficult to complete all necessary tasks within the timeframe proposed by the counterparty. After multiple rounds of communication, the two sides ultimately failed to reach a consensus. To avoid exposing the company to uncertain risks as a result, the company has decided to terminate this major matter.

Meiling terminates acquisition of European home appliance company due to disagreements.

　　On July 15, 2014, Meiling Electric (000521) issued an announcement stating that, due to “significant disagreements remaining” with Indesit regarding the acquisition plan, the conditions for implementing the acquisition had not yet been met. Consequently, the company terminated its previously planned acquisition of a portion of the equity in Indesit Company S.p.A held by Fineldo S.p.A, the controlling shareholder of Indesit Company S.p.A.

The target party does not accept the privatization plan.

　　On March 27, 2014, Boyan Technology (002649) issued an announcement stating that the company had terminated its previously disclosed acquisition of Collet Information Systems Co., Ltd. Earlier, on March 21, the company had announced its intention to acquire U.S.-based TPG Company for RMB 140 million in a wholly-owned transaction, aiming to facilitate adjustments to the company’s business portfolio and support its strategic transformation and upgrade.

　　The announcement indicates that, given that Collette Information Systems Co., Ltd. has not accepted the company’s proposed privatization plan, the company believes that the current situation has essentially ruled out the possibility of participating in Collette’s privatization. Therefore, the company has decided to terminate this acquisition deal.

     Bidding failure

　　Compared to the aforementioned failed overseas M&As, unsuccessful bidding battles are even more common.

　　 Hainan Airlines’ bid to acquire London’s airport was unsuccessful.

　　On February 26, 2016, the bidding process for London City Airport in the United Kingdom was finally concluded. A consortium comprising AIMCo Group, the Ontario Teachers’ Pension Plan, and the Kuwait Investment Authority won the acquisition for nearly £2 billion (approximately US$2.8 billion).

　　This means that China’s HNA Group has lost out in this bidding competition. Earlier reports had indicated that HNA Group was collaborating with Britain’s Barclays Bank in its bid for London City Airport in the UK.

Low bid leads to State Grid’s failure to win the Australian project tender.

　　On November 25, 2015, the results of the grid tender project in New South Wales, Australia, were announced. State Grid Corporation of China failed to win the bid. The ultimate winner was a bidding consortium formed by a New South Wales-based Australian consortium, which also included companies from Canada and the Middle East. The winning bid amount was A$10.258 billion, equivalent to approximately RMB 47.3 billion.

　　According to reports, the main reason for the State Grid's unsuccessful bid this time was that its offer was lower than that of its competitors.

Huadong Medicine Terminates Acquisition of U.S. Pharmaceutical Company

　　On August 29, 2015, East China Pharmaceutical submitted a bid to acquire equity in Kramer’s Pharmaceutical Company to UCB S.A., the controlling shareholder of Kramer’s Pharmaceutical Company, a Belgian pharmaceutical company.

　　On September 7, 2015, East China Pharmaceutical issued an announcement stating that the company had received formal notification from UCB S.A., a Belgian pharmaceutical company, that its board of directors had approved the transfer of equity in Kramer City Pharmaceuticals Inc. in the United States to Lannett Company, a U.S. pharmaceutical firm, and that a final agreement had been reached with the other party and publicly announced.

　　This means that Huadong Medicine’s attempt to bid for shares in Kremer’s Pharmaceutical Company has failed, and the acquisition has been terminated.