Achieving Success in US M&A

Peter Neumann, James Yong Wang and Aref Amanat

Chinese companies have many reasons to look to the US for potential M&A targets and partners, including strategic benefits and continuing low valuations in some sectors due to the US economic downturn. Overall, the US represents one of the most open markets for acquisition of corporate control by foreigners. As compared to China, however, the use of competitive auctions is much more common, and buyers need to be prepared to move quickly. Chinese buyers need to understand key aspects of US law and M&A deal culture, and prepare carefully in advance. A number of potentially complex aspects of US M&A practice are discussed below.

Managing perceptions. Even if there are no legal barriers to completing a US acquisition, negative publicity surrounding fears of foreign buyers can reduce the attractiveness of a potential buyer from overseas. This problem can be particularly acute where long-standing consumer brands or downsizing of US operations is involved. Sellers may also shy away from Chinese or other foreign buyers they perceive as being out of touch with the realities of US deal practice, and therefore more troublesome to deal with or less likely to get the deal closed. Chinese companies can manage these risks by establishing a special purpose vehicle with US co-investors and bringing in seasoned US persons at the board level. This will go far to reduce any anti-foreign bias.

Due diligence & business culture. Where the target is a US public company, buyers typically rely heavily on public disclosure documents. While private targets require more hands-on investigation, to avoid sellers suffering “deal fatigue” and calling off a promising transaction, foreign buyers should be selective about their questions, and learn as much as they can in advance about the US industry.

Committee on Foreign Investment in the United States (CFIUS). Despite concerns over US protectionism, CFIUS has a clearly defined mission to protect US national security interests, defined narrowly. Chinese buyers can manage CFIUS by identifying the sensitive operations of a target, initiating informal discussions with CFIUS in advance, arranging for pre-closing divestiture of any assets that raise US security concerns, and arranging for a restricted role of the foreign buyers in the management of sensitive US operations. Although CFIUS filings are voluntary, state-owned Chinese enterprises (SOEs) should assume their US deals will be reviewed and make a filing in any event. Non-SOEs should also consider filing preemptively.

Labour and workplace issues. Much of the value of a US company may reside in its people: the quality of management, technical and creative teams. At the same time it may be necessary to downsize and cut costs after an acquisition has been completed. Chinese buyers should be aware that US labour laws are typically more strictly enforced than in China, particularly with respect to occupational safety and workplace conditions. Unions have clear legal powers. Pension and severance-related obligations may pose a heavy burden.

Certain regulatory bars. Although the US imposes far fewer restrictions on foreign investors than China, certain key industries such as domestic shipping, broadcasting, and power generation and transmission remain restricted or prohibited.

Antitrust. Generally speaking, US M&A deals involving consideration of $63.4 million or more require Hart-Scott Rodino filings. It may be possible to negotiate in advance divestiture of certain parts of a business to allay concerns of regulators, particularly if an acquisition would serve to consolidate an industry with only a few main players. Also, antitrust authorities require that, until closing, a buyer and target compete as separate and independent entities. Excessive pre-closing information sharing, coordination or transfer of control can trigger scrutiny for “gun-jumping”.

Distressed or bankrupt targets. There can be exceptional value in distressed assets. Given the level of debt syndication and securitization in the US economy, however, creditors and other stakeholders are now much more varied than traditional bank lenders. Foreign purchasers should thoroughly understand relevant legal procedures and how sophisticated creditors (such as hedge funds investing in distressed debt) and other stakeholders will assert their rights.

Shareholder litigation. In most acquisitions involving US public companies, there will inevitably be shareholder litigation challenging the deal process or valuation. The claims are often driven by an aggressive culture of plaintiff-side lawyers seeking a settlement rather than actual problems with the deal. Foreign buyers should be prepared for this routine litigation and ensure that, during the deal process, appropriate precautionary measures are followed.

Financing options. As a general matter, foreign buyers are unrestricted by US law or practice from borrowing money from US banks to fund a US acquisition, and may use assets of the target as collateral. A Chinese buyer (listed in China or overseas) may also consider using its own shares, made available to US shareholders by way of American depositary receipts, as a form of acquisition “currency”.

Securities law. In the case of publicly listed targets, a publicly listed Chinese buyer’s disclosure requirements may be inconsistent with those of the US company. To get the deal done, it may be necessary for one party or another to negotiate waivers from the stock market regulators where they are listed. Where the target will remain publicly listed post-closing, Chinese buyers should be aware that the US likely represents a much more stringent disclosure and compliance environment than found in China.

Tax. Chinese buyers should consider choosing a jurisdiction for the acquisition vehicle with favourable tax rates for US-sourced dividends. Other issues with significant US tax implications include the proportion of debt and equity used in financing the acquisition, and US interest deductions on acquisition indebtedness. In the case of tax-free transactions, the parties should pay close attention to special tax rules applicable to acquisitions by foreign buyers.

Chinese companies in non-resource industries, on the whole, are at an early stage in their globalization. With adequate preparation and seasoned legal, financial and business advisers, they can position themselves well to execute an effective US M&A strategy. This will greatly enhance and accelerate the development of true China-based multinational companies.

Peter Neumann is the managing shareholder, and James Yong Wang is a shareholder, in the Shanghai office of Greenberg Traurig. Aref Amanat is an experienced adviser in cross-border M&A. Now living in China, he previously worked as an attorney at Wachtell Lipton Rosen & Katz in New York