Podcast: Chinese Regulatory Landscape Affecting Tech Deals Across the Globe

Tech Deals: Chinese regulatory landscape

In this week’s episode, we look at the Chinese regulatory landscape in relation to tech deals. Joining host Julie-Anna Needham is Ed Vinales, public markets editor for Asia, and Lisha Zhou, managing editor for Dealreporter and Parr. Dealcast is presented by Mergermarket and SS&C Intralinks.

In this episode, you'll hear about:

  • How U.S.-listed China-based ride-hailing company Didi Chuxing lost 30 percent or so wiped off its market value due to a regulatory crackdown orchestrated by Beijing.
  • Why Chinese regulators are setting up a new data security review of all the Chinese companies that want to list overseas.
  • A Chinese private equity firms' attempted acquisition of a U.S.-listed but Korea-based chip company.

JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie-Anna Needham. In this week's episode, we're looking at the Chinese regulatory landscape in relation to tech deals. I'm joined by Ed Vinales, public markets editor for Asia, and by Lisha Zhou, managing editor for China for Dealreporter and Parr.

Hi Ed. Hi Lisha. thanks for joining me today.

ED VINALES: Hello.

LISHA ZHOU: Hello.

JULIE-ANNA NEEDHAM: So starting off, let's look at China's Didi Chuxing, the ride-hailing company which is listed in the U.S. It saw 30 percent or so wiped off its market value due to what the global media's calling a regulatory crackdown orchestrated by Beijing. Can you explain what's happening and what's going on with this?

LISHA ZHOU: Yeah. Just two days after Didi Chuxing was listed in the U.S., this cyberspace administration of China launched a cybersecurity review into the taxi hailing company. And two days later, CAC also launched scrutiny into other three companies called Yunmanman, Huochebang, and Boss Zhipin-- all the three companies are all listed in the US recently. And several days later, the CAC issued a draft to revision of the cybersecurity review measures in which it proposed a revision that all the Chinese companies, that possessed the personal data of the one million users in China, will have to apply for a review by the CAC before it's listed overseas.

So it seems currently, the Chinese regulators are setting up a new data security review of all the Chinese companies that want to list overseas. This is because the Chinese government is worrying about the Chinese companies, while listing in the U.S., the can leaked data, important data and Chinese personal data, to the US authorities. This will increase data security risks to China.

JULIE-ANNA NEEDHAM: And so what are the implications for future Chinese companies that want to list in the US and access US capital markets?

LISHA ZHOU: This will definitely slow down Chinese companies listed in the U.S. and also currently, the agency has not clarified what the outcome of the review before the overseas listing. So we just need to continue to observe what the outcome of Didi Chuxing's cybersecurity review will be and we will see how it will influence Chinese companies' U.S. listing. Because now it sounds like CAC will be a regulator that reviews all the Chinese internet companies listed in the US or overseas market.

JULIE-ANNA NEEDHAM: Will that deter some of those companies from listing in the U.S. do you think or is it a bit too early to say?

ED VINALES: I think it will definitely deter investors' appetite for some of these listings and I think also for some of the banks handling these IPOs, they've got a little bit of egg on their face, right? Because of this regulatory, if you read the news, there is some suspicion that Didi Chuxing was sort of warned that there was some regulatory concerns on the China side but pushed ahead with the IPO anyway.

When you're talking about USD 30 or USD 40 billion being wiped off its market value following a listing, definitely there's a lot of investor sentiment, a lot of risk-off in terms of sort of Chinese exposed IPOs and mergers, and all sorts of stuff there that are deemed. And in a lot of these situations, I think it's fair to say, and Lisha will be able to answer, that they are wrapped up in the wider sort of U.S.-China tech war and decoupling if you like, which we could talk more about.

JULIE-ANNA NEEDHAM: Maybe linking into that and moving on slightly, China's antitrust regulator, SAMR, is taking its time in approving a host of U.S. semiconductor mergers. What's that about? Is that related to China's crackdown on its domestic tech champions or is it related to something else?

LISHA ZHOU: I think this is related to the whole macroeconomic environment and also the geopolitical environment change recently. Because it sounds like the U.S. and China, tensions has been escalated in the past few months that China has realized that the competition between the U.S. and China are, in fact, inevitable. So China now is emphasizing the independence in the technology to deal with the decoupling in technology of the two countries. And to build up its independence, China is encouraging innovation in the basic science and infrastructure technology side.

And all this has looked like it's not the tensions between the two countries, are not only the tensions or the competition, you can describe like a battle. It's like a battle so in this kind of scenario, the security of data and security of supply chain will be the priority for the Chinese government to think about. And this is will also influence the tech deal reviews because the competition in the tech sector is a key of the gameplay of the U.S. and China. So in the tech sector, all the deals involving U.S. companies will be carefully reviewed and are all subjected to the state council's decision.

Because all these deals will change the landscape of the tech sector and currently, it's overseen by a Chinese vice premier, Liu He, who is leading the tech and scientific innovation issues in China and also who is the chief negotiator of the Sino-US trade talks. And his dual role ensures that the tech sector review, or landscape change, is well involving the US and China strategies. That's why all these deals involving U.S. companies will be high profile enough to cause Chinese top decision levels the attention.

ED VINALES: I was going to say, Lisha, that a lot of the spreads on these U.S. chip mergers deals, which is we're talking tens of billions of dollars worth of mergers. Companies-- Maxim Integrated Products, Korea and a lot of high tech companies chip mergers, there's about five or six currently going through. A lot of the spreads widened dramatically around the time of the Didi Chuxing situation in the last few weeks, but they had been widening a little bit for the past month or so.

And as Lisha was mentioning, there is reason to believe that these deals are all going to see increased political scrutiny, or scrutiny from the minister. And the big point there I think that Lisha was making as well as that Liu He, the senior vice premier, is now in charge of the semiconductor efforts in China as well as being the economic negotiator between the U.S. and China. That's quite telling.

JULIE-ANNA NEEDHAM: And looking at one particular semiconductor deal, there have been some interesting developments relating to the Chinese private equity firms' attempted acquisition of a U.S.-listed but Korea-based chip company. Can you explain a bit more about that and how that fits into the picture?

ED VINALES: I could jump in here a little bit quickly. It's Magnachip is a Korean company so it's yes, it's U.S.-listed but Korea-based. It has very little exposure to the U.S. beyond its listing. We actually can't find any exposure there. So when that deal was announced, it was Chinese private equity firm, Wise Road, which has emerged on the scene in the last few years and done some notable investments in the semiconductor space, in the high tech space, and when that deal was announced the deal party said this will not require U.S. or Korean approval. And what they were referring to was CFIUS in the US, the National security watchdog in the U.S., and Korea's government.

However, in the deal agreement, the deal actually had some very telling conditions structured around reverse break fee and all that which suggested that the deal parties did actually have some concern that the U.S. government and the Korean governments might look at it, and they have looked at it. So what you've got is over the last few years, you've got Chinese companies looking around the world, particularly in the U.S., for chip assets. They've been blocked in the U.S., they are still managing to do I think a few in Europe, again increasing scrutiny. Now they're looking to acquire a Korean company that has a U.S. listing but no assets in the U.S.

And yet, the US government is sticking its nose in and has enforced a CFIUS review of that deal. Which I think has raised eyebrows in China and sort of goes back to this battle description that Lisha was talking about between the U.S. and China over the development of their semiconductor industries and whatnot. So basically that Magnachip deal is it's kind of wrapped up in this whole theme of U.S. versus China tech development and whatnot. And that deal is trading with widespread shares are trading around 23, the offer is about USD 30 per share, so it's trading with a significant discount as people fear that the U.S. might even convince Korea to stop that deal happening.

But we're following, that's an ongoing situation, and it'll be interesting to see how that plays out. So it's another one to watch as a temperature check on the whole U.S.-China relationship. And another interesting point about that we feel is something worth watching is that there is a deal that Korea's SK Hynix is doing for Intel's NAND Memory Business, a big USD 9 billion deal, and that requires Chinese approval. So could it be used as leverage? Could that approval will be used as leverage? Possibly, we're not sure at the moment, but it's definitely something that people will be some concerned about.

LISHA ZHOU: To China's side, I heard from some senior sources as to the Chinese government that sounds like where China wants to do, the U.S. will say no. So even a small deal like Magnachip is covered by CFIUS and so equivalently, China would also slow down approving the U.S.-driven deals to get more time to China's chip industry to develop. So it is beneficial to China to slowly clear these deals and to slow down the consolidation in the tech sector, not only the U.S., but the global consolidation in this sector. That's why it is said that China is going to tighten the scrutiny on the tech deals, especially involving U.S. companies. And the tightening means a lengthier review process and maybe more conditions, or even cannot rule out the possibility of blocking some deals.

JULIE-ANNA NEEDHAM: So we've covered quite a lot of ground there with lots of different strands. Can you just sum up how the merger review is being used by China and by the U.S. to facilitate its political aims? Because it feels like it's becoming increasingly hostile between the two countries.

LISHA ZHOU: China's side thinks that the U.S. has already used all kinds of measures to try to stop Chinese companies to access U.S. technologies and now it seems China will also do the same in the sector.

ED VINALES: CFIUS is being used as a tool to help America maintain its technological advantage over China. And China, I think what we're saying, is that China will not hesitate to use its regulatory machinery to combat what they're perceiving maybe as a U.S. monolithic attempt to consolidate its tech industry. I'm not sure that's quite right because I think these companies are merging commercial interests. But where the US companies are merging, the Chinese companies that are trying to catch up in this sector are exposed because of their suppliers and competitors and whatnot. So while the U.S. consolidates, it's not good for the Chinese, for their Chinese peers, and for the Chinese semiconductor industry which is trying to catch up. So they will try and slow down. Potentially, the fear is that the Chinese are using their regulatory powers to slow down America's consolidation of this chip industry essentially.

LISHA ZHOU: While China is building its independence in the technology sector, China in reviewing the deals, two things were also on the priority to consider. One is data security and the other is supply chain security, and where the center of the supply chain security is the first priority for China to take in consideration in its review process.

JULIE-ANNA NEEDHAM: Great. So lots of interesting things to keep an eye on there. Ed and Lisha, thanks very much.

LISHA ZHOU: Thank you.

ED VINALES: Thank you.

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JULIE-ANNA NEEDHAM: That was Lisha Zhou and Ed Vinales. Thank you for listening to this week's episode of Dealcast presented by Mergermarket and SS&C Intralinks. Please rate, review, and follow the podcast. You can find us on Apple Podcasts, Spotify, or look out for your Mergermarket news alert. For more information, check out our show notes. Join us next week for another episode.

26 July 2021