2012.02.29 China Business News Views:
This week, 365house.com (300295), which was invested by CoStone Capital five years ago, will soon be open for subscription on the ChiNext. However, CoStone Capital Chairman Zhang Wei said in an exclusive interview with China Business News this Tuesday that the high returns from IPO exits were unsustainable. In contrast, he believes that exits through the merger and acquisition market will be more attractive with the adjustment of the valuation system of the capital market.
Zhang Wei: The Promising M&A Market Brings More Opportunities
This week, 365house.com (300295), which was invested by CoStone Capital five years ago, will soon be open for subscription on the ChiNext. However, CoStone Capital Chairman Zhang Wei said in an exclusive interview with China Business News this Tuesday that the high returns from IPO exits were unsustainable. In contrast, he believes that exits through the merger and acquisition market will be more attractive with the adjustment of the valuation system of the capital market.
“In the beginning, institutions generally have a more accurate knowledge about the market due to their limited funds. The yield of IPO exits is 2 to 3 times that of backdoor listings and mergers and acquisitions, and the huge interest rate difference have made IPO exits become the main method for PE firms to exit. As for the recent situations and future trends, Zhang Wei said that “The capital market will not continue to tolerate mediocre companies easily getting too high IPO prices. In this case, the price difference between the capital market and the merger and acquisition market will be smaller. Therefore, the M&A market will become increasingly attractive for PE exits.”
In the United States where the PE/VC industry is highly developed, while the number of IPO exits accounts for only about 10% of all exits, the number of exits through mergers and acquisitions accounts for nearly half. Zhang Wei believes that in China’s PE industry, mergers and acquisitions and shareholders’ repurchases will soon replace IPOs and become the most popular and important investment methods.
“From another perspective, both good companies and slightly immature and mediocre young companies can get capital due to the abundance of capital in China. However, this does not mean that every invested company can successfully complete the IPO on schedule. There has appeared the trend that mergers and acquisitions or major shareholder repurchases will become another important channel for PE/VC exits.” Zhang Wei pointed out that a quarter of exits in the United States were involved in disputes about transfer of interests due to the existence of inter-institutional projects.”
In addition, from the perspective of looking for investment projects, Zhang Wei argues that acquisitions and mergers also provide a lot of opportunities for PE/VC.
“Most industries in China are highly fragmented, and each industry will go through a process from fragmentation, accumulation to mergers and acquisitions to form a large-scale.”
Zhang Wei notices that the Chinese economy has transformed from the old growth model of sharing export growth and demographic dividend and entered a stage of steady or slowing growth. Therefore, many uncompetitive companies that have occupied the market earlier are facing the needs of mergers and acquisitions for further development. Meanwhile, the shareholding structure of many listed companies has begun to change, with the largest shareholder’s shares decreasing, which results in dispersed ownership. Moreover, during the intergenerational inheritance of family enterprises, when the second-generation owners cannot cope with the diversified operations created by the first-generation entrepreneurs, there will be a need for merges and reorganizations.
Zhang Wei said, “we believe that there is a great opportunity in the field of mergers and acquisitions because of these changes in China’s economic activities.”
Rewritten by: Yang Yang, Edited by: Du Zhixin, Li Yunzhen
The year 2019 marks the fortieth anniversary of China’s Reform &Opening-Up, once again, we meet at the turning point of history. What’s the next step for the game, is there any clear guidance? The answer is affirmative.
Our country is enjoying a good momentum of development, which does not come from the Washington Consensus nor the Beijing Consensus. China’s experience has proved that both the visible hand and the invisible hand are crucial: the visible hand, stands for the government-led reform, and would yield benefits for reform and opening up; the invisible hand, stands for the Marginal Power represented by the private sector, and would improve economic efficiency and tax collection, create jobs and employment opportunities.
Provided that we want to protect and expand the benefits form reform, three simple but mandatory agreements are to be made and followed: No.1 Private ownership must be recognized, protected and treated equally with public ownership constitutionally, both ownerships are scared and inviolable;No.2 Make further clarification of the principal position of market economy, “deepen economic system reform by centering on the decisive role of the market in allocating resources”, as President Xi addressed in the third Plenary Session of the 18th CPC Central Committee;No.3 Implement the guiding principles of “comprehensively promoting law-based governance” of the fourth plenum. The rule of law is essential for economic growth, irreplaceable to protect private ownership, and necessary to encourage innovation and entrepreneurship.
Above are three rules for us to avoid falling into the Middle-income Trap. Assuming that we are breaking systematic barriers to private enterprises’ participation in market economy, and boosting innovation and entrepreneurship of our society, then we are heading towards a promoting direction. We are marching in the path of light, regardless of the ups and downs of Sino-US relationship, the drop in GDP growth rate, or the monetary policy.
These principals also apply on knowing how better to run a business: don’t be hedged by rules and regulations at the beginning, pay more attention to your survival, and you’ll learn more when you start your second business.
For many years, Huawei has been the only Chinese company on the list of the Top 50 R&D Spenders. Regardless of the economy and its income, what Huawei has been doing is investing in its future, dedicated to R&D, continuously and resolutely. This provisional work underscores Huawei’s accomplishments, making Huawei anindustry leader.
So, there are standard answers on how to run a company,which could be summarized as concentration and professional dedication, continuous investment on innovation and trying harder in R&D. Entrepreneurship is also important, every single company needs entrepreneurs to push aside all obstacles and difficulties, to implement strategies and ideas. We, as investors, are destined to look for such outstanding entrepreneurs and their companies, invest in them and partner with them.
At this key point of history, a country, a company, or asingle individual, will all need to find the right path. Four decades after the Reform and Opening-up, it’s time to learn from our experience and stop “wadding across
