BUYOUTS: US Investors Punish Homebound China Orphans
Bottom line: As many as three-quarters of privatizing US-listed Chinese firms could see their buyout offers revoked, but many of their stocks may be oversold due to excessive investor worries during the latest trading session.
What started as a wave of euphoria by US-listed Chinese firms looking to make some quick money by de-listing from New York and returning home is rapidly turning into chaos, with shares of many of those companies tumbling in the latest trading session. The fall is directly tied to China’s own rapidly crumbling stock markets, which was where most of these US orphans were hoping to re-list to get better valuations than they had in New York.
But now those plans have been thrown into doubt, and at least one analyst is joining my previous prediction that many of the record 27 companies to receive privatization offers this year could ultimately see those offers revoked. That means many of these companies may be forced to remain listed in the US, where they were punished by angry investors in the latest trading session.
In a strange but perhaps appropriate twist, many of the companies from the privatization wave are now actually trading at lower prices than their pre-offer levels. There’s really no reason for such a dip, since US-listed China stocks didn’t really move in sync with the massive rally that saw Chinese stocks more than double over the last year through early June. That China rally has gone into a sharp reverse in the last 3 weeks, with the main Shanghai index now down nearly 30 percent from its peak.
Software security specialist Qihoo 360 (NYSE: QIHU) has been the largest company to announce a de-listing plan so far, and its stock is typical of what’s been happening with the larger group. The company’s American Depositary Shares (ADSs) slid 6 percent in the latest trading session, ending the day at $63.10. That means the stock is now 18 percent below its buyout offer price of $77, and is even below the $66 level where it was trading before Qihoo announced last month that it had received a buyout offer.
Other companies that have received buyout offers were also down anywhere from a modest 3 percent in the latest trading session, to a plunge of 11.5 percent for online real estate services specialist E-House (NYSE: EJ). Amid the sell-off, media cited research house JL Warren Capital saying that many of the buyout deals could be canceled after China announced an IPO suspension over the weekend in a bid to stabilize tanking domestic markets. (English article)
What’s Next?
Now that we’ve covered what’s already happened, the much more intriguing questions are what should we expect next in this twisted tale, and what are the implications for the stocks of these Chinese orphans? As I’ve said above, the latest share sell-off looks somewhat vindictive, like almost a form of punishment by US investors who are angry at all the mixed signals they have received from the markets over the last couple of months.
If that’s the case, some of these shares might be oversold and should at least bounce back to their pre-announcement levels in the next week or two. After all, most of these were never very exciting companies to start with, which is why their shares were languishing in the first place. But many of the shares were relatively stable before the privatization wave, so there’s really no reason they should suffer if the buyouts collapse.
Then there’s the question of how many buyout offers will actually collapse, and whether any will get completed. To answer that question you really need to look at the backers of the deals. Several offers were backed by big western names including IDG and Sequoia Capital, and those could stand a better chance of still getting completed. But announcements that didn’t disclose their financial backers are probably the shakiest, as many were probably supported by speculative money that is rapidly evaporating with China’s stock market correction.
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