The wobbling wheels on China’s stock market rally had a visible effect on New York-listed Chinese tech stocks, sparking a selling wave on Wall Street after Friday’s plunge of more than 7 percent in Shanghai. US investors in China blue-chips like Baidu (Nasdaq: BIDU) and Alibaba (NYSE: BABA) probably have less to worry about from the Chinasell-off, since these New York-traded shares tend to move more in sync with the US and haven’t rallied to the irrational levels seen by many Chinese stocks.
What can be expected?
But many may be wondering what the China sell-off means for the record 20 companies that announced plans to privatize from New York over the last 3 months. If the sell-off in China continues, I would predict that half or more of the recent buyout deals could collapse, causing share prices to tumble and providing an interesting opportunity for savvy short sellers.
Before we go any deeper with that analysis, let’s quickly review the latest trends that saw the Shanghai composite index plunge 7.4 percent last Friday, its worse decline in nearly 20 years, bringing its losses to nearly 20 percent from a peak in mid-June. We’ll gloss over the fact that a loss of this magnitude would probably signal a major economic downturn in any western country. After all, this is China and swings of this magnitude have become quite common in a rally that has seen the stock markets more than double over the last 12 months.
Shares of 2 of China’s “Big 3” Internet firms that trade in New York fell but by far smaller amounts, with Alibaba (NYSE: BABA) and Baidu (Nasdaq: BIDU) down 2.3 percent and 2 percent, respectively, on the day of the Shanghai bloodbath. But more eyes were probably focused on many of the companies like Qihoo 360 (NYSE QIHU) and E-House (NYSE: EJ), which have received recent management buyout offers.
Vaguely funded buyouts at risk
Many of those buyout offer announcements contained little or no information on who was backing them, hinting that much of the pledged funds were speculative money tied to China’s stock market rally. What’s more, many of the offers included the implicit assumption that privatizing companies would seek re-listings in China, which again would require a market where their shares would be better valued than in New York. That assumption is still true now, though would quickly change if China moves into a true bear market.
The US-listed privatizing companies all saw their shares drop, bringing them all below their buyout offer prices. But within the group, there was quite a bit of variation in the daily drops and the gap between their latest closing and buyout offer prices.
The big companies shrugg off the blood bath, smaller ones are not so lucky
Names like Mindray Medical (NYSE: MR) and E-House (NYSE: EJ) seemed to shrug off the Shanghai bloodbath, both dipping by modest figures of about 1 percent, to end the day below their buyout prices by equally modest amounts of 5 percent and 8 percent, respectively. But smaller names like AirMedia and China Information Technology dropped by more, and are now both trading around 20 percent below their offer prices.
At the end of the day, the quality of the buyer group is the critical element, including its funding sources and also what percentage of the company’s shares the group already controls. The higher quality the funding source and the larger percentage of shares owned by the buyer group, the better the chances are that the privatization will succeed. The size of the buyout is also key, since companies worth billions of dollars are far more complicated to privatize than ones worth just several hundred million.
Anyone wondering how to make a quick buck might do a little research on some of those factors, and also keep a close watch on the Chinese stock markets. Even after the sell-off at the end of last week, the fact is that Chinese stocks still trade at about twice their levels from just a year ago. That means there’s still plenty of room for downside, and further drops could cause backers of even some of the higher quality buyout offers to have second thoughts about going through with their plans.
An exclusive content from Doug Young, Young China Biz