Anbang’s failed $14.2 billion bid for Starwood Hotels & Resorts Worldwide isn’t just a setback for the ambitious insurance company – it may well have knocked the credibility of all aspiring Chinese overseas buyers.
The company’s behaviour during its unsolicited pursuit of Starwood underscored impressions that Chinese bidders can be difficult to read and unpredictable. Anbang also played fast-and-loose with people’s expectations for funding documentation.
Management boards at M&A targets have to spend more time and money evaluating bids from privately owned, youthful companies such as Anbang, which was only founded in 2014. To do so, they have to be certain it’s worth the time and effort.
Anbang didn’t do itself any favours in this regard. The insurer waded into ongoing merger discussions between Starwood and Marriott with a higher offer, only to abruptly drop its bid with little explanation besides: “due to various market considerations”.
It marked the second biggest withdrawn offer from China on record, after CNOOC abandoned its attempt to acquire Unocal for $18.5 billion in 2005 due to resistance in the US Congress.
Anbang’s behaviour even during its unsolicited offer had been, to put it kindly, cavalier. The company offered Starwood a written guarantee that it would pay for the company even if the Chinese insurance regulator blocked the deal, a person familiar with the discussions said.
Anbang also offered little detail on its proposed funding package, merely supplying a skimpy outline about which bank would put up the money for its first offer, the person said. This seemed a foolish tactic, given mounting concerns about the levels of leverage some Chinese companies are piling on in order to fund big overseas acquisitions.
Anbang chairman Wu Xiaohui then raised eyebrows with his domineering approach to the M&A discussions with Starwood. While he spoke at length, his coterie of expensively assembled advisers and consortium partners were almost entirely mute, according to the person familiar with the talks. If corporate leaders do not take advice they run the risk of appearing less predictable as counterparties in merger talks.
Anbang clearly tried to soothe concerns about its recent arrival on the world’s M&A stage by bringing in private equity firms J.C. Flowers and Primavera as partners. However the person familiar with the deal said the consortium partners were not vocal in negotiations and likely had a very small equity stake. J.C. Flowers was in on the deal partly due to the fact it had maintained a relationship with Anbang after it sold the Beijing-headquartered firm Belgian insurer Fidea.
To be sure, Anbang’s aggressive bid for Starwood may be an extreme case. But it comes as the stakes rise for Chinese companies, their targets and advisers.
China’s companies were the biggest acquirers and racked up the biggest overseas shopping bill of $92.2 billion on record in the first three months of 2016, according to data provider Dealogic.
Concerns had already existed among the management boards of potential targets that Chinese buyer bids have to overcome layers of red tape at home and political resistance overseas. That makes them riskier to entertain.
Anbang’s misstep is likely to cost future Chinese acquirers. One senior investment banker estimated Chinese bidders would have to pay an extra 10% premium for acquisitions and put down a cash deposit to offset target companies concerns.
A deposit would be more comforting than the promise of a break-up penalty, although these are also becoming very substantial. ChemChina has agreed to pay Syngenta a reverse break-fee of $3 billion if its $43 billion takeover does not receive Chinese regulatory approval.
For Chinese companies seeking to play a bigger role on the world M&A stage, generous offers are just the starting point. Ultimately, the ability to close an offer is key.
Anbang’s failure to do so with such a high profile bid is likely to have ramifications for its fellow Chinese would-be acquirers.