Industrial integration, market value management, and large buyers of state-owned assets play a combination of mergers and acquisitions

In the past year, many state-owned institutions have "carried" large sums of money in the market to find the "prey" of acquisition. Judging from the M&A data of A-share listed companies, in recent years, local state-owned institutions have become big buyers in the M&A of listed companies. Behind this, state-owned assets not only have the goal of optimizing the economic layout and structural adjustment through mergers and acquisitions, but also have the demand for quickly merging into the revenue statements of high-performing leading enterprises to jump in the scale of assets.

A reporter from the China Securities Journal found that in the past two years, the combined transaction of "agreement transfer + waiver of voting rights" has quietly become popular among the acquisition of state-owned assets. Under this model, state-owned assets can not only become the actual controller of the listed company at a lower cost, but also solve the problem of "professional managers" in mergers and acquisitions, so that the original management can still enjoy most of the company's benefits after the merger and acquisition. In addition, as the major shareholders who have lost the "actual controller" label have fewer constraints on reducing their holdings, their liquidity has become stronger.

Economic layout optimization + structural adjustment

"A state-owned asset in Shandong Province has a scale of 3 billion to 5 billion yuan of M&A demand this year, and the direction of M&A is in the field of advanced manufacturing and medical health, giving priority to the pan-semiconductor industry chain. At the same time, priority is given to listed companies and companies with a net profit of 100 million to 200 million yuan. This is a recent China Securities Journal reporter received a message about the demand for state-owned assets acquisition. Since the beginning of this year, there have been many mergers and acquisitions similar to state-owned assets acting as buyers in the primary market.

Zhang Chen (pseudonym), who participated in the acquisition of the state-owned assets, told a reporter from the China Securities Journal: "They prefer a controlling merger and acquisition, because the pressure of capital investment is relatively large, so there are no conditions such as the relocation of enterprises." He said that in addition to industrial development, the main purpose of the state-owned assets large-scale merger and acquisition is to realize the expansion of the revenue scale of the entire state-owned assets platform through the acquisition of leading enterprises on the track to consolidate the statements.

"A provincial state-owned assets group, seven years ago, the total assets of 70 billion to 80 billion yuan, now more than 800 billion yuan, why can the scale grow rapidly? It depends on mergers and acquisitions. Another domestic M&A veteran said.

Wang Yunfan, CEO of Morning Whistle Group, said that the main purpose of state-owned assets participating in mergers and acquisitions is to achieve economic layout optimization and structural adjustment. State-owned assets affect the economic pattern of different regions to a large extent, and the acquisition of high-quality assets in line with the current economic development trend not only increases its own layout of strategic emerging industries or new productivity industries, but also drives the direction of industrial development in the region and forms a regional industrial strategic layout.

Zhang Chen said that the holding acquisition is the most desirable operation of local state-owned assets, and the revenue of the acquired enterprise can be incorporated into the state-owned assets statement after the controlling acquisition, but if the state-owned assets only become the second shareholder, the profits of the enterprise can only be incorporated into the statement.

The China Securities Journal reporter learned that for the locality, the most direct role of the rapid acquisition of industry leaders through local state-owned assets is reflected in the province's GDP ranking that year.

At the recent "11th Global Investment and M&A Summit", state-owned assets M&A has become a hot topic. Wang Yunfan said that at present, the mainstream mode of mergers and acquisitions in China is mergers and acquisitions of listed companies, and industrial integration and market value management are the main logic of mergers and acquisitions of listed companies.

In the M&A of listed companies, state-owned assets have become large buyers. According to the data, in 2023, there will be at least 31 transactions in which local state-owned assets acquired the control of listed companies and completed the delivery, accounting for nearly one-third of the number of listed companies that implemented the change of controlling stake in the whole year. Among them, the disclosed transaction value exceeded 35.1 billion yuan, and the average transaction value exceeded 1.1 billion yuan.

"If you can acquire a listed company, it will be more beneficial to the local assessment, and the local government will need to do much less explanation work when carrying out mergers and acquisitions than unlisted companies." Zhang Chen said.

In addition to the jump in asset scale, there are many factors that drive the participation of state-owned assets in mergers and acquisitions.

Wang Yunfan said that first of all, mergers and acquisitions can empower industries or enterprises through state-owned assets. In the public utilities sector, for example, after the acquisition of state-owned assets, the target enterprise can break through such restrictions and improve profitability as "within the system". Second, mergers and acquisitions of leading companies that are conducive to the development of local industries. Over the years, local governments have paid more and more attention to the binding of industries, such as the Internet industry that Hangzhou vigorously developed in the early years, and the new energy industry layout in Hefei later. These enterprises have a strong agglomeration effect, which can fully drive mature enterprises and start-ups in the upstream and downstream of the industrial chain to develop locally.

In addition, the recent release of the new "National Nine Articles" proposes to strengthen the supervision of mergers and acquisitions, strengthen the relevance of the main business, and strictly control the quality of injected assets. "As an important source of funds for the domestic capital market, state-owned assets will pay more attention to policy-supported industrial mergers and acquisitions to guide the economy to develop in a sustainable and healthy direction." Wang Yunfan said.

"In our cooperation with state-owned assets, we found that in the next 3-4 months, state-owned assets will play a more significant role in mergers and acquisitions." Su Bin, director and vice president of Infore Group and chairman of Infore Investment, said.

As a representative of the state-owned assets fund, Xiang Ming, deputy general manager of Chengtong Fund, the manager of China's state-owned enterprise structural adjustment fund, revealed that in recent years, the fund has made a lot of investment and layout in semiconductors, integrated circuits, biomedicine, health, IT, advanced manufacturing and other industries.

"Transfer by Agreement + Waiver of Voting Rights"

A reporter from the China Securities Journal learned in the investigation that in the past two years, the combined transaction of "agreement transfer + waiver of voting rights" has quietly become popular among the acquisition of state-owned assets. It solves the financial difficulties of state-owned assets in mergers and acquisitions in the past and the operational difficulties after mergers and acquisitions.

Yu Tiecheng, president of Guanghui M&A Research Institute and chairman of Guanghui Investment, introduced that the so-called "combined" acquisition refers to the fact that the controlling shareholder of a listed company does not give up the identity of the largest shareholder but gives up its voting rights, and the state-owned assets acquire a certain amount of shares at a lower cost, obtain control of the listed company, and become the actual controller.

After combing, it is found that since 2023, many mergers and acquisitions of listed companies have adopted a combined transaction method of "agreement transfer + waiver of voting rights", and behind some transactions, state-owned assets finally obtained control of the enterprise.

For example, on February 4, 2023, after signing the share transfer agreement with Zibo SDIC, the original controlling shareholder, actual controller and shareholder of Huijin Technology signed the "Letter of Commitment on Irrevocable Waiver of Voting Rights", promising to irrevocably waive the voting rights corresponding to all the remaining shares of the company held by them from the date of transfer of the subject shares of the first share transfer to the name of Zibo SDIC, with a total share of 40.41%.

After the completion of the acquisition, Zibo Guotou obtained 20% of the equity of Huijin Technology, plus the shares issued by the private placement, Zibo Guotou finally held a total of 29.90% of the shares, since the date of the transfer of the target shares of the first share transfer to the name of Zibo Guotou, the controlling shareholder of Huijin Technology was changed to Zibo Guotou, and the actual controller of the company was changed to the Management Committee of Zibo High-tech Industrial Development Zone.

On September 12, 2023, Pulutong also completed the transfer of control of the company through a combined transaction of "transfer by agreement + waiver of voting rights". After the change of rights and interests and the waiver of voting rights, the controlling shareholder of Pulutong became a green investment, and the actual controller is the State-owned Assets Supervision and Administration Bureau of Huadu District, Guangzhou. In this way, Green Investment has become the controlling shareholder of a listed company by acquiring only 5% of the shares of Pulutong.

Yu Tiecheng said that on the one hand, state-owned assets can control a listed company at the minimum cost; On the other hand, it solves the problem of motivation for professional managers. In the past, although state-owned assets had the financial strength to acquire, they often lacked experience in operating listed companies after the acquisition, and the original management lost its status as a major shareholder and could not obtain most of the profits from the operation of the enterprise, and the operation and management motivation was insufficient, resulting in the performance of the listed company after it was acquired.

"For the major shareholders of listed companies, this model of trading is 'fame and fortune', and they often give up their false names after weighing them." Wang Yunfan said that state-owned assets become the actual controller of listed companies, and they can also bring more state-owned resources such as funds, orders, channels, etc., to further make listed companies bigger and stronger, which is conducive to the growth of market value. As major shareholders who have lost their "actual controller" label have fewer constraints on reducing their holdings, their liquidity has become stronger.

There are still difficulties in the merger and acquisition of state-owned assets

Even as a large buyer with strong financial strength, there are still many difficulties in M&A transactions involving state-owned assets.

"If I'm a sell-side advisor to a listed company, there's an important premise that if the listed company's share price rises 20% two weeks after the merger and acquisition begins, the deal is closed. If you don't keep it secret, you can't do a good job in mergers and acquisitions. Yu Tiecheng said.

In his view, first of all, the collective decision-making mechanism of state-owned enterprises makes it difficult to keep sensitive information about mergers and acquisitions confidential. In state-owned enterprises, the M&A project goes through the decision-making process in the investment department, finance department, legal department, general manager's office meeting, party committee pre-meeting, board of directors, etc., and the project situation often cannot be kept confidential.

Second, there is an invisible "premium ceiling" for state-owned enterprises to acquire listed companies. Generally, the average price of the listed company in the past 20 trading days will be referenced, and the purchase price shall not be at a premium of more than 20%, and the maximum shall not exceed 30%. Under this logic, in order to sell at a good price, it is not easy for companies to promote holding M&A transactions during the downturn in stock prices, so when the secondary market begins to rise in the future, it will be the time for holding M&A transactions to pick up.

Finally, if a state-owned enterprise acquires a market-competitive enterprise, the incentive mechanism of the state-owned enterprise is a major drawback, such as controlling the company's profit growth year by year, but in reality, the company's net profit may reach a very high level in a year. In addition, there is a certain risk of explosion in the acquisition of listed companies by state-owned enterprises, and if state-owned enterprises enter an industry through mergers and acquisitions, it is precisely when the industry is going downhill, and it is difficult for state-owned enterprises to save market-competitive enterprises.

At the same time, based on the sporadic and small probability of M&A transactions, state-owned assets M&A is also facing a more stringent macro environment under the situation of stricter supervision.

Luan Hongfei, executive general manager of the M&A Department of Huatai United Securities Investment Bank, said that stricter supervision has made it more difficult to restructure. Strict supervision has been normalized, cross-industry acquisitions have been strictly controlled, and the "three highs" - high commitment, high valuation and high goodwill type restructuring have received great attention from regulators. At the same time, the regulatory review standards for the quality of M&A and restructuring assets are similar to those for IPOs, and the exchange's non-audit major cash asset restructurings are gradually becoming substantive reviews in daily supervision.

"Around 2017, there was a period of mergers and acquisitions in A-shares, when most of the restructuring was based on rising market capitalization and stock price increases, but some cases ended in thunderous performance and poor management." Luan Hongfei believes that a truly successful M&A is a reorganization based on industrial logic, and in the same industrial chain, high-quality assets are scarce, so it is determined that high-frequency large-scale M&A and reorganization are less likely.

From a policy point of view, the industry remains cautiously optimistic about the state-owned M&A market. "The M&A market will continue to be active, and when the next economic cycle arrives, it is possible that the 2.0 era with industrial M&A as the main theme will come." Luan Hongfei said.

He believes that, first of all, the new "National Nine Articles" will raise the IPO listing threshold and force the primary market investment valuation and pricing system to return to a relatively reasonable range, which will gradually converge with the M&A and restructuring market; Secondly, the new "National Nine Articles" clearly encourage the integration of A-share listed companies, and some leading listed companies with small market capitalization may become merger and acquisition targets better than other unlisted companies; In addition, the requirements of relevant departments for the market value management and capitalization of SOEs have also made SOEs more motivated to improve various indicators through the A-share capital market.