Chinese Listed Companies Target Failed IPO Candidates for M&A Opportunities

Listed companies in China are increasingly turning their attention to businesses whose initial public offering attempts have failed, with around 30 percent of mergers and acquisitions announced this year by companies listed on the Shanghai Stock Exchange involving such firms. The sectors most targeted for these mergers and acquisitions are semiconductor, automotive, and biopharmaceuticals.

Gch Technology recently announced its plans to acquire a company specializing in additives for synthetic resins and modified plastics. Similarly, Tianjin Motor Dies expressed its intention to purchase an additional 50 percent of Dongshi Motor Technology Group, a subsidiary that faced an unsuccessful IPO filing in Shenzhen. These failed IPO candidates are seen as attractive opportunities due to their significant operational scale, improvements in compliance following rectifications, and promising growth prospects, as per insight from an investment banker.

Failed IPO candidates are often offered to potential buyers at lower prices by venture capitalists to expedite an exit strategy, which in turn enhances the likelihood of completing a deal, according to Tian Lihui, dean of the Institute of Financial Development at Nankai University. However, not all merger and acquisition endeavors by listed companies targeting failed IPO candidates come to fruition. The main reasons for these failures usually stem from differences in asset valuation between the parties involved, with sellers frequently inflating prices by referencing the IPO valuation.

When the gap between the asking price and the buyer’s evaluation is too significant, the probability of a successful acquisition diminishes, Tian highlighted. Additionally, a lack of rectification of compliance issues identified during the IPO review process by the target company can also lead to the collapse of such M&A deals. It is imperative for both the selling and buying entities to align their expectations on pricing to ensure a successful transaction.

In conclusion, failed IPO candidates present an appealing opportunity for listed companies in China seeking mergers and acquisitions. While these deals can offer significant benefits in terms of operational scale, compliance improvements, and growth potential, parties involved must overcome challenges related to asset valuation discrepancies and compliance issues to successfully complete such transactions. Collaboration and negotiation are key to bridging the gap between the expectations of buyers and sellers and ensuring a mutually beneficial outcome.