news

Wang Yajie, reporter of Economic Observer

As soon as he sat in the passenger seat, Lao Yu said to the head of the state-owned platform company who was driving beside him: "Let's go and take a look at that new material company (a listed private enterprise in the neighboring city) first."

Lao Yu is a local government official in the economically developed Yangtze River Delta region and is familiar with state-owned asset mergers and acquisitions.

They chose to set off on August 17. This day was Saturday, and Lao Yu couldn't wait for the working day, because this new material enterprise was in great demand. In addition to his state-owned platform, a state-owned asset in a certain place in central China also showed acquisition intentions.

On the same day, after visiting the above-mentioned new materials companies, they went on to visit two other listed private enterprises.

This is not an isolated case. Since 2024, state-owned assets have been enthusiastic about acquiring shares in listed companies.

The Economic Observer learned through Wind data and incomplete statistics from announcements of relevant listed companies that since 2024, the actual controllers of more than 20 listed companies have been changed to local state-owned assets. Among them, there were more than 10 such acquisition cases in July alone, and this number is still increasing; in the whole year of 2023, this number was only about 20.

More ongoing acquisition cases have not yet been made public. A legal consultant who is helping state-owned assets acquire shares in listed companies predicts that the number of such cases will continue to increase.

The Economic Observer learned that a state-owned steel company has just set up a working group and is looking for suitable targets. The working group has a clear goal, which is to acquire listed private companies in the new energy field.

Due to the business sensitivity of listed companies, many state-owned asset acquisition cases cannot be disclosed to the public until they are completed or disclosed publicly.

On one hand, state-owned assets are "snatching up" the equity of A-share listed companies, and on the other hand, some private enterprises are also frequently contacting and seeking state-owned assets to "take over". However, not all acquisitions can be negotiated.

After contacting several private enterprises, the Economic Observer learned that some enterprises in the traditional manufacturing field with overcapacity are having difficulty finding buyers. A private enterprise boss seeking state-owned capital acquisition feels that capital liquidity is slowing down, and private enterprises are facing even greater challenges.

In this context, a textile listed private enterprise has become an "abandoned child". A government official in the place where the enterprise is located told the Economic Observer that the enterprise's business is no longer clear, its textile business has been shrinking year by year, and it is now facing delisting. Faced with the private enterprise's demand for sale, the local government does not intend to help, but wants to let the market decide.

From local governments and local state-owned assets to listed private enterprises, buyers and third parties assisting in acquisitions, all have joined this wave of "grabbing A shares" with their own judgments and original intentions, influenced by the overall economic environment, market factors and the demands of the companies themselves.

Go to "bottom fishing"

Lao Yu admitted that whenever he mentioned local state-owned assets acquiring listed companies, he would say "we are concerned about resource integration and industrial chain expansion". But in fact, he felt that it was more for the purpose of bargain hunting.

In Lao Yu's view, the current market downturn is a good opportunity for state-owned assets to "pick up bargains". State-owned assets can invest in some undervalued assets and purchase equity when the price is low. Once the market picks up in the future, the returns from this investment will be considerable.

He is a "veteran" in promoting local state-owned asset acquisitions. During the round of state-owned assets bailing out private listed companies around 2018, and when state-owned assets acquired "shell companies" on a large scale around 2020, he promoted and participated in many acquisition cases.

In comparison, state-owned assets' acquisitions of listed private enterprises since 2024 are different from before.

In 2018, the local government where Lao Yu worked took the lead in promoting the acquisition of a private enterprise in the new material industry, and the acquisition price was much higher than the market price. The acquisition was not considered from the market level, but to stabilize the situation and prevent the further expansion of financial risks. At an internal government meeting that year, Lao Yu's leader pointed out that there was a guarantee relationship between the private enterprise in the new material industry and many companies. Considering the security of the guarantee chain and funds, this acquisition must be done.

Six years later, the relief of the previous crisis is no longer Lao Yu's goal. This time, he has more dimensional ideas.

As a government official, you must first face up to the assessment requirements of the local government. Lao Yu gave an example, the attitude of the local government towards state-owned asset acquisitions is directly affected by the assessment system. For example, in some acquisition cases, the state-owned asset platform is implementing the takeover requirements specified by the superior department, integrating the business of local leading private enterprises and integrating local advantageous industries to promote the development of the regional economy.

Considering the long-term market situation, Lao Yu believes this is a good deal.

What is the good deal? Lao Yu believes that in the current economic cycle, especially affected by factors such as the US interest rate hike, the prices of some assets are shrinking. At this time, state-owned assets can use their abundant cash to invest and purchase low-priced shares, so that they may gain benefits when asset prices rise in the future.

Of course, the key to success lies in whether the company can survive the difficulties and whether the industry it invests in has long-term value.

Lao Yu typed the two keywords "assessment" and "market" into the WeChat chat box and sent it to himself. He said to the head of the state-owned platform who was driving beside him: "Who says bottom fishing is not a healthy ecosystem? I think it is a healthy one."

Before visiting the new material enterprise in the neighboring city, Lao Yu had participated in a closed-door discussion on state-owned assets acquiring listed companies. Earlier this year, a listed private enterprise in the real estate industry in Lao Yu's region was spotted by a state-owned asset in another region. During the discussion, the state-owned asset party that came to discuss the acquisition envisioned a bold plan for its future development after "bottom-fishing", which was to directly divest the real estate business of the company within a certain period of time, allowing it to transform and develop into the new energy sector and break away from the depressed real estate industry.

Lao Yu applauded after hearing this: "I think it is a healthy ecosystem to buy at the bottom under such circumstances. To put it another way, if the company itself has no problems, but only the major shareholder's funds have problems, buying at the bottom can at least stabilize production and operations."

This acquisition inspired Lao Yu. On August 17, on his way to the next city, he asked the AI ​​applet with his mobile phone: "Continue to search for information on the development and transformation of the new materials industry chain."

However, Lao Yu’s vision and transformation of the industrial chain is not the choice of all local governments.

Officials from the county-level government where Lao Yu is located said that their state-owned assets are limited and they will only focus on core businesses for now. They will not consider expanding acquisition projects in other areas of the industrial chain for the time being.

In contrast, provincial or prefecture-level city platforms like Lao Yu’s are well-funded and are able to make such investments. Lao Yu believes that the size of the platform and the nature of the operating entity, such as an urban investment company, are also important considerations.

Who wants to touch my taxes?

Officials from the State-owned Assets Supervision and Administration Commission of the two places slammed the table.

On one side are state-owned enterprises in North China, and on the other side are state-owned enterprises in East China. The focus is on the acquisition dispute of a technology company in North China.

Originally, the state-owned assets in North China did not interfere in the mergers and acquisitions of the above-mentioned technology companies. When the state-owned assets in East China came to inspect and connect with the company, the local authorities expressed welcome.

After several rounds of communication, the acquisition negotiations made substantial progress. At the last minute, local state-owned assets began to "urgently intervene" because they heard that "once the acquisition is successful, the company will no longer be local, and the first step is to relocate production capacity, which will not only lose corporate resources, but also affect tax revenue."

Usually, local governments acquire listed companies through state-owned asset platforms and can use these "shell" resources to replace assets or inject new industrial assets to promote the upgrading and development of local industries.

Around 2020, there was a situation where local state-owned assets intensively acquired shell companies. The logic behind it was similar: since the local industrial structure may be relatively traditional and it is more difficult to cultivate new listed companies, the rapid listing of industries can be achieved through the acquisition of shell companies.

The above-mentioned state-owned enterprise person in East China said that another reason for the dispute was the local requirement to increase the number of listed companies.

The Economic Observer checked the official websites of local governments in many places and learned that many urban areas across the country require the number of listed companies to double by the end of 2024, and local governments have set clear goals for the growth of the number of listed companies.

Even the State-owned Assets Supervision and Administration Commission of some regions in the northwest has put forward the requirement of increasing the number of listed companies for more than two years. One of the main ways to achieve such goals is to promote local enterprises to go public. Once a local enterprise successfully goes public, the local government will give rewards and subsidies. Another way is that local state-owned assets give priority to acquisitions within the region, because this is easier to operate and the relevant parties are more familiar with the local situation.

In 2024, the policy direction changed.

On August 16, the Ministry of Justice issued a document: The Ministry of Justice, together with the Ministry of Finance and the China Securities Regulatory Commission, has drafted the "Regulations of the State Council on Regulating the Services Provided by Intermediary Institutions for the Public Issuance of Stocks by Companies (Draft for Comments)" (hereinafter referred to as the "Regulations") and solicited public opinions.

In this latest "Regulation", local people's governments at all levels shall not give rewards to issuers or intermediary institutions based on the results of public issuance and listing of stocks.

In other words, local incentives for companies to go public may no longer exist in the future.

Under such circumstances, cross-regional acquisitions have gradually become a more popular method for local state-owned assets. However, cross-regional bargain hunting is not easy.

The above-mentioned state-owned enterprise person in North China said: "Let me ask you without beating around the bush, who does the tax belong to?" He expressed dissatisfaction with the requirement of relocation of the company's registered place proposed by the state-owned enterprises from other places that came to acquire the company, because after the relocation, the local area would lose a source of tax revenue.

Public data from the Ministry of Finance shows that from January to May 2024, national tax revenue was 804.62 billion yuan, a year-on-year decrease of 5.1%.

The acquired companies are also in a difficult situation. When state-owned assets in two places compete for the same target, there is usually no fixed bidding process. In the process of the game between the two parties, they can only rely more on the negotiation and consultation capabilities of each party.

In addition to the local SASAC, the relevant local government departments intervened to a certain extent in the signing procedures for the acquisition. The above-mentioned business person described himself as "like the filling in the cookie".

The latest progress is that after many consultations among local government departments, the State-owned Assets Supervision and Administration Commission, the Financial Office and other state-owned assets in other places, the final agreement reached is that the acquired listed private enterprises will not be relocated or transferred for the time being, and these matters will be discussed later based on the development situation.

Knocking on the door of a buyer

The person in charge of the state-owned capital platform who helps Lao Yu drive is called a "professional acquisition consultant" in the local investment circle.

His feeling about this round of local state-owned assets' acquisition of A-share listed companies is that, in many cases, private enterprises' enthusiasm for "seeking marriage" far exceeds that of state-owned assets.

This can be confirmed by the number of listed companies that have entrusted the head of the state-owned asset platform. According to his statistics and observations, after reviewing the financial statements of relevant companies, it is known that companies with sufficient cash flow but poor financial conditions often have a strong desire to seek state-owned assets to take over.

Taking the location of this person as an example, the trend of local state-owned assets acquiring A-share listed companies has become increasingly prominent, especially in 2024, when a new round of climax arrived. Most of the listed companies that have expressed their intention to "seek marriage" are inStrategic emerging industriesOr fields with high growth potential, such as computers, transportation, power equipment, etc., and are facing operating difficulties or financial pressure.

Not only listed companies, the head of the state-owned asset platform said that more unlisted companies have also approached him recently to express their need to find state-owned assets to acquire their equity.

In contrast, the majority of companies that entrusted the head of the state-owned platform to acquire and merge a few years ago were large-scale affiliated companies. Most of the listed companies being acquired today are small and medium-sized companies.

In recent days, he has been asked many times by companies to ask him a question: how can he catch the other party's eye and successfully complete the acquisition?

In other words, how do state-owned assets "grab A" and how do private enterprises "seek a marriage", and what is the path?

The head of the state-owned capital platform gave answers from the perspective of target selection, due diligence model, negotiation pricing, assessment and execution.

In terms of target selection, state-owned assets mainly make matches based on the purpose of the merger and acquisition. Usually, one is revenue and profit, which are used for consolidation; the second is technology and team, which are used for new products; and the third is upstream and downstream, to integrate resources.

The head of the state-owned platform explained that first of all, the company's development must be good before it can come into the buyer's eyes. The judgment criteria are mainly where the company's core competitiveness lies, whether it can withstand the downturn in the industry, especially when industry profits decline, whether the company can still maintain growth.

He said: "M&A is the future. Companies that lack management thresholds will not be good targets. If you merge purely based on financial logic, you will most likely fail."

During the due diligence process, the model currently followed by state-owned assets is: first, publicly disclosed information, such as public accounts, local governments and industry associations, peers, customers, company shareholders, management, etc.; second, a professional team, including the acquirer's own and third parties (securities firms, law firms, clubs, etc.), corresponding to the three aspects of business, legal affairs, and finance respectively.

When negotiations reach a critical stage, the main focus will be on pricing.

On this point, the head of the state-owned platform said that whoever has the most urgent needs will have less say, which also includes negotiation skills and the degree of compatibility between the two parties. In mainstream valuation practices, valuation is generally based on 8 to 12 times the average net profit in the next three years. Of course, depending on the situation, there will also be performance betting commitments, mainly promising that the company will grow at an annualized rate of more than 20% in the future, which is usually based on net profit + the average net profit in the next three years.Income ApproachPricing.

In addition, due diligence must also take into account historical factors, including industry dividends and internal advantages, including team, technology, management, etc., and whether these factors will change after the merger and acquisition. All of these need to be fully considered.

The assessment of state-owned enterprises that acquire listed companies mainly depends on whether the performance in the next few years can be achieved, that is, whether the acquisition valuation reflects the acquisition price at that time. In addition, after the acquisition is completed, whether the effect of 1+1 is greater than 2 or less than 2. In other words, whether the original advantages will change after the acquisition, and in which direction. This requires the acquirer to analyze whether the original main contribution points to the growth of the enterprise will undergo significant changes with the completion of the acquisition.

Specifically at the execution level, the transaction structure formed after the negotiation and the execution of related contracts mainly include price, payment method, payment time, purchase equity ratio, adjustment mechanism and special terms, etc. After all, the transaction structure is the key to balancing the interests of both parties and resolving valuation differences.

Can you “eat it”?

The rush to buy is just the beginning. What is more important is whether the market can digest it.

Zhu Changming, partner of Sunshine Times Law Firm, is following up on the acquisition of local state-owned assets. From the perspective of post-investment management, he said that the post-acquisition integration work is related to the success or failure of the acquisition. Many failed acquisition cases have proved that the acquisition is just the beginning. The integration of listed companies after the acquisition is crucial, including handling the integration of state-owned enterprises and private enterprises. Otherwise, it will seriously affect the acquisition effect.

He observed that the acquisition methods of state-owned assets are becoming more market-oriented and systematic. Local state-owned enterprises generally adopt market-oriented methods to acquire listed companies. In order to control acquisition risks, there are more and more systematic acquisitions that cross-combine multiple acquisition methods. From the perspective of local governments, in the future, we must not fall into the misunderstanding of "wealthy and willful" and "acquisition is omnipotent". If we lose sight of the local industrial foundation and blindly acquire listed companies, we will most likely suffer. After all, local characteristic industries and resource endowments are the foundation of local economic development, and capital operations must not be divorced from local realities.

In some regions, there has been a phenomenon of convergent investment promotion that is out of touch with reality. Lao Yu gave an example, some regions are rushing to develop semiconductors, photovoltaics, energy storage, artificial intelligence,robotRegardless of whether the local industrial chain needs it or not, we should take it first.

Zhu Changming commented that this round of state-owned asset purchases has aggravated the imbalance in economic development in various regions. Since the coastal economically developed regions have strong economic strength, local state-owned assets are strong and can maneuver in the capital market, making it easier for them to win in the acquisition competition and acquire excellent listed companies, thereby further consolidating their economic position. On the contrary, those regions with underdeveloped economies and weak local strength are unable to acquire listed companies due to "lack of funds" and instead face the risk of being poached, thus forming a vicious cycle and facing more severe development challenges.

From the perspective of the acquisition process, Zhu Changming reminded that when some state-owned assets were acquired, there were problems such as insufficient pre-acquisition work, inadequate acquisition decision-making and acquisition framework design; omissions in acquisition plans and legal documents, which could not effectively prevent and resolve risks; lack of effective integration after the acquisition, and failure to achieve the purpose of the acquisition.

Yu Changjiang, managing partner of another law firm, has also been providing legal advice for state-owned asset acquisitions for a long time. He believes that from the perspective of state-owned assets, investment itself is a dilemma: on the one hand, it is necessary to ensure the preservation and appreciation of state-owned assets, and on the other hand, all investments, especially equity investments, are risky. In order to reduce risks, state-owned assets need to make precise choices at the technical level, including the selection of industries, sectors and specific companies, as well as conducting thorough due diligence in the early stages of M&A projects to assess potential risks.

Yu Changjiang suggested that if private listed companies hope to be acquired, they need to be mentally prepared for the possible acquisition, especially in terms of corporate compliance.

For fast-growing companies with traditional governance structures, such as family businesses, the introduction of investors with state-owned capital backgrounds may bring about changes in management and decision-making, add new regulatory requirements and different management logic, which may trigger conflicts among relevant parties. If not fully prepared, these conflicts may turn into internal friction, affecting corporate governance and business development.

(The following figure is a flowchart of local state-owned assets acquiring listed companies, compiled by the Economic Observer based on public information)