Chinese RTO. BUSI 3001 SBLC Week 3(4) , Spring 2014. Charles Mo & Company March 17, 2014. Reverse Take Over/Reverse Merger
An Image/Link below is provided (as is) to download presentation
Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.
In a Traditional Merger, the acquirer company retains the parent legal entity/structure, issues stocks or cash to buy out the acquired company. Thus the acquired company may cease to exist or becomes a subsidiary of the Acquirer.
In a Reverse Merger, the acquirer company is in name only, probably is a dormant company, and does not own any assets. but will retain the legal entity after the reverse merger. The acquired company wanting to go public injects itself with its own assets into this dormant company in exchange of stocks.
The dormant company usually is a US listed penny stock or a shell company traded over the counter
Injecting company’s management takes over control of the new RTO company, changes its name, offers additional shares to the public.
Initial capital/expenditure for attorneys, accountants, investment advisors are paid by the injecting company.
Only through a secondary offering or private placement will an RTO company receives funding of capital.
This is a shorter route to get listed in a US Exchange without going through the formal and rigorous process of an IPO.
From 2007 through March 2010, 159 Chinese companies listed in the US through reverse takeovers,. 3 times the number of Chinese IPOs in the US.
Disadvantage of an RTO
Chinese company going through RTO must spend capital in advance to execute the purchase of the US RTO unlike IPO which receives capital from the capital market.
Fees for investment bankers, attorneys, and accountants may amount to multiple million and as high as 7-9% of the capital raised.
Sometimes raising the capital never happens since institutional investors shuns away from the OTC stocks.
The RTO company may subject itself to hundreds thousands of dollars in annual tax liabilities and regulatory compliance costs since now the RTO company is subject to US tax regulations.
So why do Chinese companies still go for the RTO?
First generation of Chinese entrepreneurs are relatively naive in the art of raising capital.
Chinese entrepreneurs see any public listing as a pride and a marketing tool.
Chinese entrepreneurs face enormous hurdles of securing local capital and financing.
Black market interest rate has reached as high as 200% per year
It is more attractive to raise financing through public listing overseas.
Unfairly taken advantage by unscrupulous foreign investment bankers/attorneys
Advantages of an RTO
Immediate public trading status
Lesser cost than an IPO
Less stock dilution
Unlike IPO, the process of going public and raising capital are separate. A company can go public without raising additional capital.
RTO is less susceptible to market condition than that of an IPO
IPO may take a year or more to complete, but an RTO can be completed in as little as 30 days
Where can you list in the US for an RTO?
OTCBB - Over-The-Counter Bulletin Board
Pink Sheet – National Quotation Bureau
NASDAQ - Nat Assoc of Sec Dealers Automated Quotations
NYSE – New York Stock Exchange
NYSE Euronext – Former American Stock Exchange
Number of Chinese firms listed in the US via Reverse Takeover vs. IPO ( from 2007 through March 31, 2011)
Reverse Mergers: 159 from a total of 603
IPO : 56 from a total of 433
Casualties of RTO companies in 2011
26 Chinese companies delisted in 2011 in the US stock exchange
Reasons got delisted from major exchanges
Traded under $1
Failure to meet disclosure requirement
Financial status questioned
Who can suspend the public trading of a stock?
SEC ability to discipline the delisted Chinese companies is limited
RTO s are legal, but the SEC can’t extend its jurisdiction into China
So SEC can’t subpoena documents and people.
With company assets and most senior executives in China, the US has limited scope to enforce any decisions against them.
Media Express listing
MediaExpress programs entertainment and sells ad space on video screens installed in buses.
Listed its shares through a reverse takeover on NYSE Euronext’s American Stock Exchange in October, 2009
Raised $46 million
In January 10, 2010 Mr. Greenberg’s Starr International poured in $30 million in a private placement
MediaExpress continued to report rapid growth in earnings. In October, 2009, Starr Itl poursed in additional $13.5 million
In November, short sellers started to become suspicious at ME’s return on assets were three times higher than the next best competitor.
Muddy Waters Research reported fewer than half of the 27,200 buses than ME claimed.
Couldn’t or shouldn’t the CPAs and the Investment advisors and underwriters foresee fraud problems?
Longtop Financial Technologies
The company shares were delisted from the NYSE in August, 2011
SEC is trying to enforce a subpoena for files related to audits
Muddy Waters, a short selling research firm charged the company’s financial statements as unfairly stated.
The auditor Deloitte China resigned as a consequence and citing problems of verifying cash balances. Fake revenues and fake cash were reported.
Deloitte contented that handing over the audit work paper would trigger violation of China’s state secrets laws
Possible lawsuits against auditors, management, and board of directors.
Cease and Desist on Delist - Relist
Buy cheap China companies listed on NASDAQ, AMEX
Take them private
Bain Capital to spend $100 million taking NASDAQ listed China Fire & Security Group private
Abax Capital planned buyouts of NASDAQ listed Harbin Electric and Fushi Copperweld for more than $700 million
Companies may not look as undervalued
Lots of problems with RTO
Class action lawsuits
Relist in China
CSRC may view these delisted companies as not listable
Risks of a public company gets de-listed
Class action shareholders lawsuit
Lack of sufficient coverage in D&O insurance
When joining the board of directors of a US listed Chinese company, you must carefully consider the following conditions.
Must have D&O insurance in any US public company
Know the management and see to it that they are ethical
Know the company well and at a minimum visit their plant(s)
Know the accounting rules in the SEC
Fallout from the SEC decision27_01_2014_017China Critizes Rulings on Auditors
China criticized a decision by a U.S. judge that rekindled a longtime accounting dispute between the two countries and hammered the shares of U.S.-traded Chinese companies, even as China said it would negotiate with U.S. regulators over a solution.
Temporarily suspends the China affiliates of the big Four accounting firms from auditing U.S.-listed companies,
cast a cloud over U.S.-traded Chinese companies and Western multinationals with significant operations in China. It could also confound the plans of Chinese companies considering New York listings
The Big Four accounting firms - PricewaterhouseCoopers, Deloitte Touche Tohmatsu, KPMG and Ernst & Young—have said they would appeal
The ruling, if it stands, could leave more than 100 Chinese companies that trade in U.S. markets without an auditor
Baidu Inc.’s American depositary shares fell 6.2% Thursday and 1.35% Friday, while 58.com Inc.’s slid 6.7% Thursday and 6.2% Friday. Qihoo 360 Technology Co.’s shares declined
3% Thursday and 9% Friday
China ’state capitalism’
Developing country – also a rising superpower
Leaders don’t assume the market is pre-eminent
State power is essential to maintain stability and growth
One party line and one party rule
Model with track record of getting things done
Western belief shaken in
efficacy of markets
Competence of politicians
Example of quick establishment of an industry
China has the world’s largest solar energy industry
A shortage of polycrystalline silicon in 2007 – the main raw material for solar panels
5 producers in the US all taken or bought by Japanese, Koreans, and Taiwanese
prices soared hitting $450 a kilogram in 2008
BJ’s response was swift
Development of domestic polysilicon supplies as national priority
Money poured in from state owned companies and banks
Local governments expedited approvals for new plants
Mr. Zhu Gonshan an entrepreneur magnate raised $1 billion dollar for a plant, started production within 15 months.
In just a few years, he created one of the world’s largest polysilicon makers, GCL Poly Energy Holding
China’s sovereign wealth fund bought 20% of GCL Poly for $710 million
Today China makes about a quarter of the world’s polysilicon and controls roughly half of the global market for finished solar power equipment
State capitalism -
World’s biggest exporter
Second largest economy in the world
Rise of powerful state-led economy
State run economy can decide
Entire new industries
Can tilt the playing field against the private sector
Piling up wealth in the central banks
3.2 trillion in foreign exchange reserves
Market share of top 10 solar manufacturers, 2009
China has aggressively sought green technology
First Solar ( US)10%
Suntech Power (China) 7
Baoding Yingli (China)5
Ja Solar (China)5
Vast majority of the industry controlled by state companies
Government owns almost all major banks
Government owns all three major oil companies
All three telecom carriers
Major media firms
Beijing is now the biggest sources of revenue growth for Caterpillar
Biggest buyer of commercial jets outside the US
Wean China off expensive foreign technology
Open door policy launched by Deng Xiao Ping
In 1978 brought waves of foreign technology firms
Setting up R&D centers
National Medium and Long term Plan
Blueprint for turning China into a tech powerhouse by 2020
Doubling R&D spent from 1.3% to 2.5% of GDP
Export tax breaks
Free apartment for 3 years for executives
China born US citizen
Pioneer of America’s solar industry
Whose innovations light up the first solar powered billboard of NY Times’s Square
Nurtured by US financial aid
Embraced by politicians
Pulled in more than $50 million in state and federal grants, loans and tax credits, partly to bringing jobs to Toledo, Ohio
Huawei Technologies Co – a privately held telecommunications equipment maker has its overseas expansion supported by China Development Bank,
In 2004 CDB extended a five year, $10 billion dollar credit line
Routinely lends money to foreign buyers to finance their purchases of Huawei products
Revenues risen 200% in the past 5 years
Has become one of the top three telecommunications companies along with Nokia Siemens Networks and telefon AB LM Erricsson
Sprint Nextel excluded Huawei and fellow Chinese telecom company ZTE Corp from a contract valued at billions of dollars because US fears of company has ties to military.
Europe also indicated complaints about Huawei because of its unfair advantage from government subsidy
What do you need to know if you sit on the board of a US listed company
What liability you may face?
O & D insurance
How do you know that the Chinese companies in the US carries adequate liability insurance?
Appointment of Auditor
What if the auditor resigns
Secondary offering - The issuance of new stock for public sale from a company that has already made its initial public offering (IPO).IPO = initial Public Offering - An initial public offering (IPO) or stock market launch, is the first sale of stock by a company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises.
Private Placement -(or non-public offering) is a funding round of securities which are sold without an initial public offering, usually to a small number of chosen private investors. In the United States, although these placements are subject to the Securities Act of 1933, the securities offered do not have to be registered with the Securities and Exchange Commission if the issuance of the securities conforms to an exemption from registrations as set forth in the Securities Act of 1933 and SEC rules promulgated thereunder. Most private placements are offered under the Rules known as Regulation D. Private placements may typically consist of stocks, shares of common stock or preferred stock or other forms of membership interests, warrants or promissory notes (including convertible promissory notes), bonds, and purchasers are often institutional investors such as banks, insurance companies or pension funds.