Skip to main content

M&A monitor

China brings its tech titans down to size

There was widespread shock when Ant Financial’s IPO – on course to be the biggest in history – was abruptly halted in early November following the release of draft regulations that pulled the rug from beneath its lending model.

A few days later, Beijing issued a second set of rules designed to limit the power of China’s tech giants, this time targeting their transactional activity.

The guidelines announced by the State Administration for Market Regulation – China’s antitrust authority – change the treatment of deals involving variable interest entities (VIEs), the corporate structures favoured by Baidu, Tencent and the rest. The VIE model enables China’s internet platforms to raise cash overseas while circumventing the foreign investment restrictions that prevent non-Chinese ownership of strategic assets from rising above 50 per cent (China classifies tech platforms as value-added telecommunications businesses, which fall into this category).

At a high level, a VIE involves an offshore (often listed) entity using contracts, rather than shares, to ‘own’ operations on the Chinese mainland. Until the new rules were published, deals involving VIEs were generally not filed as the SAMR (and its predecessor, MOFCOM) tended not to accept them out of concern that approval would be considered an endorsement of the VIE structure’s legality. There were signs earlier this year that the SAMR was heading in this direction with its approval of a Yum China! transaction with a VIE element. But now the SAMR has declared all VIE deals should be filed as long as they meet the threshold – and with the big tech players in the government’s sights, it may be a while before they test Beijing’s willingness to approve their expansion plans.

Trade agreement to drive Asia-Pacific investment

The signing in November of the Regional Comprehensive Economic Partnership created a trade bloc that covers nearly 30 per cent of the world’s population and a similar share of its GDP. While 83 per cent of the goods flowing between the 10 Asean nations plus China, Japan, South Korea, Australia and New Zealand were already covered by some form of deal, it is the first time China has entered into a multilateral trade partnership. The deal is set to drive closer integration of regional supply chains, so expect more cross-border investment and M&A between the signatories in the years to come.