January 25, 2016 10:30 am JST | Nikkei Asian Review
Edward Tse, Alexander Loke and Alan Chan

An unusual hostile bid from a small property and insurance group for China’s largest listed property developer is prompting speculation that the country may be on the brink of a new era of domestic takeover battles.

The target, China Vanke, is actively trying to fend off a potential takeover by Baoneng Group, a lesser-known Shenzhen-based conglomerate that has suddenly emerged as Vanke’s largest single shareholder. The battle marks the first time in the Chinese equity markets that such a large and well-established listed company has been targeted by a corporate raider.

Chinese corporations have become increasingly comfortable in recent years with launching hostile bids for companies overseas. Examples include Guangdong Rising Assets Management’s bid for Australian miner PanAust and China Petroleum& Chemical’s move on Hong Kong’s China Gas Holdings in 2012.

However, Chinese companies have been noticeably more docile at home, perhaps because of the lack of precedent and resulting uncertainty about how hostile bids might be treated. Success for Baoneng, however, would set a precedent for similar bids by other Chinese companies. It might also mark the beginning of a higher profile role for insurers in bringing about consolidation of the property sector, among others.

Vanke’s management has labeled Baoneng’s equity purchases a “hostile takeover,” clearly worried that the group could build a controlling stake and step into the boardroom if it continues its buying spree. Wang Shi, Vanke’s chairman, has said that the company does not welcome Baoneng’s move, which it fears will harm its reputation and credibility.

Wang said that Yao Zhenhua, Baoneng’s chairman, lacked business prospects and questioned his company’s financing capacity, noting that Baoneng’s property transactions totaled only a few billion yuan in 2014 compared with Vanke’s 215.1 billion yuan ($32.7 billion) the same year. Yao has responded that Baoneng is a law-abiding company and that he believes in market forces.

Baoneng’s “barbarians at the gate” bid has posed challenges to Vanke’s corporate culture and operational style, and may harm its plans for a strategic transformation. In 2015, Vanke took its first steps toward building a new business ecosystem, including entering new business areas and adopting a trial-and-error entrepreneurial approach to searching for opportunities.

The takeover tussle has attracted enormous public interest. Chinese social media are full of chatter about its implications and there are suggestions among analysts that the bid may be part of a game being played for personal advantage between Vanke and senior executives at Baoneng.

At this stage, both companies’ actions can be presumed legitimate since Baoneng has every right to purchase Vanke’s shares in the secondary market and Vanke is justified in sticking to its view of the quality of its capital and management.

Chinese regulators are watching the battle closely. The China Securities Regulatory Commission has confirmed that it is working with the China Insurance Regulatory Commission and the China Banking Regulatory Commission to examine Baoneng’s bid in the hope of ensuring “an open, fair and just market order” and to “protect those involved, especially small and medium-sized investors’ legal interests.”

If any malicious intent crosses legal boundaries, this will likely be exposed by the authorities. Meanwhile, the bid and Vanke’s response suggest that the reform of China’s market economy has come a long way. Hostile takeover bids are an integral part of a market economy, and Vanke’s actions suggest an increasing level of confidence in dealing with them.

Share suspension

On Dec. 18, Vanke suspended trading in its shares to avoid price fluctuations and to gain time to seek outside capital or alternative partners. It said it would announce details of a major asset-restructuring plan by the end of January.

Various possible further moves were discussed in leaked internal conversations and in social media postings. These included the possible dilution of Baoneng’s shareholding through an issue of new shares by private placement.

On Dec. 23, Anbang Insurance Group, which previously owned 5.69% of Vanke, raised its stake to more than 7% by acquiring shares worth more than 2.8 billion yuan. The share purchase was followed by a public announcement by Anbang that it will actively support Vanke’s management team, including Wang, and help fend off Baoneng’s bid.

This helped to reinforce Wang and his management colleagues, who together with Anbang hold about 30% of Vanke, compared with Baoneng’s 23.52%. China Resources, a large state-owned enterprise, holds 15.23% and is also opposing Baoneng.

Wang is a well-known entrepreneur and has cultivated a high profile that has included studies at the universities of Harvard and Cambridge at an advanced age and sharing his personal experiences and perspectives with Chinese youth.

Wang has been vocal on social media sites, sharing his views on the clash of corporate interests between Vanke and Baoneng. As the parties fight for control, the battle has become a social media event as much as a corporate tussle. Revelations have included the disclosure by social media users that Wang gave an internal speech to Vanke’s employees stating that Baoneng did not deserve to be Vanke’s top shareholder.

In the main, social media has turned a corporate event into a personality clash, focusing on the character of those involved rather than the takeover itself. This aspect of the bid battle is likely to make Chinese business leaders rethink their social media strategies — especially on the crucial issue of how to get their stories out while negating or controlling any negative aspects.

Beyond the immediate corporate battle, the bid highlights the trend of Chinese insurance companies acquiring good assets and their increasingly critical role in consolidating industries. The Chinese government has been advocating supply-side economic management to consolidate overcapacity in many sectors and cull weaker companies.

Shanshui Cement Group has been at the center of a similar battle for control since April last year, when China Tianrui Cement increased its stake to more than 28%. Tianrui’s acquisition of such a large stake highlighted the potential for consolidation of the cement industry as well as corporate governance issues arising from decentralized equity structures.

Such external pressures from potential corporate raiders will encourage companies to focus more on improving productivity, management capabilities and asset utilization. How the confrontation between Vanke and Baoneng pans out will serve as a test for China’s capital markets and corporate governance. The end result should solidify China’s development of a more transparent and stable market economy.

Edward Tse is founder and CEO of Gao Feng Advisory, a global strategy and management consulting company, and author of “China’s Disruptors” (Portfolio, 2015). Alexander Loke is a consultant at Gao Feng and Alan Chan is a senior consultant there.