Being a leader in Taiwan, or even in the Greater China region, as many Taiwanese businesses already are in their respective industries, is no longer enough in a world that is flat and where competition is international.
Globalization and global competition are driving Taiwanese businesses into seeking continued growth, domestic as well as overseas. Mergers and acquisitions (M&A) provide an obvious means and can often be a shortcut for businesses to achieve their goals for growth.
At a time when many Taiwanese companies (save for the very few who have truly gone global) need to look to expand internationally, the backing of international private equity funds in bringing international knowledge, networks and the required financing makes good sense.
As such, there should have been plenty of partnering opportunities. However, this has not been the case for the past several years. While industry-to-industry M&A activity has steadily climbed after the 2008 financial crisis, private equity activity involving international funds has stagnated or even frozen up after the Yageo setback in 2011.
In April 2011, Yageo Corp founder and chairman Pierre Chen (陳泰銘) teamed up with Kohlberg Kravis Roberts (KKR), the US-based international private equity firm, and launched a public cash tender offer to acquire up to 100 percent of the outstanding shares of Yageo, at a price of NT$16.10 (up to US$1.6 billion).
The plan was to delist and make Yageo private after the completion of the tender offer — a typical private equity-backed management buyout (MBO) approach.
Although MBOs may be common elsewhere, such buyouts occurs much less frequently in Taiwan. An MBO can provide a business that has decent potential a much-needed break from the public market to refocus its strategies to achieve longer-term strategic goals. Taking the company private for some time, away from the pressure to periodically answer to the market and produce short-term financial results, can allow the company more room to make the needed transformation to realize its full potential.
A successfully transformed business will often eventually go public again. Private equity firms provide, among other things, the financing required during the private period to support the management to refocus the business.
Dell is currently trying the same and fighting its own set of hurdles. When things turn out well, private equity funds will typically exit, either when the company again goes public or by selling to a new owner.
In the Yageo MBO, because Orion, the entity jointly formed by Pierre Chen and KKR, is not local, Orion’s bid for Yageo was subject to foreign investment approval by the Investment Commission. That review was based on a set of seven principles governing the review of private equity investments in Taiwan: transparency of investment; sound investment structure from a financial perspective; protection of domestic employees; protection of shareholders investing in the target company; domestic tax impact; impact on the financial market; and impact on the continued development of the target enterprise.
The principles have been generally perceived by foreign investors to be lacking clearly identifiable standards or thresholds to meet. Despite the Yageo MBO having met all other requirements and thresholds under the tender offer, and company and securities regulations, the Investment Commission ultimately did not approve the Yageo MBO, citing, among other reasons, insufficient protection of minority shareholders’ interests.
Had the Yageo MBO been backed by domestic firms or funds, the same tender offer would not have required Investment Commission approval. This highlights the different treatment of foreign and domestic investors attempting buyouts.
Unfortunately, the general perception left since 2011 is that foreign private equity firms teaming up with management for buyouts is not welcomed in Taiwan.
Despite Yageo and other setbacks over the past few years, private equity firms continue to keep their eyes out for attractive Taiwanese targets. For the past decade or so, private equity targets in this region have predominantly been in China. However, an increasing number of buyers and investors have shown concerns over the high valuation and lack of transparency of many Chinese firms, and shifting government policies in China.
In comparison, Taiwanese targets are still reasonably priced and have better transparency on financial and operations overall. Headline-making deals aside, private equity players who look at middle-market targets and those who are willing to take significant minority stakes, rather than buyouts, have continued to be able to do their deals in Taiwan over the past years.
Two years has passed since Yageo, and the government, in an effort to draw more foreign investments to Taiwan, is making substantial efforts to relax regulations relating to international private equity funds coming to Taiwan. This effort includes the revamping of key legislation governing foreign investment and M&A.
In response to the general appeal to foreign investors, the foreign investment regulation will soon be amended to provide for a more transparent review and approval procedure. Timing of final decision will be significantly shortened from one to two years in the past to about two or three months.
The Executive Yuan is also revamping the M&A laws to introduce several key changes aimed at providing a more organized and less rigid regime, but at the same time, also bringing up the level of protection of minority investors. The move may make Taiwan more attractive to foreign funds (including private equity firms), something that it has not been doing well in recent years according to regional rankings.
The key proposed changes under discussion include: raising the threshold required to delist a company to a two-thirds shareholders vote; requiring establishment of a special committee to review and approve all M&As; and making more types of consideration (cash, stock, or other assets) available for use in different types of M&As (merger, spin-off, share swap etc).
There are a number of elements that paint an exciting picture of the potential new highs of inbound foreign investment to Taiwan: The upcoming relaxation of international private equity investments into Taiwan; the upcoming revamped M&A regime, coupled with major economic policies and developments of recent years — such as the slashing of corporate income tax to 17 percent, the signing of the Economic Cooperation Framework Agreement with China, the signing of the Japan-Taiwan Investment Protection Agreement and other free-trade agreements on the horizon.
In this era, M&A plays an ever more important role in business operations. The success or failure of a major M&A can potentially determine the success or failure of an enterprise. Fighting for survival in this changing global economic climate is no easy task. The government stepping in to create clearer and quicker consolidation paths is crucial. Of course, partnering with international private equity funds to go global is one potential route not to be ignored by Taiwanese firms.
John Lin is a partner at the international firm Jones Day. The views expressed in this article are that of the individual and are not the views of Jones Day.
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