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Buyout trend marks new phase in cleanup cycle

By Doug Young (Global Times)

09:54, June 25, 2013

Smartphone chip maker Spreadtrum has become the latest US-listed Chinese firm to receive a buyout offer, continuing a trend that is making such names an endangered species on New York's two stock exchanges. The process is the result of natural market forces and thus should be allowed to continue without interference, even though it could also cut off an important funding source for some of China's most dynamic companies.

Spreadtrum's announcement of a buyout offer late last week wasn't too surprising for Chinese stock watchers, who have witnessed a sudden acceleration in such bids this year. Under the offer, a group connected to Tsinghua University offered to buy all of Spreadtrum's American Depositary Shares (ADS) for $28.50 apiece, representing a 28 percent premium to the stock's last closing price. Spreadtrum's shares shot up 16 percent after the announcement.

The offer comes just a month after Pactera, another up-and-coming high-tech firm engaged in IT outsourcing services, announced a similar privatization plan. Pactera's only major US-listed rival, Camelot Information Systems, announced its own similar plan in March. Other companies that announced similar bids over the last year include drug maker Simcere Pharmaceutical, budget hotel operator 7 Days and outdoor advertising specialist Focus Media.

These firms are some of China's most dynamic companies, and many became darlings of US investors after they listed their shares in New York over the last seven years. But then investor sentiment rapidly cooled starting in early 2011, after short sellers uncovered a series of accounting irregularities at some of the firms.

The past two years have seen an ongoing cleanup of the sector led by the US securities regulator, with many smaller firms being forced to de-list due to accounting irregularities. One of those cases was in the news just last week, with word that the regulator was charging the now de-listed China MediaExpress and its former CEO with accounting fraud.

The series of scandals and chill in investor sentiment has led to a prolonged downturn for all US-listed Chinese shares, depressing values of even companies that don't have any obvious accounting problems. Spreadtrum exemplifies the broader situation, with its shares valued lower than sector peers including Marvell Technology and global mobile chip leader Qualcomm.

Recognizing these bargains, private equity firms have stepped in to finance most of the buyout offers from the past year.

Most observers expect that many of the companies could later get re-sold for higher prices, or possibly re-listed on the Chinese mainland where investor sentiment is more positive.

This kind of process is completely market driven. Opportunistic short sellers sparked the downturn by preying on accounting weaknesses at some firms, and then regulators stepped in to rid the market of other problematic players. The current buyouts mark the last stage of the cleanup, driven by private equity firms that see bargains in the remaining undervalued stocks.

While this process is healthy and necessary, it could also mark the loss of an important fundraising option for capital-hungry Chinese start-ups and also the loss of a significant channel for Westerners to invest in China.

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