Tuesday, November 28, 2006

Foreign Investment as strategy to Evade China-bound investment laws?

The US investment firm Carlyle's bid for a local hi-tech firm has sent positive vibes throughout the local stock market for a number of reasons....

The local benchmark index capped 10 consecutive days of gains by hitting a six-year high yesterday, spurred by the Carlyle Group's bid for Advanced Semiconductor Engineering (ASE), the world's largest chip-testing and packaging company.

The TAIEX rose 70.79 points, or 0.95 percent, to 7,498.15 on turnover of NT$127.17 billion (US$3.89 billion), marking its highest close since Sept. 6, 2000.

Foreign investors bought a net NT$16.02 billion of shares yesterday, boosting net purchases to NT$88.57 billion since the beginning of this month.

"International acquisition activities are an inevitable trend," Ann Chang (張慈恩), vice president of JF Asset Management Taiwan, said in a telephone interview yesterday.

Taiwanese stocks that boast healthy fundamentals are relatively cheaper than those in neighboring markets like Hong Kong, making them attractive to foreign investors and private equity funds like the Carlyle Group, Chang said.

Hong Kong has some pretty interesting problems and has been struggling since it became part of China to establish a high-tech sector -- handicapped by a start up rate that is less than half the global start-up rate.

Why are these companies being acquired?
"The Carlyle bid for ASE is likely to trigger a series of takeovers by foreign investors in Taiwan's high-tech sector, using the island as a springboard into the huge mainland [China] market," an analyst with a regional brokerage said


Citing institutional investor research, local media reported yesterday that 30 local companies, including the world's second-largest contract chip maker, United Microelectronics Corp, along with Acer Inc and Chunghwa Picture Tubes, had been targeted by suitors.

The idea is that if local companies are sold to foreign investors, they are no longer local, and thus, are free to ignore the restrictions on local investment in China. The DPP needs to relent on this one. Taiwan's businesses are moving to China no matter what, and will either ignore or circumvent the laws, as necessary.

Eager to maintain its edge over rivals in an industry led by Amkor Technology Inc, ASE was expected to use the foreign takeover -- if it went through -- to bypass the government's restrictions on investments in China, dealers said.

Under the nation's current policy on China-bound investments, local companies are only allowed to invest up to 40 percent of their net worth on the mainland.

Critics have called for a relaxation of this regulation which ties the hands of local businesses, while their rivals from around the world face no such restrictions.

"Above all, ASE has come up with a solution for many other Taiwanese companies that have also been weighed down by the government's restrictions against their expanding further in China," said an analyst with a leading foreign securities house who asked not to be named.

If you are scratching your head trying to remember, Carlyle became famous in 2001 when it was linked in conspiracy theory to the airline stock short selling prior to 9/11. One of their paid "consultants" is George Bush Senior, and they are a major defense contractor in the US.


Sun Bin said...

1. i have a link on the chinatimes site on this issue, which also talked about the (alleged) intention of the owner of ASE.

2. The plan to to privatize ASE, and re-list the parent company (now a carribean company) somewhere else (eg HK) and raise capital to invest into mainland China.

3. HK's post 1997 economic problem has nothing to do with its returning to China -- and positive economic impact if any. However, one can blame China for installing the impotent Tung to ruin HK.

4. Carlyle has strong link to the GOP, before Bush, it also hired Shultz (ex-secretary of state). given how important the ROC political parties (blue or green) look at the US relationship, i bet the deal would be approved swiftly

Anonymous said...

Clyde Said:

Not only the high-tech sector but retailing also (and others) have the attention of foreign investors for the main reason that the Western world is starting to come to grips with the reality that the only people making money in China are other Chinese, namely from Taiwan.

The combination of playing well in the political environment (including having no trouble adjusting to the wide-spread corruption after decades of practice under the KMT) and experience in management, finance, and quality control means it pays to team up with Taiwan businesses.

As you point out Michael, there is only one way for business here to go, the question is how much prosperity comes back to Taiwan? We've already missed the financial boom that Taiwan should have captured (handed over the HK).

Michael Turton said...

3. HK's post 1997 economic problem has nothing to do with its returning to China -- and positive economic impact if any. However, one can blame China for installing the impotent Tung to ruin HK.

Sorry, my bad. I only meant to date the time, not imply a cause.


Anonymous said...

Wait a minute here: ASE has only invested about 10% of its net worth in PRC, far less than the 40% limit imposed by law. Are you guys sure that ASE was trying to circumvent the law so that it may go to mainland?

Michael Turton said...

That's what the media reports have claimed. Now that it isn't owned by Taiwanese it is not bound by investment laws.


Anonymous said...

I meant ASE's investment in mainland (10%) hasn't reached the limit imposed by law yet (40%). Why would ASE take the alternate route when it still has a lot of room (40-10=30%) to go?

Anonymous said...

Only a small room of men know the true "intent" of the ASE purchase, and they're all going to keep their mouth shut on this issue until the deal closes.

But regardless of what happens to ASE, the larger trend is obvious. The Taiwan exchange is actually *decreasing* in terms of listed shares, while other Asian exchanges are growing quickly.

I'm not sure I understand the suggestion that the HK economy is struggling. It certainly did in the aftermath of the Asian economic crisis, but for the past 3-4 years, it has out-performed her east Asian peers. Her economy is growing significantly faster than the Taiwanese economy.

Anonymous said...

Sun Bin, get off it. Carlyle will try its best to list in the US. HK is small fry, even if it is relatively better in Asia. The ONLY reason people EVER list outside the US is that their companies are too small. US investors are just too damn optimistic and there is just too much law and order.

I've been looking at Taiwan's economy for awhile, and I just think there's just enormous, enormous potential. Carlyle and a lot of other private equity and foreign funds are thinking the same thing and that's why they are buying in. The prospect of another wave of foreign capital will drive Taiwanese stock prices up.

All is not so well though from the Taiwanese perspective though, because:
1) Carlyle and foreign private equity are going to make huge, huge bucks--why can't Taiwanese capital be as efficient? The only reason Carlyle can make this huge margin is because Taiwanese capital can't provide you with a good valuation. Yes, the money wouldn't be there to be made without the American money managers, but you bet your ass they are going to get their "fair" share.
2) Foreign investment in Taiwan's stock market was good for Taiwan's financial industry. Private equity delisting companies and relisting them in the US is potentially disastrous for Taiwan's stock market.
3) Private equity isn't transparent. In a place like Taiwan, and much worse, in the Wild West that is China, this is very, very, very bad. Carlyle can basically (carefully) bribe the shit out of Mainland Chinese officials. No one gets to look at their books if they take a company private.

Su Tsen-chang needs to hurry with lifting the investment laws. Allow transfer of sensitive investment and technology? No. Allowing free movement of capital? Yes, and hurry up. DPP is wrong on this one, and private equity should give them a nice kick in the ass to hurry up and do what they were going to do anyways.

Of course... the rules for investment INTO China and repatriation of profits aren't exactly Statue of Liberty free either. But still. You need to be able to interact with China. It's too big. Otherwise foreign capital is going to eat you up on the cheap and do what you didn't want them to do in the first place.