"A cunning rabbit has three burrows."
For listed companies that are engaged in cross-border M&A, facing the strict review of foreign exchange control policies, if they only rely on a single traditional path to raise funds, they will often have a hard time. However, those smart companies, like "cunning rabbits", carefully lay out three or four "burrows" to bypass the obstacles to capital flow within the compliance framework, so as to successfully complete the transaction. So, how can listed companies cleverly solve foreign exchange controls when conducting cross-border M&A? What classic cases are worth learning from? Today, Goheal will take you to find out.
Foreign exchange control problem: "stumbling block" on the road to M&A
Cross-border M&A is an important means for enterprises to deploy globally, but the smooth exit of funds is a realistic problem that cannot be avoided. In recent years, with the tightening of foreign exchange regulatory policies, the traditional "direct remittance of M&A funds" model has become increasingly unfeasible, and enterprises need more flexible strategies to break through the siege.
In this context, companies often face three major problems:
1. Limited foreign exchange quotas - cross-border mergers and acquisitions involve large amounts of funds, but the single foreign exchange purchase quota is limited, the approval process is complicated, and it is easy to affect the timeliness of the transaction.
2. Strict review of funds going abroad - even if there is sufficient funds, it may face the problem of blocked remittances due to tightening policies.
3. Risk of exchange rate fluctuations - large amounts of funds flowing across borders are greatly affected by exchange rate fluctuations, which may lead to increased transaction costs or even losses.
So, in this context, how can listed companies find a way to crack it?
The method of "both inside and outside": a good way to crack foreign exchange control
When facing foreign exchange control, smart companies will not confront it head-on, but adopt a more strategic approach to let funds "go out of the sea in a roundabout way". The following are several common solutions:
1. "Domestic guarantee and foreign loan": domestic guarantee, overseas financing
The core idea of this method is that the domestic parent company or affiliated companies provide guarantees to help overseas subsidiaries obtain loans from local banks, thereby completing the merger and acquisition transaction. In this way, the funds are not actually "going abroad", but are met through overseas financing to meet the merger and acquisition needs, avoiding the restrictions of foreign exchange control.
Case: Zhongding Holdings' Acquisition of Tristone
In 2016, Zhongding Holdings successfully acquired Tristone, the world's second-ranked supplier of engine cooling systems, for 170 million euros through its overseas subsidiary Zhongding Europe. Since it is difficult for domestic funds to go overseas directly, Zhongding Holdings adopted the method of "overseas subsidiary acquisition + domestic guarantee and foreign loan":
Direct payment by overseas subsidiaries: transfer cash through overseas subsidiaries to avoid direct outflow of funds.
Domestic guarantee and foreign loan: domestic listed companies provide guarantees for overseas subsidiaries, and overseas banks lend money to finally complete the transaction.
Optimization of leveraged financing: adopt a reasonable leverage structure to improve the efficiency of capital use and reduce capital costs.
This strategy not only allows Zhongding Holdings to successfully complete the transaction, but also avoids the risk of exchange rate fluctuations and improves the efficiency of capital use. Goheal believes that this method is a highly operational path for companies with overseas subsidiaries.
2. Overseas syndicated loans: leveraging the global capital market
For companies with large M&A capital needs, overseas syndicated loans are also an efficient financing method. By introducing international bank consortiums to provide loans, not only can the problem of capital outflow be circumvented, but also the financing cost can be effectively reduced.
Case: Wingtech Technology's acquisition of Nexperia
When acquiring Nexperia, Wingtech Technology adopted an innovative financing strategy, namely "offshore syndicated loan", with the following core operations:
Using the target company's subsidiary as a guarantee, rather than the acquirer itself, to circumvent the problem of shareholder-level funding restrictions.
Through equity pledge financing, the barrier-free flow of funds is achieved, bypassing the traditional "domestic guarantee and foreign loan" model.
Optimizing leverage structure, reducing capital costs, and improving M&A efficiency.
The success of this model enabled Wingtech Technology to successfully acquire Nexperia, the world's third largest semiconductor standard device supplier, and ultimately completed an important reinforcement of China's semiconductor industry chain. Goheal pointed out that this model is particularly suitable for companies with large capital demand and a strong business foundation overseas.
3. "Red chip structure + overseas fundraising": bypassing the approval of capital outflow
For some companies in emerging industries, especially technology companies, using the red chip structure and financing in the overseas capital market has become another effective path. The core idea of this method is:
1. Establish a holding company overseas and inject domestic business assets into the overseas structure.
2. Raise funds through overseas capital markets, such as through IPOs and private equity financing, and directly complete cross-border mergers and acquisitions.
Typical representatives of this model include companies such as Tencent, Alibaba, and ByteDance, which have successfully circumvented the problem of foreign exchange control through overseas listings or equity financing and completed many international mergers and acquisitions.
Goheal believes that although this model requires more complex architecture design and a longer preparatory period, it is still a path worth considering for companies with long-term global layout plans.
Future Outlook: How to make cross-border mergers and acquisitions smoother?
Although foreign exchange control is still a "threshold" for cross-border mergers and acquisitions, more and more companies have found a way to crack it. From domestic guarantees and foreign loans to overseas syndicated loans, to red chip structure financing, each method demonstrates the flexibility and innovation of capital operation.
Of course, each solution has its applicable conditions. When operating in specific operations, companies still need to make detailed designs based on their own conditions to ensure compliance and efficiency.
So, what new capital outflow strategies do you think will appear in Chinese companies' cross-border mergers and acquisitions in the future? Welcome to leave a message in the comment area and discuss more possibilities of cross-border mergers and acquisitions with Goheal!
[About Goheal] Goheal is a leading investment holding company focusing on global mergers and acquisitions. It has deep roots in the three core business areas of acquisition of controlling rights of listed companies, mergers and acquisitions of listed companies, and capital operations of listed companies. With its profound professional strength and rich experience, it provides companies with full life cycle services from mergers and acquisitions to restructuring and capital operations, aiming to maximize corporate value and achieve long-term benefit growth.
