The lessons learned from Anbang's failed Starwood bid

Shanghai

After the consortium led by Anbang Insurance Group abruptly withdrew its $14-billion bid for Starwood Hotels & Resorts Worldwide, insiders are wondering if the move is a sign that Chinese businesses, which have been investing heavily in international markets, may not be able to deliver on their acquisition expectations.

Although China's biggest M&A deal so far this year is China National Chemical Corp's agreement to acquire Swiss seeds and pesticides group Syngenta for $43 billion, several Chinese companies are having trouble convincing Western peers that they are a credible M&A counterparty.

Chinese companies "have turned into voracious suitors this year," the Wall Street Journal noted, citing data provider ­Dealogic. These businesses have agreed to $92.3 billion of foreign takeovers in 2016 alone, compared with $106.7 billion in all 2015.

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Last month there were reports that China's insurance regulator, the China Insurance Regulatory Commission, would likely reject a bid by Anbang to buy Starwood, since it would put the insurer's offshore assets above a 15-percent threshold for overseas investments.

"To succeed in the U.S., Chinese companies will have to adapt to American styles of governance and transparency. It will be difficult to close mega deals without a more open style, so we may see more modest deals until China changes," Erik Gordon, a professor at the University of Michigan's Ross School of Business, told Reuters.

One expert told the Financial Times that counterparties were likely to demand a higher premium from Chinese bidders after the high-profile collapse. “These developments only increase the risk profile of Chinese buyers in the eyes of sellers because everyone is concerned about whether the Chinese can actually close deals.” 

Warning Signs
Anbang’s approach to Starwood was unorthodox, with surprise meetings, shifting offers and a "less-intense" level of scrutiny of Starwood's financial records than expected, the Wall Street Journal wrote. Ultimately, said Fred Hu, chairman of Primavera Capital Group, a partner in Anbang’s bid, the consortium walked away because the price "got too rich."

From the beginning, Starwood officials were "pleased but cautious" of Anbang and its chairman. While the insurance company had strong financial backing, it was relatively new to the hospitality industry, while Marriott had a strong reputation and the potential to create the largest hotel company in the world. 

There were other hurdles to overcome. For example, Anbang was reportedly unclear about what sort of return it expected on the investment, or whether it viewed an acquisition as a long-term proposition. Moreover, Starwood and Marriott had already received approval for their merger from most major regulators in the U.S. and abroad, but Starwood was unsure if Chinese regulators would support the acquisition. When Starwood consistently insisted on guarantees that the deal could go forward—requesting proof of financing and regulatory approval at the higher offer—Anbang hesitated, then walked away. 

J.C. Flowers—another member of the consortium—was "fully involved in all due diligence," Starwood CEO Thomas Mangas said in a conference call. "They didn't share with us their economic splits. However, they did say that the vast majority of the capital would be coming from Anbang. I think all three [members of the consortium] brought unique skills to the table." 

Looking Ahead
Going forward, Mangas said, the "call for asset diversification [and] currency diversification in the sovereign wealth funds…from Chinese insurance companies like Anbang continues to be strong and we're very actively still feel very good about hitting our disposal targets for the year despite the relative noise of this transaction."
 
The Washington Post suggested that the U.S. adopt a policy that encourages Chinese investment on controlled terms. "The best way to preserve American security and prosperity and to keep China’s aggression in check is not to resist China’s desire to invest but to encourage it. The more money Chinese companies pour into the United States, the more motivation China has to maintain good relations and the more it has to lose if relations turn sour." 

Sources: Reuters, Wall Street Journal, Washington Post, Financial Times

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