Merger of the Month Ends in a Whimper

What promised to be the largest acquisition of an American corporation by a Chinese company ended in an unexpected way on March 31. The withdrawal of the 12 year-old Anbang Insurance under the pretext of “various market considerations” from the bidding war for Starwood was a surprising anti-climax to the most keenly watched bidding war of March 2016. 

Starwood actively sought to sell itself last November. Marriot International announced an acquisition bid for Starwood Hotels & Resorts Worldwide Inc. valued at USD 12.2 billion. Rather unexpectedly, Anbang Insurance gate-crashed the acquisition on March 18 with an all cash offer valuing the company at USD 13 billion. Marriot was forced to raise its bid on March 21, valuing the company at USD 13.3 billion. As if to show its cash power and determination, Anbang Insurance raised the bid on March 28 and put Starwood’s value at USD 14 billion. Marriot decided not to raise the price again and it seemed all things were set for the Anbang takeover of Starwood. However, all of a sudden, Anbang’s bid ended in a whimper.

What captured the world’s attention was not the bidding war between Marriot and Anbang, rather it was the background of Anbang and the way it spends its money. Anbang’s chairman Wu Xiaohui is married to a granddaughter of China’s deceased leader, Deng Xiaoping, and Chinese magazine Caixin has reported his link to the family of Chen Yi, a founder and long-serving foreign minister of the republic under Mao Zedong, as well as to Levin Zhu, the only son of retired Premier of Zhu Rongji. However, two weeks ago Levin Zhu denied publicly any involvement in Anbang, and Chen Xiaolu, the youngest son of Chen Yi, has also denied any extensive role in the company even though twelve years ago he was one of the founders of the company.

Anbang broke into the US hotel industry in 2014 with its USD 1.95 billion acquisition of the iconic Waldorf Astoria Hotel. It then spent USD 1.6 billion to acquire US insurer Fidelity & Guaranty Life, and USD 1 billion for a 63 percent stake in Tongyang Life Insurance of South Korea. The insurer has also recently agreed to a USD 6.5 billion purchase of Strategic Hotels & Resorts, an owner of U.S. luxury properties from the Blackstone Group. 

The Financial Times has done a serious calculation of the ability of Anbang to fund the takeover and found the answer unsettling. Many observers have been watching Anbang’s overseas property acquisitions with disbelief. In January, when China was under capital flight stress, the Chinese Insurance Regulatory Commission (CIRC) had cut the amount of assets that an insurance company can invest overseas from 15 percent to 5 percent. They are wondering how Anbang had skipped the rule for its overseas investments. In fact, Caixin had reported earlier that CIRC would veto both the Starwood and Blackstone deals.   

It is not clear what caused the abrupt end of the Anbang bid and the answer might never come out. The Blackstone deal is supposed to close at the end of April and if it is indeed aborted as Caixin had predicted earlier, then the hand of CIRC is highly probable. The whole Anbang saga could enhance the credibility of the Chinese regulator on its claim that nobody is exempted from the rule.