I am starting to follow with interest the current effort by Charles River Laboratories International (CRL) to buy Chinese pharmaceutical research outsourcing company WuXi PharmaTech (WX) for US$1.6 billion.
The deal, which was announced on April 26th, has not been covered extensively, but is starting to get some attention because an activist hedge fund holding 7% of Charles River’s stock, Jana Partners, is opposing the deal, suggesting WuXi PharmaTech is overpriced.
What fascinates me, though, is the silence (thus far) of the Chinese government.
China’s Foreign Investment Vortex
China is in the midst of trying to build industries around a small cohort of local firms in clean, high value-add, science and technology-based sectors, in the hopes of pushing the nation’s economy past reliance on the export of cheap manufactures. As a company engaged in contract pharmaceutical research, WuXi PharmaTech would seem to be right in that hot spot.
The central government has a history of opposing the outright acquisition by foreign companies of all but the smallest or most crippled local firms. What is more, they have shown their willingness to do so in industries that are not central to the government’s planned direction for the economy. The two most memorable examples are The Carlyle Group’s failed effort to purchase a stake in construction machinery giant Xugong, and Coca-Cola’s (KO) blocked purchase of local juice maker Huiyuan (OTC:CYUNF) just over a year ago.
As I noted in my post-mortem of the latter deal, “Seven Reasons for the Coke-Huiyuan Epic Fail,” government policy is emphatic that foreign companies not be permitted to purchase a majority interest in a “large and successful established Chinese company.”
What is more, Charles River has a bit of a timing challenge. We are going through a period during which Beijing’s policy makers are, for a range of reasons, questioning the value – and the need – for foreign direct investment in China’s industries.
None of this is to suggest that the deal will not go through. WuXi PharmaTech is listed in the Cayman Islands, which may limit the central government’s ability to oppose the deal (though I doubt it, given China’s recent insistence on examining large mergers of non-Chinese firms.) The team handling the deal may have done their spadework with the government and obtained buy-in in advance. Or the government may not consider WuXi PharmaTech a large and successful established Chinese company.
Just in case, though, I am going to offer some free advice to the Charles River/WuXi PharmaTech deal team:
1. Explore with competent and wise local legal counsel the extent to which this deal might fall under provisions of China’s anti-monopoly law, make sure you skirt it with a wide margins, and make sure you are prepared to make that case in the face of public opposition by your biggest local competitor.
2. Familiarize yourselves with the full range of FDI policies, written or not, understand the mood in Beijing and around the country around foreigners buying local firms, and be prepared to address it well with all audiences.
3. China’s government wants value-add from foreign investors, not just a fat check. Make very clear what China is going to get out of the deal, and make it a lot.
4. Be prepared to make a logical, intelligent, and sensitive case for the deal to the general public. You may think you operate outside the scope of public interest because you are in pharmaceuticals, but don’t bet on it.
5. Don’t ever let up or appear to hesitate. They can smell weakness on you when you do, and it will be all over.
6. Keep the people at the Department of Commerce, the FDA, and the U.S. Embassy in Beijing informed all the way. You may need their help at some point.
7. Finally, don’t take the current silence as assent. You need to begin your charm offensive now.
Disclosure: No positions