Bottom line: A flurry of lawsuits alleging undervaluation in the latest buyout offer for US-listed Chinese firm Synutra (NASDAQ:SYUT) could signal growing new resistance to low valuations for many other existing offers.
The law firms that make their money by suing publicly traded companies have found a new reason to sue, taking aim at the dozens of Chinese firms now trying to privatize from New York. This new wrinkle in the wave of privatization bids for US-listed Chinese companies comes after infant formula maker Synutra became the latest to get an offer from a management-led group to take the company private.
This marks the first time I've seen so many lawsuits threatened after a company announced the receipt of a buyout offer, with at least three firms saying the offer undervalues the company. Up until now, we've only seen minor shareholder resistance to most buyout offers, even though many of the buyers are taking advantage of depressed valuations for the companies being privatized.
This entry by the law firms into the equation means we can probably expect to see a big increase in similar lawsuits when other companies announce new or finalized buyout offers. That's because these law firms are far more disciplined and systematic than most investors and will probably automatically now threaten lawsuits whenever anyone receives a new offer.
US-listed Chinese stocks have tumbled since the start of the year, in tandem with a sell-off that has seen the main Shanghai index plunge 18 percent since January 1. Synutra shares got sucked up in the trend, tumbling nearly 20 percent since the start of the year before the company received its buyout offer at the start of this week.
According to the offer, the management-led group will pay $5.91 for each of Synutra's American Depositary Shares (ADSs), representing a 63 percent premium to the stock's last closing price before the announcement (company announcement, Chinese article). That's one of the larger premiums we've seen in the nearly year-old buyout wave. But it's also worth noting the premium would have been much smaller if the offer had come in December before the ongoing sell-off.
No sooner did Synutra announce its bid then at least three class-action lawsuit specialists announced their own intent to sue for a higher price (announcements). These kinds of lawsuits are quite common, and these specialist law firms usually take action when a company's stock price drops suddenly due to release of unexpected bad news.
Among the three dozen companies to launch privatization bids in the current wave, few have encountered this kind of resistance so far. One notable exception was dating site Jiayuan (NASDAQ:DATE), which was one of the earlier companies to get an offer in the privatization wave that began last year.
Several investors complained that the offer was far too low, and the buyout group ultimately raised its offer quite a bit. But even after that, US investors complained the offer was still too low, and in December a major independent advisory company recommended that shareholders reject the deal because it undervalued Jiayuan (previous post).
It's not yet clear if the class-action lawsuit specialists will start to take similar actions against other US-listed Chinese companies when they announce new buyout offers, since this is one of the first major cases I've seen. But the signal certainly looks ominous for the companies looking to go private, and could force some to sharply raise their bids or simply abandon their de-listing plans altogether.