No more regulatory blind eye for Internet mergers and acquisitions in China, East Asia News & Top Stories

BEIJING (CAIXIN GLOBAL) – Chinese antitrust authorities have turned a blind eye to the type of deals that have helped companies like Alibaba Group Holding Ltd. and Tencent Holdings Inc. became internet titans.

As part of a comprehensive crackdown on the anti-competitive activities of the major Chinese technology companies, the state administration for market regulation (SAMR) issued new guidelines for the “platform economy” on February 7th, which bring several gray areas into their regulatory remit.

For the first time, the variable rate enterprise (VIE) structure – a legal structure used by many Chinese tech companies – is now officially covered by China’s Antimonopoly Law, as per the guidelines. VIEs, typically located in low-tax areas like the Cayman Islands, have been widely used by Alibaba, Tencent, and others to raise funds in the U.S. and circumvent Chinese laws that prohibit foreigners from owning assets in certain sectors.

Since December, regulators have fined 13 companies, including Alibaba, Tencent and Baidu, for failing to apply for antimonopoly permits for their internet-related investments and acquisitions. Meanwhile, for the first time in 13 years, Chinese lawmakers are fundamentally revising the antimonopoly law to give it more teeth. The existing law has long been criticized for being too lenient to the country’s sprawling and powerful internet giants.

The new focus on mergers and acquisitions comes on top of recent regulatory action banning the e-commerce industry’s common practice of “selecting pages” or forcing merchants to do business with only a single internet platform service. Alibaba received a record fine this month related to the picking sites’ tactics.

M&A examination

In recent years, mergers and acquisitions that could potentially eliminate or limit competition, such as multiple deals in the online hailing sector, have typically been made by companies with VIE structures. Since such deals were not governed by the Antimonopoly Act at the time, businesses typically did not report to regulators, and regulators often watched.

A large number of Chinese internet platforms, including food delivery, hailing, online travel booking, and online tutoring, are supported by Alibaba or Tencent. Most of these investments have never been examined by antitrust authorities.

Now the tide is turning. The recent fines imposed on the 13 companies were only 500,000 yuan (S $ 103,000) each, a negligible fine compared to billions of yuan worth of deals. This was the maximum penalty under current antimonopoly rules, and industry experts do not expect such penalties to have any significant dissuasive effect. The upcoming amendments to the antitrust law are expected to increase the maximum fine for such violations to 10 percent of a company’s sales in the previous year.

Tencent was fined 500,000 yuan for its 1.65 billion yuan investment in online tutoring platform Yuanfudao in 2018, and Baidu was fined the same for acquiring Ainemo Inc., a manufacturer of consumer electronics including voice-controlled speakers , fined in 2014. The companies were fined for failing to obtain prior approval of the deals, despite the fact that SAMR found the deals themselves not to be anti-competitive.

In the 13 years since the Antimonopoly Act came into effect, Tencent reported 785 investment deals and Alibaba 440, according to the company’s Tianyancha database.

In December, SAMR announced that it was planning to acquire the game streaming site DouYu International Holdings Ltd. worth billions of dollars by rival Huya Inc. The merger of Huya and Douyu, both backed by Tencent, would give Tencent a 67.5 percent stake in the new company.

The SAMR recently opened an investigation into a 2015 deal in which Alibaba acquired a 44 percent stake in the e-commerce unit of state giant China Minmetals Development Co. Ltd. which the regulator suspected could represent an illegal concentration of market power under the Antimonopoly Act.

Slower M&A pace

On April 12, the first day of trading after Alibaba’s record antimonopoly fine of 18.2 billion yuan (S $ 3.75 billion), the company conducted an investor 911 call ahead of the market opening to reassure investors that that the penalty would not have a material adverse effect on his business.

When asked if Alibaba was under any other antitrust investigation, vice chairman Joe Tsai said he didn’t believe it. “We experienced the test and are happy to have the matter behind us,” said the managing director.

Alibaba has also slowed its pace of investments and acquisitions. There has been no agreement since the increase in stakes in the logistics companies Shentong Express Co. and YTO Express Group Co. in the third quarter of 2020.

Tencent downplayed the effects of Beijing’s heightened control. While discussing Tencent’s profits last month, President Martin Lau said the company is reviewing previous investments to ensure they meet antitrust requirements and Tencent will maintain its normal practice of taking minority stakes in Chinese startups. Tencent meets with regulators frequently and will take a proactive approach to compliance, Lau said.

This does not mean that internet deals are heading for a break-in. After a unit of SF Express on December 14th due to the acquisition of China Post Smart Logistics Technology Co. Ltd. After fined 500,000 yuan, the logistics giant continued its operations, including the purchase of a 51.8 percent stake in Hong for $ 2.2 billion. Kong-listed Kerry Logistics Network Ltd. SAMR closed the deal earlier this month, stating that the combined market share of the two companies is less than 15 percent.

Several other internet platform deals were also recently approved, including an electric vehicle joint venture between Chinese search giant Baidu Inc. and Zhejiang Geely Holding Group, as well as a new digital bank created by JD.com and China Merchants Bank.

Only some of the many M&A deals per year are rejected by regulators, said a person close to the SAMR. “As long as it meets the relevant standards for fair competition screening, it is very likely that it will be approved,” the person said.

Between 2016 and 2020, the SAMR investigated more than 90 cases of suspected illegal market concentration and approved 41 with restrictive conditions, official data shows.

Normal market concentration is still an effective way for companies to improve efficiency, expand scale, and improve competitiveness, said Shi Jianzhong, a member of the State Council’s Antitrust Advisory Committee and a professor of political science and law at the University of China. Stepping up regulatory scrutiny is a preventative measure to rule out deals that might turn off or limit competition, but it doesn’t mean not allowing transactions from internet companies, he said.

“They just have to be done in accordance with the law,” Shi said.

This story was originally published by Caixin Global.

Comments are closed.