Monday, March 27, 2006

Chinese Growth Companies Seek SPAC Mergers

Several cash-rich Chinese growth companies--the kind backed by blue chip venture capitalists--are pursuing mergers with cash-rich special purpose acquisition companies (SPACs) in the United States.

Similar to blind pools, SPACs are private equity investment vehicles that are run by senior management teams to acquire or capitalize as yet unidentified companies. Investors get the comfort of structured investment guidelines and a commitment to return their invested capital, minus a small management and expense fee, if an acquisition doesn't occur within a specified time period.

A typical SPAC sits atop $20 million in cash, though war-chests of up to $100 million have also been raised.

The additional SPAC cash is a tempting asset for China's new breed of young, elite entrepreneurs who have successfully started and built fast-growing companies in Internet, technology and other sectors. Unlike their struggling, old school counterparts--bloated outfits that are either entirely state owned or partially state owned--the lean and mean go-go companies can't qualify for loans from China's state-owned banks.

Some of the newer companies are already listed on foreign stock exchanges, where, for reasons unrelated to the actual running of their businesses, share prices have often been disappointing. So the prospect of a dual listing on a larger US exchange, such as NASDAQ, is attractive.

US investors are likely to be impressed by the quality of the Chinese management teams--executives educated at America's top business schools and accustomed to the style and ways of the country's most prestigious investment banking and venture capital companies. In contrast with the party hack-types involved in state-owned and second-tier outfits, the managers of the high-flying private companies naturally fit in with the global economy's emerging class of financial engineers and superstars.

"These are Chinese managers who would feel comfortable at Davos," said a SPAC investor, referring to the annual world economic forum in Switzerland.

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