Disturbing the Peace: Anatomy of the Hostile Takeover of Co.

Taurai Muvunza∗ Terrill Frantz†

Abstract Wang Shi, a business mogul who created his empire of wealth from scratch, relished in his fame and basked in the glory of his affluent business. Nothing lasts forever! After mastering the turbulent business of development in his country and there- fore enjoying a rising and robust stock price, China Vanke Co. Ltd (âĂIJVankeâĂİ) founder and Chairman of the Board of Directors, Wang Shi was suddenly presented with a scathing notice from the : rival (âĂIJBaonengâĂİ) filed the regulatory documentation indicating that it had nicode- mously acquired 5% of his company and was looking to buy more. Vanke case became brutal and sparked national controversy over corporate governance and the role of Chi- nese government in capital markets.

Keywords: Vanke; Baoneng; corporate governance; hostile takeover; China arXiv:2003.06019v2 [q-fin.GN] 9 Jul 2020

∗Tsinghua-Berkeley Institute. Tsinghua Shenzhen International Graduate School. Shenzhen, 518055, China. Email: [email protected]. The author wishes to thank an ’anonymous’ employee from Vanke for providing helpful comments †Professor of eBusiness and Cybersecurity, Harrisburg University of Science and Technology, Pennsylva- nia; U.S. Email: [email protected].

1 1 Introduction tion of yearly sales are driven by this cate- gory through providing U8 decoration sys- Baoneng is a fierce rival that does busi- tem, BIM based quality control and refab- ness in a way Wang calls âĂIJvulgarâĂİ; in ricated housing. Secondly, Vanke markets no way would he allow his company and its itself as an integrated urban property ser- stellar reputation and glory be plundered by vice provider which includes shopping malls, an ensuing majority ownership and thus con- integrated complex development, Vanke Ed- trol over Vanke by BaonengâĂŹs predatory ucation, Vanke Resort, and long term leasing founder and 46 year old CEO Yao Zhenhua. apartments. Lastly, Vanke Worldwide is also The tranquility of business at Vanke and one of the oldest focus areas of the company. the harmony in ChinaâĂŹs nascent world of Having established operations in more than M&A was rattled in their core. Even the 71 cities in China, Vanke Worldwide Strat- Chinese government disapprovingly took no- egy has enabled the company to cover five tice. Wang Shi labelled the takeover not cities outside China including Singapore, San only hostile but also âĂŸpredatoryâĂŹ and Francisco, New York and London. Real es- further denounced an attempt by Baoneng tate started experiencing significant growth to become the major shareholder stating around 1990 largely because of opening up that Shenzhen Jushenghua Industrial Devel- and reform agenda. After and opment Co., ("Jushenghua"), BaonengâĂŹs Shenzhen stock exchanges were set up in 1990 subsidiary, used reckless debt to finance the and 1991, respectively, Vanke was one of the share acquisition. This marked the brewing first companies to be listed in 1991 on Shen- of a takeover battle, which gained attention zhen Stock Exchange. In 1993, Vanke also in mainstream media, boardrooms and fur- issued B shares and established residential ther attracted a consortium of companies to property development as its core business. the battleground for control. Revenue and profit growth for Vanke aver- aged 29.1% and 31.3% compounded yearly from 1991, and the shares increased value correspondingly. From 1990, there was a 2 History of Vanke steady growth in urban population. Between 1990 and 2000, urban population surged from Wang Shi founded China Vanke, which 28% to 36% and by 2007; urban population boasts over thirty years of experience in the was approaching 50%. This increased the housing market, in 1988 in Shenzhen. The demand for housing as more and more peo- 1982 draft of the sixth Five Year Plan under ple relocated to urban areas in search for the leadership of Deng Xiaoping focused on jobs and a better life. Consequently, middle- reform and premised on progress towards a income households grew faster and the num- market economy, at the same time opening a ber of households who could afford to own a window for the then 1988 provisional regula- house increased as wages soured. Urbaniza- tions on private enterprises that allowed the tion became the driver for real estate growth. legitimization of sole proprietorship, partner- In addition to that, the government relaxed ships and limited liability corporations. The regulations on land, for example, Article 64 same wave of reform saw the inception of of the Property Rights Law made it possi- conglomerates that have now become lead- ble to own estates and immovable property, ing brands in todayâĂŹs Chinese markets. which opened doors for real estate compa- When Vanke was established, real estate and nies to borrow excessively from and housing in China had not gained traction buy land from government for development. and average income per capita was below 2 Total revenue hit 100 billion yuan in 2010 000 yuan. Low demand for housing is at- and Vanke has continued to enjoy enviable tributed to this phenomenon where China profits. In 2015, Vanke posted 261.47 billion had a large rural population accounting for yuan in revenue (see Figure 1), a year on year over 80% in early 1980s and roughly, 20% growth of 14.3% making it an industry leader lived in the cities. This curtailed growth in in China based on sales revenue. In July real estate sector. Vanke, a first mover in 2016, the company was listed on the âĂIJ- real estate, consolidated market share and Fortune Global 500âĂİ by Fortune Magazine as GDP grew exponentially each year, the for the first time, ranked 356th. demand for houSsing and real estate devel- Other Chinese developers that appeared on opment boomed. the list include Wanda and Evergrande. VankeâĂŹs mission has three focus areas. VankeâĂŹs success cannot only be attributed Firstly, the company has defined itself as a to ChinaâĂŹs rising middle income and ur- Global Residential Developer. A large por-

2 banization, but also to Wang ShiâĂŹs strat- ket after Brexit vote. Despite speculation of egy to enter new international territories such a decline in housing market due to uncertain- as Singapore, United States and United King- ties following Brexit, Vanke’s overseas invest- dom. China Vanke entered the U.S. when ments have paid off. It improved the com- the real estate market was recovering from panyâĂŹs performance, positioned it to be the 2008 recession and its investments have the market leader in ChinaâĂŹs real estate - been made during a period with reasonable making it one of the attractive companies on prices. Major Chinese developers such as the stock market. Individual investors and Wanda and Greenland Group have targeted corporations began to regard Vanke as an Chinese immigrants in New York and Cal- investment choice after the company outper- ifornia as their customer base. They have formed all other developers consecutively in also invested in office property acquisitions, China. However, when China’s economy re- schools and hotels. According to Wang Shi, verted to a "New Normal", a dilemna occured entering US market gives Vanke an opportu- on the markets: stocks were overvalued and nity to learn and understand business models economic performance could not match the in a developed market and gain rising stock prices. The government encour- experience through project cooperation with aged companies to prop up the stock market. other US developers. In 2013, Vanke part- New regulation that was passed to allow pen- nered with Tishman Speyer and another US sion funds and insurance companies to invest developer, Hines, to develop a San Francisco in bonds and money market instruments pro- condominium project which became one of vided a leeway for real estate companies to the early moves of Vanke in U.S. In Septem- access capital easily. Pension funds and in- ber 2016, in a bid to step up its overseas surance companies which had huge sums of investments from 5% to the 20% target, the cash reserves also snapped the opportunity company agreed to purchase Ryder Court in to venture in trading high risk assets. On Mayfair, an office building located in Cen- the market, amongst real estate companies, tral London for GBP115 million. The prop- Vanke stood out due to its stunning perfor- erty was acquired from UK-based Hender- mance and this triggered a takeover attempt. son Global Investors whose shareholders had mounting uncertainties in the real estate mar-

Figure 1: Vanke’s Annual Sales Revenue

3 The Battle for Control 1: March 30, 1994 when Junan Securities rep- resenting 4 big investors purchased large vol- Baoneng vs Vanke ume of stocks of Vanke on the secondary mar- ket. The stock market in China was barely Vanke had not encountered a takeover at- 4 years old and the regulations vague. Wang tempt and battle for control since its found- Shi considered it as a potential takeover. ing. The only time there was a tussle was on Vanke shares were suspended and Wang Shi

3 met with the investors from Jinan Securities. yuan per piece since July 10th. At that time, On April 4, Wang Shi announced victory and Foresea Life was 20% owned by Jushenghua the shares resumed trading. Despite the po- which in turn was 99% owned by Baoneng tential takeover, Wang Shi did not consider Group (see Figure 2). Wang Shi called the consolidating his ownership, which he gave purchase an attempt for hostile takeover and up when the company went public in 1991, rejected Jushenghua and Foresea Life as ma- instead, shares kept floating on the market jor shareholders of Vanke, citing that the âĂŞ posing a threat for another takeover. share purchase was bought by short-term In 2000, Vanke welcomed debt, which could further negatively affect (Holding) Co. Ltd ("China Resources"), (see VankeâĂŹs capital structure. Vanke held an Figure 2) as a major shareholder. China urgent meeting to plan against the takeover Resources controlled a stake of 14.89%. On and battle Baoneng. China Resources had July 25, 2016, Wang Shi woke up to dis- been VankeâĂŹs largest shareholder for 15 cover that 15.04% of Vanke’s A shares had years, would the state-owned company res- been purchased by Foresea Life Insurance cue Vanke from the battle? Ltd ("Foresea Life"), at an average of 14.4

Figure 2: Ownership Structure of China Resources and Baoneng

On September 1, China Resources in- neng stated the controversial acquisition was creased controlling stake to 15.29% at a cost motivated by VankeâĂŹs performance and of 500 million yuan. Baoneng Group con- further expressed that the continued invest- tinued to use its subsidiaries to purchase ment in Vanke was to hid a call by govern- shares and consolidate its position as the ment to prop up stock markets. As the bat- largest shareholder of Vanke. Vanke’s stock tle for control continued through impulsive price shot up rythmically in response to the purchases of VankeâĂŹs stocks, China Secu- takeover and within two weeks of Decem- rities Regulatory Commission ("CSRC"); the ber, the stock rose 33% to 22.21 yuan a regulatory arm of government for securities, piece, increasing the market capitalization reported they would not intervene as long of the developer to a whooping 245.5 bil- as the players abide by rules. Vanke would lion yuan. Meanwhile, An Bang Insurance have welcomed the intervention of govern- Group, a global insurance company with to- ment to cool down the heat on the stock tal assets of nearly 1971 billion yuan was market. Although investors were taking the VankeâĂŹs second largest shareholder. It risk to purchase VankeâĂŹs expensive shares raised its stake from 4.4% to 5% in Decem- which were trading at 3 times book value, ber after Jushenghua and Foresea Life had they also feared that the stocks were over- lifted their stake twice on December 4 and valued and did not reflect the actual per- 10th from 15.29% to 22.25% at a total aver- formance of the company. Furthermore, un- age cost of 7.46 billion yuan. Total number of certainty over VankeâĂŹs reaction to reverse shares owned by Foresea Life and Jushenghua the takeover increased. The effect would send stood at 2.21 billion, acquired at a staggering the prices plunging down significantly. Inter- cost of 35 billion yuan (Security Times). Bao- national watchdogs for investors began to

4 offer warnings about the future of Vanke. while owned 3.5%, For example, on December 16, Morgan Stan- China Securities Finance Corp had 3.4% and ley swapped Vanke off âĂIJChina FocusâĂİ Citic Securities owned 3.1% (see Figure 3). list and the following day, Before the takeover, most of VankeâĂŹs frag- scrapped Vanke off the âĂIJConvictionâĂİ mented share structure made it easy for a list. An Bang, which had strongly affirmed its fierce conglomerate like Baoneng to make support for Wang Shi raised its stake further a bulk purchase of shares on the market. to 7.01% on December 17 despite these warn- After halting trading, investors speculated ing signs. Fitch confirmed that VankeâĂŹs that Vanke could use a poison pill strategy ratings were immediately unaffected by the to dilute BaonengâĂŹs stake. The strat- tussle and that it will monitor the develop- egy would have Vanke issue new shares to ments closely. How prepared was Vanke to a private investor at a discount, thereby di- oust an unwavering adversary without actual luting not only BaonengâĂŹs but also other ownership of the company? Vanke halted major shareholdersâĂŹ stake. Moreover, a trade on December 18 at 13:00, citing asset buyback of shares from individual investors restructuring and acquisition after the stock was a possible alternative, only executable price had surged by 62% in December alone. if Vanke has the resources to purchase the overvalued shares. Earlier in July 2015 when the hostile takeover began, Vanke set out 10 3.1 VankeâĂŹs defense mecha- billion yuan to buy back shares but due to the surge in price, they could only repur- nism chase 160 million worth of shares, accounting When Vanke suspended trading of its for 0.113%. Other sources contemplated that shares, its largest shareholders were Bao- China Resources would continue to increase neng with 24.4% stake, followed by China controlling interest in Vanke to regain control Resources, which had 15.3%, An Bang was as the largest shareholder. third at 7%, Guosen Jinping controlled4.7%

Figure 3: Ownership Structure of Vanke

3.2 A White Knight 14, Vanke announced its defense strategy. The developer had found a white knight, Hong Kong âĂŸHâĂŹ shares resumed Group Co. Ltd ("Shen- trading on January 6 and share price plum- zhen Metro"), to ease the pressure off Vanke. meted as investors feared that a reverse on They signed an MOU with Shenzhen Metro the takeover attempt was looming. On March

5 agreeing to sell part of its assets to Vanke VankeâĂŹs ongoing battle for control did in exchange for shares and cash. The deal, not eat into the companyâĂŹs revenue and estimated at 60 billion yuan was designed growth, (see Figure 1). In February, Vanke to have Vanke acquire Shenzhen Metro for beat 17 developers to win a residential site in 45.6 billion yuan through offering 2.87 bil- Hong Kong Government tender. At the end lion new shares at 15.88 yuan a piece in of the same month, the U.S unit of China exchange for 20.65% stake in Vanke. This Vanke joined with Slate Property Group and seemingly amicable arrangement would dilute Adam America Real Estate to purchase 45 BaonengâĂŹs stake to 19%. When China Rivington Street for U.S$116 million. Back Resources learnt that their stake was at risk in mainland China, the developer began to of dilution, they disapproved the deal and incorporate a new business model dubbed blamed Vanke for not consulting them. In âĂIJRail + PropertyâĂİ by entering into board meeting to decide the striking Shen- strategic partnership with Shenzhen Metro zhen Metro deal, seven voted in favour of Group and acquire its property division. As the deal and three board members from parties to the tussle fought tooth and nai to China Resources voted against it while one gain control, Vanke bought 96.55% interest board member abstained. Vanke made a tri- in property firms held by Blackstone, a U.S umphant announcement of victory to proceed financial services company, at a cost of 3.89 with the deal. China Resources grudgingly billion yuan. questioned the legality of the boardâĂŹs res- On July 22, a day after sealing the deal olution in that the rules required 2/3 majority with Blackstone, Vanke announced to pay for the deal to pass, and the 7/11 vote was 2015 cash dividends of 7.20 yuan pretax, for insufficient. Though Jushenghua and Foresea every 10 shares held as of July 28, 2015. Life were not invited to the board meeting, The 6-month January to July contract sales they unequivocally expressed their rejection were 217.5 billion yuan, which was relatively of the proposal. After the vote, Baoneng higher, compared to the previous year. Even criticizing Vanke’s executives for mismanage- though the second quarter financial state- ment of the company and immediately called ments for Vanke showed the companyâĂŹs out to oust Wang Shi and all his board mem- performance had improved year on year, bers. The decision to oust Vanke caused H the third quarter results released in Octo- shares to slip 3.8% even though rating agen- ber showed that Evergrande had surpassed cies had warned against it. Vendors began to Vanke in total sales in the month of Au- renegotiate contract terms as more and more gust. VankeâĂŹs total sales grew by 49% and traders dumped the shares. The decision the developer criticised Baoneng for reducing by China Resources and Baoneng to block confidence among partners and customers. Shenzhen Metro deal raised suspicion that This led to project cancellations and tighter the two were acting in concert. On June 27, credit. The long run effects would cloud CSRC asked whether Baoneng and China Re- Vanke’s performance and pose risk among sources were acting in concert. While China shareholders. Investors rallied behind the Resources had rejected the Shenzhen Metro feud, driving stock price high while paying deal, they opposed the proposal by Baoneng superficial attention to operational and fi- to oust VankeâĂŹs management. They fur- nancial results. ther clarified that China Resources did not reach an agreement with Baoneng to vote in concert. 4 Battle for Control 2: The 3.3 VankeâĂŹs performance more the merrier During mergers and acquisitions, com- On July 1, VankeâĂŹs listed shares in pany culture can change dramatically and Shenzhen resumed trading for the first time employees may leave the company or lose in more than six months, (see Figure 4). their jobs. One of Vanke’s Non-Executive The anticipated restructuring process was Directors, tendered his resignation on Decem- widely viewed by investors as an opportunity ber 22, 2016. Vanke denied allegations that grasped by Vanke to reverse the takeover. the resignation was prompted by misman- Out of fear, investors started ditching the A agement of the takeover feud. On January shares and they plunged 10% - triggering a 1, Vanke posted total sales of 262.7 billion halt, to 21.99 yuan from 24.43 yuan which yuan, making it the number one developer in was the closing price on the day of suspen- China by sales revenue. This confirmed that sion. On the other hand, H shares jumped

6 significantly up by 8.4% to HK$16.48 on the stocks at least after one day of holding it. same day. As shares resumed trading and In other words, investors are forbidden from price fell, Baoneng remained unfazed and selling stocks that they have bought on the seized the opportunity to increase stake to same day. The T+1 comes after the CSRC 24.972% at a cost of 1.5 billion yuan. The abandoned the T+0 strategy which was im- regulations in mainland China does not al- plemented in 1995 but later abandoned in a low shares to fluctuate by more than 10% bid to control market volatility and risk. The in a day, and in the event that daily volatil- ongoing debate on this issue is whether T+1 ity reaches 10%, a halt will be triggered to reduces or exacerbates market volatility and suspend trading for that day. Another con- market manipulation as well as protect the troversial rule on ChinaâĂŹs equity markets interests of investors. is the T+1 which only allows investors to sell

Figure 4: Performance of Vanke’s shares before and after suspension

4.1 China Evergrande joins the the allegations. In 2015, ’s takeover battle total sales reached 201.34 billion, making it China’s second largest developer by sales. Evergrande group cited strong results as a On August 4, Wang Shi was rattled by reason for the share purchase. After a whole the news that Evergrande Real Estate Group year of the hostile takeover, a consortium of Ltd ("Evergrande Group"), a Fortune500 de- companies were still willing to join the bat- veloper started in in 1996 had tle for control. As more developers increased bought 4.68% stake in his company, making their participation, China stocks rose in the it the fourth largest shareholder in Vanke. month of August in other sectors such as coal. The purchase of 516.9 million A shares at Within a week, Evergrande Group increased a total cost of 9.1 billion yuan had Vanke its stake to 6.82% at a cost of 14.57 billion stock reaching the 10% volatility peak, clos- yuan, overtaking An Bang and becoming the ing at 19.67 yuan in Shenzhen, while H shares third largest shareholder. Evergrande Group surged 3% and closed at HK$18.60. Rumors announced that its share purchase in Vanke that Vanke leaked information about Ever- was made out of its cash reserves despite grandeâĂŹs share purchase before official an- bearing a 600% debt level that could have nouncement attracted the attention of China negative impact on VankeâĂŹs ratings. On Securities Regulatory Commission (CSRC), August 24, S&P revised VankeâĂŹs outlook which issued a statement for Vanke to pro- from stable to negative though prevailing vide an explanation; however, Vanke denied

7 credit rating remained unchanged. Moody dition to that, Vanke stated that Baoneng followed suit and slashed Vanke to negative did not qualify to be registered as a share- due to uncertainty in management and tight- holder because they violated regulations. The ened credit conditions. courage by Wang Shi to continue battling the During the first week of November, Ever- takeover sent the price falling and between grande Group increased in Vanke stake to July 4th and July 19th, Vanke shares had 8.3%. On November 11, CSRC suspended collapsed by 30%, threatening margin calls Evergrande Group’s trading accounts due to and more chaos as banks began to seek an âĂIJabnormal trading behaviorâĂİ, a ten- exit out of the funding arrangements. Bao- dency to snap up publicly traded stocks of neng was at the verge of a forced liquidation. other companies on secondary market. Fur- In response to the investigation, Shenzhen themore, issued Stock Exchange found that Vanke and its a warning to Evergrande Group to stop us- shareholder Jushenghua had violated disclo- ing its insurance unit as a slush for trading sure regulation, and further issued a letter assets. China Insurance Regulation Com- requesting the companies to comply. The mission ("CIRC") followed by expressing its CSRC summoned directors of both compa- unsupportive stance to Evergrande Life In- nies to meet with the regulatory body and surance and further summoned it to refrain discuss the matter. The commission ex- from the abnormal behavior. In a filing to pressed that Vanke and Jushenghua had dis- Hong Kong Stock Exchange on November regarded the stability of capital markets, sus- 18, Vanke reported that Evergrande had ac- tainable development of the firm and interest quired 1.04 billion A shares, boosting their of small shareholders. stake to 9.452% at a total cost of 22.26 bil- The growing trend that conglomerates were lion yuan. On the same day, Vanke shares using their insurance arms as vehicles of fi- hit a record high of 28.9 yuan per piece. nancing takeovers and acquisitions prompted , a Hong Kong China Insurance Regulatory Commission based developer was also secretly snapping (CIRC) to issue a stern warning against the VankeâĂŹs A shares on the open market and behavior. A collaborated effort by CSRC, their position remained unknown. The feud CIRC and China Banking Regulatory Com- got intense, billions of yuan kept pouring mission ("CBRC") to investigate VankeâĂŹs and the lack of transparency exacerbated the takeover battle found no irregularities in Bao- battle. The regulations require that when a nengâĂŹs fundraising mechanism. The inves- company holds 5% interest in another entity, tigation gave birth to more regulations which it may request a seat on the board of direc- tightened corporate fundraising. On July 27, tors. a new regulation was passed which stipu- lated that shareowners who own at least 5% of a listed firm could not use money netted through the issuance of 4.2 How Baoneng financed the Products ("WMPs"), AMPs or capital raised acquisition from third party fundraising platforms to buy additional shares in the company. After purchasing about 25.4% of Vanke at an estimated cost of 43 billion yuan, Bao- neng was by far Vanke’s largest shareholder. However, Wang Shi was determined to fight 5 A closer look at major for his company. On July 17, Vanke asked CSRC to investigate Baoneng on allegations players of misconduct. Baoneng, through its sub- sidiary Jushenghua, had set up nine Asset The Vanke takeover battle did not only Management Plans ("AMP") (see Figure 3), test the equity markets in China, but also re- a type of shadow banking arrangement used vealed the extent to which government inter- to finance stock purchases and takeovers. JP feres in corporate takeovers. Companies that Morgan & Chase estimated that 26 billion are well connected to powerful officials often of the 43 billion yuan was lend by six banks rely on government support when market dy- through AMP, and that AMP funds in China namics are deemed disruptive. On one hand, had already reached 32 trillion yuan. The before he founded Vanke, Wang Shi was once banks listed by Vanke to have participated a railway official married to the daughter in setting up the AMPs included Ping An of the then deputy Communist Party boss , Guangfa Bank, China Construction of province, Wang Ning. When Bank and China Mingsheng Bank. In ad- Wang Shi resigned from the position of gen-

8 eral manager in 1999, he appointed Yu Liang takeovers in China are settled peacefully who left a major state owned enterprise to through negotiations with the help of local be his successor. During the takeover battle, and provincial authorities in order to min- Vanke had the backing of An Bang Insurance imize costs and losses and ensure stability Group, which was the third largest share- of the markets. Further transformation in holder of Vanke before Evergrande joined the ChinaâĂŹs financial markets is likely to see tussle. The founder of An Bang, Wu Xiao- increased activism and corporate takeovers. hui is married to the granddaughter of Deng In fact, Vanke was not the only company to Xiaoping âĂŞ the communist leader cred- undergo corporate takeover in 2015. Tian- ited with pioneering ChinaâĂŹs opening up rui International Holding Co. Ltd increased policy in 1978. It can be argued that the its stake in the major cement maker China success of major companies depends on the Shanshui Cement Group Ltd to 28% in the relationship that exist between the founders open market without declaring this to its tar- and officials in positions of power. get. The tussle went on for several months On the other hand, Baoneng Group was set after which China Shanshui defaulted and up by two brothers, Yao Zhenhua an el- Tianrui International successfully removed der brother of Yao Jianhui, who both con- China ShanshuiâĂŹs management board. In trol Foresea Life and Jushenghua. Baoneng 2004, JapanâĂŹs Sumitomo Mitsui Financial Group, established in 1992 first traded as a Group failed to acquire UFJ Holdings when retailing business but further developed into Mitsubishi UFJ Financial Group crashed the a massive conglomerate through acquisitions takeover efforts. However, outside China, and it now owns over 40 shopping malls. Chinese firms have become popular for huge Its core businesses include real estate devel- acquisitions and investments in real estate, opment, modern logistic industry, cultural football clubs and high tech firms. In U.S tourism and financial industry. China Re- equity markets, corporate takeovers began sources, a multi-business holding state-owned as early as 1893 characterized by horizontal enterprise established in Hong Kong in 1938 mergers where firms in manufacturing and as Liow & Company but later renamed China mining were combining to eliminate compe- Resources Company in 1948. The company tition. Early examples of U.S acquisitions was the largest shareholder of Vanke for the include Standard Oil Company of New Jer- past 15 years before the takeover battle with sey founded in 1870, which made a series 14.89% stake. As the battle continued, a of acquisitions and finally became known as non-executive director of Vanke openly crit- the New Jersey Holding Company; followed icized China Resources for lending cash to by United States Steel Corporation in 1901. Baoneng to finance its acquisition in Vanke. Another great wave of hostile mergers in U.S Baoneng was reported to have pledged 2.02 happened after the dotcom boom in early billion shares in Jushenghua to a division of 1990s and they were characterized by Lever- China Resources in July 2015. In response, aged Buy-outs. China Resources stated that the share pledge was to offset an outstanding payment from Baoneng on a previous real estate project that was jointly developed by Baoneng and 7 Farewell to Arms its subsidy, in 2015. Whether China Resources and Baoneng were After fighting relentlessly for a year and a acting in concert from the first day of the half, Wang Shi managed to bring back Shen- tussle remains unknown to the public. zhen Metro, the same company whose 60 billion yuan deal was blocked by China Re- sources Company in a vote in June 2016. On 13 January 2017, Shenzhen Metro announced 6 A Comparison with that it would buy the entire 15.3% stake of VankeâĂŹs second largest shareholder, China other takeovers Resources for 37.17 billion yuan, thus, an average of 22 yuan per share. Part of the In China, previous acquisitions have not agreement also meant that Shenzhen Metro been as confrontational as the VankeâĂŹs would take over the three board seats in case. Given that the financial markets in Vanke, which were previously held by China China are only 30 years old, the business en- Resources. Apart from that, in June 2017, vironment does not support much activism Shenzhen Metro announced plans for a major that can lead to hostile takeover as com- acquisition of Vanke, which led to the suspen- pared to mature markets. Most corporate sion of Vanke shares for a week from June 7

9 to 11. The restructuring plan saw Shen- ship with Shenzhen Metro would continue zhen Metro acquiring 1.55 billion A-shares to focus on providing integrated urban ser- at a cost of 18.80 yuan per share (a total vices, expanding realty business partnership of 29.2 billion yuan) from EvergandeâĂŹs to property management. The board also subsidiary Hengda Real Estate Group that put up a plan to build 32 lines in total in the controlled 14.07% of Vanke. The restructur- next 10 to 15 years as Shenzhen Metro and ing made Shenzhen Metro the largest share- Vanke continue their expansion into second holder of Vanke garnering 29.37% control in and third tier cities. total.This deal marked the end of the hostile takeover for Vanke. On June 21, 2017, Wang Shi announced his resignation as Chairman of Vanke. The companyâĂŹs president Yu 8 Conclusion Liang took over as the Chairman of the real estate conglomerate. On the same day, Shen- The hostile takeover became a yardstick zhen Metro, VankeâĂŹs largest shareholder for development in ChinaâĂŹs financial mar- proposed nominees for board of directors of kets. In the context of China, the markets whom three were original Vanke directors. are young but with improved regulation and Shenzhen Metro did not nominate any di- transformation, other foreign firms will be- rectors from second or third largest share- come prevalent players in the market. To a holders. An investigation by CIRC revealed greater extent, hostile takeovers in China are that Yao Zhenhua, Chairman of Baoneng had generally not welcome. Vanke became an ex- used funds from his insurance company to un- ceptional case as one of the testing ground dertake a hostile takeover. On January 27, for hostile takeovers on Chinese soil. The Yao Zhenhua was stripped off his leadership takeover attracted major players in the finan- position in Foresea Life Insurance and effec- cial markets including banks, hedge funds, tively barred from the insurance industry for public and private companies. It is interest- a period of 10 years. CIRC also banned Ever- ing to note while the government had to leave grande Life, the insurance arm of Evergrande the battle to market participants, it also had Group, from investing in stocks. a duty to guarantee a level playing field for On June 30, the new board was sworn in, all players. Whether the government carried headed by Yu Liang as the new chairman of out its responsibility without bias is subject the board. Although Baoneng Group did to debate, given that VankeâĂŹs âĂŸwhite not show up at the swearing in meeting, nightâĂŹ was a state-owned conglomerate. Vanke announced that Baoneng Group had The Vanke takeover battle could mark the expressed support for the new board. The genesis of more hostile takeovers in China; a new board agreed that, Vanke, in partner- phenomenon that United States has experi- enced since 1890s.

10