As Published In Billionaire’s Gamble on Distressed US Firm Reflects Growing Confidence of Chinese Investors DAK Group’s Sheon Karol asked to comment. Written by Jodi Xu Klien how Chinese investors are stepping up in an unprece- Chen Tianqiao has placed one of the biggest wagers of his dented way to seek returns by helping to run businesses. life. And it may finally be starting to pay off.Chen, through For some US deal makers, Shanda’s approach reflects Chi- his Singapore investment firm Shanda Asset Management nese investors’ growing acumen in overseas investing. Holdings Limited, has accumulated a large stake in the struggling Tennessee company Community Health Sys- tems. Between early 2016 when Chen first bought shares of the operator of acute care hospitals, and January of this year, the share price plummeted more than 80 per cent, from US$20 a share to below US$4. The Chinese billionaire is betting he can catch outsize re- turns on his investment in the distressed US health care provider when its share price improves. To make sure that happens, his investment firm stated last March it intended “to engage with (Community’s) management team regard- ing (its) business and operations and the status of the on- going turnaround strategy.” This month, Community Health’s shares have staged a 37 per cent recovery, hitting US$5.50 this week. If the turna- “They [Chinese investors] are becoming round eventually comes to fruition as planned, Shanda, more confident about investing in so- whose 24 per cent stake in Community Health makes it the phisticated economies” Sheon Karol, company’s largest shareholder, stands to gain the most. The DAK Group “We are happy to see recent Community Health System “They are becoming more confident about investing in so- gains and increased investment from other firms such as phisticated economies,” said Sheon Karol, managing direc- BlackRock,” Jason Reindrop, a spokesman for Shanda, tor at The DAK Group, which advises on cross-border told the South China Morning Post. “We support the com- mergers and acquisitions. pany and take a contrarian position against prevailing mar- ket sentiment when needed.” Such an active investing style calls to mind a similar strat- egy employed for years by US investors. In US-style share- It is still too early to predict how the investment will pan out. holder activism, investors typically urge management to But Shanda’s active involvement in US companies shows make business changes. This approach is usually more 195 Route 17 South, Rochelle Park, NJ 07662 201.712.9555 www.dakgroup.com 0118 public, involving investors sending critical letters to man- with assets under management of US$15 billion, made a agement and engaging in publicity antics. run at distressed retailer JC Penney in 2010. “Shanda’s strategy is different from that of an activist,” Pershing Square bought 18 per cent of JC Penney’s shares Reindrop said. “Shanda seeks out and invests in underval- outstanding and hand-picked Ron Johnson, a star retailer ued companies when we agree with their turnaround strat- at Apple, as the floundering department store chain’s new egy.” But US investors and professionals see it differently. CEO. The failure of Johnson, who had been Apple’s senior vice-president of retail operations, to turn around JC Pen- “It will be crazy to get to that level of holdings and stay pas- ney cost Ackman hundreds of millions of dollars and sent sive,” said Jeff Gramm, author of Dear Chairman: Board- the iconic retailer to the brink of collapse. room Battles and the Rise of Shareholder Activism, and a professor at Columbia Business School in New York. Publicly disparaging management for a fast gain has stig- matised the strategy. “Chinese investors may be more low profile and like to in- fluence things behind the scenes. But they are for sure an In an attempt to discourage so-called short-term activism, activist.” prominent US investors including Warren Buffett and JPMorgan’s Jamie Diamond signed on to a list of sug- And it is reasonable for any investor to adopt an activist gested changes for companies to adopt, titled “Com- mentality. “If you are a shareholder in a company that is monsense Corporate Governance Principles”, in July 2016. distressed, the board has a lot of leeway to not to do right by shareholders,” Gramm said. But that is not the only type of activism. For large share- holders less interested in turning a quick profit, another A spokesman at Community Health did not respond to a strategy is focusing more on the businesses’ long-term request for comment. health and engaging with management to improve ineffi- ciencies. “Chinese investors may be more low profile and like to in- fluence things behind the scenes. But they are for sure an Buffet’s advice to American Express remains a good exam- activist.” Jeff Gramm, author and professor at Columbia ple of how investors can trade short-term losses for long- Business School term gains. Active investors have fared better too. Except for 2017, US In the 1960s, American Express was embroiled in the Great funds focusing on activism have annually beat the hedge Salad Oil fraud, involving a New Jersey company that used fund index at least since 2012, according to HFR, a data water instead of oil as the collateral for its loans. In reality provider tracking US hedge fund performances. the supplier, Allied Crude Vegetable Oil Refining Corp, had filled salad oil tanks with water and put a few feet of oil on After the 2008 financial crisis, activism became a much top, deceiving everyone. more popular tactic in the eyes of investors looking for bet- ter returns. The scandal could have toppled American Express, a major lender. Buffett, then a large shareholder in American Ex- The amount of US capital dedicated to activism almost press, called for the company to “compensate parties who quadrupled to US$125 billion at the end of the third quarter were defrauded in the swindle,” pitting himself against last year, the latest figure available, from US$32 billion at some large stockholders that advocated for the company to the end of 2008, HFR data shows. ignore the issue. “It has now become an alternative that many more share- Buffett’s advice allowed American Express to emerge from holders are considering,” said Gerald Brant, a lawyer at the scandal with its reputation intact. Akin Gump. “It has become more than a niche strategy.” For Shanda, its relationship with Community Health has The approach, however, can backfire. Shareholders often been constructive. In January, as the investor announced it can make a quick buck by pressuring companies to shake had increased its stake to 24 per cent, Community Health’s up the executive suite, pay dividends or sell assets, all of chairman and CEO Wayne T. Smith said: “We are pleased which can damage long-term business prospects. In a with Shanda’s continued support and welcome and value worst-case scenario, shareholders and companies both the input of Shanda and all of our stockholders.” lose. Billionaire hedge fund investor Bill Ackman, a high- profile US activist who runs Pershing Square Capital, a firm Investing in Community Health may have originally looked like a safe bet since it is the largest US public health care 195 Route 17 South, Rochelle Park, NJ 07662 201.712.9555 www.dakgroup.com 0118 provider. But after Shanda got in, revenue continued to plunge and the company struggled to pay interest on its US$15 billion of debt. Now, under the Trump administration, the sector is likely to face more headwinds as health care reforms may further Sheon Karol chip away at hospital revenue. Sheon Karol is a Managing Director of The DAK Group, an investment bank specializ- It is unclear how much Shanda has put up to buy Commu- ing in middle-market, privately-held compa- nity Health’s shares over time. But it is clear the firm took a nies, advising business owners on sell-side hit, given the stock’s 80 per cent price plunge during the and buy-side transactions and financial re- period. If Community Health files for bankruptcy, Shanda’s structuring. He has extensive experience working with clients both domestically and entire investment is likely to be wiped out. internationally. Email Sheon directly at [email protected] Switching to a more active approach may be Shanda’s best defence. Community Health in mid-December appointed two new members, Michael Dinkins and K. Ranga Krishnan, to the board. One of them – Krishnan – sits on a board with Chen on Access Health International, an Indian non-profit health care think tank. Following news that the firm aims to push out its debt ma- turity through a refinancing, Community Health’s stock has risen this month. Shanda has not stopped at Community Health. Chen and Shanda’s president, Robert Chiu, in February 2017 were elected directors of another US investment company Legg Mason Inc, gaining a say in corporate decisions. (They both resigned in October after selling half the shares Shanda owned.) In December, Shanda disclosed in a regulatory filing that it held a gigantic 20.6 per cent stake in US peer-to-peer lender LendingClub Corp. That amount of investment gives Shanda a say in the lender’s business. Chen may be one of the earliest Chinese investors to gain a voice in US boardrooms. But this development may mark the start of a shift in how investors from China relate to US companies as outbound investment continues to rise. Chinese investment in the US reached US$29 billion in 2017 and US$46 billion in 2016, according to Rhodium Group.