With policy support continuing under measures such as the new National Nine Articles and the Six Measures for M&A, a growing number of IPO hopefuls are treating a sale to a listed company as an alternative route into the capital markets.
But this is not simply a matter of changing lanes. The shift brings a more complex set of challenges. This article looks at the logic behind the move, main points of regulatory scrutiny and the practical implications for dealmakers.
Logic behind switching
Senior Partner
Kangda Law Firm
Tel: +86 10 5086 7666
E-mail:
xiaoyang.kang@kangdalawyers.com
Measures such as the Six Measures for M&A have given industrial consolidation a more flexible institutional framework, but policy is only part of the story. The shift also reflects the core interests of each group involved.
For IPO hopefuls, a sale to a listed company can bring tangible support in the form of capital, industrial resources and market credibility, helping them break through development bottlenecks.
For listed acquirers, M&A can shore up weaknesses, expand scale or open up a second growth curve, improving overall quality. For investment funds, as the IPO route narrows and exit timelines lengthen, M&A offers a more certain path to liquidity.
Taken together, policy support and market demand form the basic logic for M&A as an alternative securitisation route.
Regulatory and review
That this shift broadly aligns with policy does not mean regulatory scrutiny has become looser. If anything, the lens has changed and the review has become more granular and exacting. In practice, regulators tend to focus on several recurring issues.
Valuation. The target’s valuation is often central. Regulators will typically compare the deal valuation against the company’s historical financing valuations and any profit forecasts previously disclosed in its IPO filing materials. The key questions are whether any differences can be justified by sound commercial rationale, and whether the pricing could prejudice interests of the listed company.
Deal background. Regulators will also trace the real reasons why the target withdrew its IPO application. If the withdrawal stemmed from substantive issues such as a sharp deterioration in performance, they are likely to ask whether the target still suffers from deficiencies that would have prevented it from meeting IPO listing conditions – and whether those issues also present an obstacle to the acquisition.
In Huatian Technology’s acquisition of Huayi Microelectronics, the Shanghai Stock Exchange expressly required explanation on these points.
Consistency of disclosure. Regulators commonly require a systematic comparison between the target’s earlier IPO filing materials and disclosure documents submitted for the restructuring transaction. Any material discrepancy must be specifically explained.
The same focus appeared in the review of China Tourism and Culture Investment’s acquisition of Runtian Industrial, as well as Primarius Technologies’ acquisition of Actt.
Valuation adjustment mechanisms (VAMs). Regulators also pay close attention to VAMs and other investor protection arrangements. The review typically centres on whether the legal status of those provisions is clear, whether they give rise to potential disputes or encumbrances, whether they could affect deal certainty, and whether they might revive if the transaction is terminated.
Those issues may in turn affect deal stability, the target’s shareholding structure, and post-closing control and integration.
Practical advice
Compared with the relatively settled review procedures and standards for IPOs, M&A transactions involve more complex deal dynamics and require parties to navigate both commercial bargaining and regulatory scrutiny. Three areas deserve particular attention:
Decision making and initial assessment. First, companies should take a hard look at their own competitive strengths, and ability to operate on a sustainable basis. If performance is in sustained decline and there is no credible response strategy, it will be difficult to show that the deal benefits the listed company. A change of route should not be seen as a way around a fundamental business problem.
Second, valuation logic needs to be recast in an M&A context. Unlike the relatively mature pricing framework for IPOs, M&A valuation is generally justified by reference to a wider mix of factors including earnings forecasts, synergies, control premiums and comparable transactions.
Deal structuring. A well designed structure can help balance interests and improve execution certainty. That may include differentiated pricing arrangements to address the needs of different participants, VAM mechanisms to bridge valuation gaps, or a staged acquisition scheme – acquiring a minority stake before obtaining control – to contain decision risk.
But structure must also stand up to regulatory scrutiny. Questions will include whether any performance commitment is consistent with the profit forecasts underpinning valuation, and whether post-closing governance, control and integration arrangements meet the standards expected of a listed company.
Only a structure that is compliance-led while still balancing commercial interests is likely to support a smooth closing.
Compliance remediation. Choosing M&A as the capital markets route does not mean lower compliance standards. Before launching a transaction, the company should still conduct a systematic compliance review against IPO-level standards.
Remedial steps can be factored into the transaction structure, for example, by carving out defective assets or business lines as part of the deal. But there should be no illusion about how much a transaction structure can absorb by way of compliance defects.
Companies should also assess carefully how those defects may affect valuation and increase review risk.
Key takeaway
In broad terms, a decision by an IPO hopeful to pursue M&A can be a rational response to market conditions. But whatever route to securitisation is chosen, compliance remains a threshold issue. Problems exposed during the IPO process do not disappear simply because the path changes.
The only sustainable approach is one built on forward-looking compliance planning, a robust industrial logic, and effective post-deal control and integration. That is how companies stand the best chance of balancing commercial value with regulatory discipline.
Kang Xiaoyang is a senior partner at Kangda Law Firm. He can be reached by phone at+86 10 5086 7666 and by mail at xiaoyang.kang@kangdalawyers.com
