By Vipal Monga 

U.S. computer distributor Ingram Micro Inc. got more than a handshake in February when it signed a takeover deal with a Chinese conglomerate.

It got money in the bank. Ingram received a $400 million deposit in an escrow account located outside China. It will collect that sum if the buyer, a unit of HNA Group, can't close the deal.

Reverse breakup fees, which buyers pay to sellers if they can't complete an agreed-upon transaction, are common in mergers. But it is unusual to demand that the buyer set the funds aside in a bank account.

In the Ingram deal, HNA, which is based in Hainan province, put the funds in an account with Deutsche Bank AG.

"You don't want to have to chase your breakup fee to China," said a person close to the deal.

Western companies are wary of suing for breach of contract in a Chinese legal system they may not fully understand, this person said.

Many American companies have been cautious toward Chinese buyers after instances of botched bids, the buyer's failure to pony up, and deals blocked by the U.S. government on national-security grounds.

That is why companies targeted in recent Chinese takeovers have asked for escrow accounts or letters of credit to guarantee deal financing or breakup-fee payments. The fees they demand can be twice as high as in other deals because of the perceived risks.

The fee HNA agreed to pay equals 6.7% of the Ingram deal's $6 billion value, compared with the 2% to 4% more common in non-Chinese deals.

Chinese takeovers are on the rise. The global value of deals announced by Chinese buyers of non-Chinese companies totaled a record $119 billion as of Monday, more than the $107 billion for all of 2015, according to Dealogic.

Recent deals include the largest-ever foreign takeover by a Chinese buyer: the pending $43 billion purchase of Swiss seed and pesticide company Syngenta AG by China National Chemical Corp. Earlier this month, Chinese home-appliance maker Midea Group made an unsolicited $5 billion offer for German robot maker Kuka AG.

"The deals are getting bigger and bolder," said Samson Lo, head of Asia mergers and acquisitions for UBS Investment Bank.

Negotiators for printer maker Lexmark International Inc. wrestled with questions of Chinese financing and regulatory approval before moving ahead with a deal to sell the business for $3.6 billion to a Chinese consortium, according to a securities filing made last week. The Chinese group was led by printer-component maker Apex Technology Co. and private-equity firm PAG Asia Capital.

Central to the deal: a $150 million reverse breakup fee the acquirers would have to pay if the deal doesn't pass muster with Chinese authorities. The buyers would be on the hook for a $95 million payment if U.S. regulators blocked the deal. The payments are secured by a letter of credit that Lexmark could cash at the New York branch of the Bank of China.

"It's the equivalent of a security deposit," said a person familiar with the transaction.

A Lexmark spokesman declined to comment. Apex didn't reply to a request for comment.

Some Chinese buyers haven't followed through. In March, Anbang Insurance Group Co. surprised Starwood Hotels & Resorts Worldwide Inc. by walking away from its proposed $14 billion bid for the hotel chain. The Chinese insurer never gave a full, public explanation of why it abruptly dropped its pursuit after it sparked a bidding war with Marriott International Inc. Marriott ended up buying Starwood for $13.6 billion.

Anbang and Starwood declined to comment.

While such incidents are relatively rare, they can overshadow successful deals, such as Anbang's $1.6 billion acquisition of Fidelity & Guaranty Life, unveiled in November.

Regulatory scrutiny is another concern. Many Chinese deals are reviewed by the Committee on Foreign Investment in the U.S., which can block acquisitions that pose national-security concerns.

In January, CFIUS blocked Phillips NV from selling most of its Lumileds LED light-bulb business to an investment fund led by Chinese venture-capital firm GSR Ventures. The committee doesn't explain its decisions.

Some Chinese companies are beginning to balk at paying reverse breakup fees, in case CFIUS blocks their deals. In the auction of Ingram Micro, two other Chinese bidders refused to pay a reverse termination fee, which was partly why their bids didn't succeed, according to a Securities and Exchange Commission filing.

Corporate boards should assess the risk that the U.S. will derail their deals, said Mario Mancuso, head of law firm Kirkland & Ellis LLP's international trade and national-security practice. Mr. Mancuso sat on the CFIUS panel between 2007 and 2009.

"Boards can mitigate that risk and get compensated for it, or they can avoid taking it altogether," he said.

 

(END) Dow Jones Newswires

May 23, 2016 20:16 ET (00:16 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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