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Is the Party Over?

Some of the exuberance is winding down, but Asia's investment bankers are still working on a long queue of IPO, M&A, and other financing deals.
Cesar Bacani, CFO Asia
January 17, 2008

When India's ICICI bank issued a US$750 million five-year bond in January of this year, it achieved a pricing of 174.8 basis points higher than similarly dated U.S. Treasuries. Not too shabby in an environment of abundant and cheap credit. Fast forward eight months. In September, ICICI again tapped the global debt markets with another five-year fixed rate note. This time, however, it had to accept an interest rate that was a whopping 237.5 basis points above U.S. Treasuries.

And this was during a relatively calm period after the first ructions in July over the sub-prime crisis in the United States, which had caused credit markets to seize up. Had ICICI held out for a better pricing, it might now be unable to raise capital at all. In November, Chinese property developer Country Garden pulled a US$1 billion global bond issue because virtually no investor in America was buying.

So is the party over in Asia? It looks like it for offshore debt financing and private-equity fueled leveraged buyouts, at least in the short term. A bank typically holds capital equivalent to 10 percent of its loan book, meaning that a dollar of capital can potentially translate into ten dollars in loans. When bank capital is reduced because of provisions for losses arising from the subprime crisis, the bank's ability to lend is compromised. In all, banks worldwide are estimated to have made US$66 billion in provisions, in effect shrinking the pot for loans by US$660 billion.

But the fallout has been much less pronounced in Asia, and this is stoking optimism that the party will get going in this part of the world again. "There's plenty of money available for acquisitions and investments anywhere in the region," says Neil Galloway, managing director and head of M&A/ECM Asia for ABN Amro. "When the merry-go-round stops [in the United States], everything stops. Here in Asia, you still have liquid local and regional banks and private client wealth supporting IPOs."

While selling global bonds and raising debt funding for leveraged buyouts may be a hard slog at the moment, the region's investment bankers say Asia's underlying growth story remains unimpaired. True, stock markets have come down sharply from record highs, which might discourage IPOs and follow-on offerings. But, argues an investment banker who handles equity syndicates: "Asia had an absolutely phenomenal year and investors are now taking a step back to ensure expectations are brought back into sync. The drinks are finished, and we're just getting to the next round."

The biggest deals in Asia in the past year have been outbound M&A, led by Tata Steel's US$13.6 billion acquisition of Anglo- Dutch behemoth Corus. Figures compiled by Thomson Financial show that outward acquisitions in Asia (ex-Japan and ex-Australia) in the year to November have breached the US$84 billion mark, which is up 99 percent from the same period last year, and is nearly 12 times the total of 2003. Singapore-headquartered companies topped the cross-border buyers' list with US$21.5 billion, followed by India with US$20.1 billion, and China with US$18.9 billion.

These trends are evident in CFO Asia's choices for Asia's Best Deals of the Year, where we honor deals that have been especially responsive to the CFO's remit to transform the enterprise, even to the point of helping usher in changes in regulations and market practices.

The year has been replete with eye-popping transactions that made it to our shortlist, among them ABN Amro's US$11.7 billion privatization of Malaysia's Maxis, UBS's US$7.2 billion acquisition of LG Card for Korea's Shinhan, Citi's US$5.9 billion IPO of China CITIC Bank, Goldman Sachs' US$1.7 billion float of China's, Morgan Stanley's US$1.6 billion listing of Chinese developer Country Garden, and ABN Amro's US$1.5 billion leveraged buyout of Singapore's UTAC by two private-equity firms.

But it is the ten deals profiled in the following pages that we judge to be the best of the best. A hint to Asia's CFOs: The way the region's business environment is shaping up, you are likely to be tempted into going to the capital markets again or into doing so for the first time as the 2008 party gets underway. You might pick up a lesson or two from these winners of the 2007 Asia's Best Deals of the Year Awards.

Cracking the Crunch
Financial advisors: Deutsche Bank, Goldman Sachs, Merrill Lynch
Why would a well regarded borrower like India's ICICI Bank accept a bond pricing that's far more expensive than what it got just eight months ago? Three words: global credit crunch. After achieving a pricing of 174.8 basis points higher than similarly dated U.S. Treasuries on a US$750 million five-year bond in January of this year, ICICI returned to the market in September and agreed to pay interest of 237.5 basis points above U.S. Treasuries. At US$2 billion, it was the biggest single-tranche bond offering ever in Asia (ex-Japan).

Welcome to the new realities of raising debt in very uncertain times. "This transaction was very opportunistic," says Jon Pratt, head of debt capital markets, Asia origination, at Merrill Lynch, one of ICICI's three financial advisors. Companies normally don't go on the road unless they're sure a transaction would follow for fear of being seen as a failure. ICICI recognized that things have changed. Even as capital markets seized up over the U.S. sub-prime crisis, it went on a two-week "non-deal roadshow" targeting investors in Hong Kong, Singapore, Europe, and the United States.

Then the bank waited. On September 26, a week after the U.S. Federal Reserve cut interest rates by 50 basis points and appeared to have calmed the markets, ICICI launched a global bond that closed the same evening in the United States. More than half of the global investors ICICI met previously put in orders, resulting in an order book that was three times oversubscribed. It helped that ICICI did not flinch from paying a high premium.

By biting the bullet, ICICI helped revitalize the Asian bond market, at least for a while. Investors had fled in August and early September because of the uncertainties over the fallout from the sub-prime crisis on the global economy (see "Asia's Bond Crunch" at the end of this article). After the ICICI deal, companies were able to raise more than US$2 billion from bond offerings, until new disclosures of sub-prime losses in October shut the window again.

With US$2 billion in its war chest along with US$750 million raised in January and US$4.9 billion follow-on equity offering in June, the bank can afford to wait out a financial crisis. Eventually, it will need to return to the markets given the rapid rise in the number of Indian companies acquiring assets abroad. Indian regulations restrict the ability of corporations to raise cross-border money, so they have no choice but to turn to banks like ICICI. For now, at least, there is enough in the till to fund India Inc.'s international expansion.

Underdog Story
Financial advisors: ABN Amro, Deutsche Bank, NM Rothschild
It was the most exciting auction London had seen in years. The two bidders, Brazil's CSN and India's Tata Steel, were evenly matched, each boasting annual revenues of more than US$4 billion. Their quarry was the much bigger Anglo-Dutch giant Corus Group, the world's 10th largest steelmaker with sales last year of US$19.2 billion. The contest became so heated that the UK's Takeover Panel organized an auction in January that featured eight rounds of E-mail bidding, and a ninth and final round of sealed bids submitted to the Panel.

At the outset, Tata Steel played the underdog. Sources say the Indian group leaked its supposed worries to the press about its inability to match CSN's financial firepower. At the auction, Tata consistently increased its bid only by the minimum of 5 pence per share. At the end of the eighth round, the price had soared to 590 pence, largely on aggressive bidding by CSN. In the final sealed bid round, however, Tata raised the ante by a hefty 18 pence to 608 pence. CSN was lulled into thinking the Indians would not go that high — its final bid was reportedly 3 pence lower.

Tata is now the world's sixth largest steelmaker; before pulling off India's largest overseas acquisition, it was way down at No. 56. But did it overpay? Tata had first offered to buy Corus for 455 pence per share, and then increased the bid to 500 pence when Corus made a counter-offer of 475 pence. Corus initially accepted Tata's sweetened bid, but turned around and said yes to CSN when the Brazilian steelmaker's offer rose to 515 pence.

At the final auction price of £6.7 billion (US$13.6 billion at current rate), Tata Steel shelled out 55.8 percent more than its original offer. The winning bid valued Corus at nine times 2006 EBITDA, higher than the 5.8 times EBITDA Mittal Steel paid for Arcelor last year. Tata evidently believed it got good value — financial advisor ABN Amro had arranged financing that was "well beyond 608 pence," says Frank Hancock, who looks after ABN Amro's corporate finance business in India. The precise amount is subject to a confidentiality agreement with the Takeover Panel.

"Tata Steel is the lowest-cost steel producer in the world," he adds. "You can put that kind of low-cost manufacturing capability together with the high-end engineering and process capabilities, distribution and marketing of Corus to create a world beater." There is no guarantee that Tata will successfully integrate an operation more than three times its size and reap the US$350 million in savings from the synergies it expects. But in a rapidly consolidating global steel industry, it has at least bought a golden ticket in the race to become one of the eventual winners.

Contrarian Play
Financial advisors: Goldman Sachs, UBS
Buy low, sell high. Hong Kong billionaire Li Ka Shing's Hutchison Whampoa got the first part right when it entered India's telecom market in 1994, before mobile, broadband, and other telecom services became the ultra-hot services they are today. The problem was the second part. Over the years, the conglomerate's Hong Kong and New York–listed subsidiary, Hutchison Telecommunications, had accumulated 67 percent of Hutchison Essar, a leading telco in India, for about US$1 billion. The offers to buy the controlling stake had become insistent. But what price made the most sense? Hutchison tends to be a contrarian — it comes in when no one is buying or everyone is fleeing, then after enhancing value, it is open to exiting if the purchase price exceeds what it expects to earn from the enterprise. But it was clear that only a handful of companies had the kind of money to buy the 67 percent stake. Recent Indian telecom deals placed enterprise value over last 12 months' EBITDA at 19 to 20 times; at those towering valuations, Hutchison's stake was potentially worth US$8.6 billion.

And Hutchison felt it could get even more. It asked Goldman Sachs, its financial adviser on nine earlier deals, to devise a formal process so bids from strategic players like Vodafone and Reliance Communications and private-equity firms could be evaluated. One wrinkle was Essar, the Indian partner that owned 33 percent of the company, which asserted that it had the right to buy the stake first. Hutchison said there was no such agreement. Buyer interest could have cooled if indeed Essar had first dibs.

In the end, Vodafone paid 28.2 times EBITDA, far higher than the comparables. Advised by UBS, the UK group ponied up US$10.7 billion in cash and assumed some US$2 billion of Hutchison Essar's net debt. Essar was won over by an offer to grant it a put option to sell its 33 percent holdings to Vodafone for US$5 billion. Because foreigners cannot own a 10 percent share in two Indian telcos simultaneously, Vodafone sold its 5.6 percent direct holdings in Bharti Tele-Ventures to the Bharti Group. It also needed approval from India's Foreign Investment Promotion Board.

Did Vodafone overpay? "The judgment you bring when valuing a target is much more sophisticated than just looking at precedent deals," says Matt Hanning, head of M&A at UBS, Vodafone's financial advisor. "You look at the asset's fundamental value, cash flows the combined businesses are able to produce, synergies you're going to derive, strategic value to the acquirer, and company and country growth rates." On these measures, Vodafone was convinced the deal was worth the money.

As for Hutchison Telecommunications, the windfall came before the advent of the credit crunch associated with the U.S. sub-prime mortgage crisis. If economies and markets tank, it has the firepower to play the investment contrarian once again.

As the World Turns
Financial advisor: Citi
In Korea, M&A tends to be a distasteful term — it brings up thoughts of foreign carpetbaggers buying up Korean companies brought to their knees by the 1997 Asian financial crisis. That may soon change. In November, Doosan Infracore closed a deal to buy the Bobcat, Utility Equipment and Attachment businesses of U.S. industrial giant Ingersoll-Rand for US$4.9 billion. Korea's largest ever foreign acquisition, the transaction may persuade the country's traditionally inward-looking family conglomerates to consider outbound M&A as a quick way to build a global footprint.

Doosan had been eyeing the Ingersoll assets for some time, but when the company finally decided to divest, the Koreans were not on the list of buyers. "Somehow the vendor was advised that Asian buyers were not credible participants in the sale process," says Shaheryar Chishty, co-head of industrials at Citi, Doosan's financial advisor. "But Doosan was able to demonstrate that it could move quickly and had the credibility and experience."

Doosan executives met with their Ingersoll counterparts to show that the Koreans were professionals who knew the construction equipment business inside and out. The company showed it had the financial strength to complete a purchase quickly, putting up US$700 million in cash from its own resources and arranging a US$4.2 billion loan from the state-owned Korea Development Bank. Finance Minister O-kyu Kwon had earlier promised government support for domestic commercial banks that back outbound M&A activities by local corporations.

With the acquisition, Doosan transformed itself into the world's seventh-largest construction equipment player, up from No. 19, and acquired an instant 38 percent market share in the United States and 43 percent in Europe. Now comes the hard part of reaping synergies by engaging in joint R&D activities among units in the United States, Europe, China, and Korea, reducing costs through greater economies of scale, and deploying Ingersoll's world-class technologies and brands in the massive Chinese market. Korea's other family corporations will be watching.

Best Gear Forward
Financial advisor: Morgan Stanley
The Nanjing-based private-sector company had an image problem as it prepared for an initial public offering in Hong Kong. While it had changed its name last year from the provincial sounding Nanjing High Speed & Accurate Gear to the more upscale China High Speed Transmission Equipment Group, its product mix still marked it as a boring maker of machinery for ships, locomotives,sugar mills, and factories. Precision gear for wind power equipment, one of the sexier parts of the renewable energy sector, accounts for only about a fourth of the company's revenues.

China High Speed's comparables in the industrial machinery sector were valued in the mid-teens in terms of forward price-earnings multiples. In contrast, Chinese solar cell manufacturer Suntech Power was trading on the New York Stock Exchange at 23 times projected 2008 earnings, about the same valuation investors were according wind-turbine maker Suzlon Energy at the National Stock Exchange of India. "Our target was to price at or through earnings multiples comparable to best-in-class Asia renewables," recalls Christopher Huang, who manages the global power and utilities group at Morgan Stanley.

Towards that end, the bank helped China High Speed negotiate with GE for the latter to take up 50 percent of the company's future order book of 1.5 megawatt turbine sets by 2010. China High Speed had become important to GE because its rivals had acquired many independent wind gearbox suppliers. GE also made a pre-IPO equity investment equivalent to 5 percent of China High Speed's stock.

"Management did an excellent job selling their story," says Huang. The narrative included not only GE's entry, but also the participation of Templeton, DPF, and Value Partners, which had bought China High Speed's convertible bonds, the company's 90 percent share of China's wind gearbox market, which is growing at 100 percent per annum, and growing sales to global players such as Germany's Nordex and Repower Systems.

The outcome: an IPO priced at 90 cents per share, 24 times projected 2008 earnings and a 54 percent premium to Chinese industrial machinery comparables. On its first trading day on July 4, the stock closed 98 percent up, at that time the best debut in Hong Kong since 1997, which raised the question of whether Morgan Stanley had underpriced the issue. "I don't think we could have priced it any higher," says Huang. It would have been foolhardy to go far beyond the valuation of the renewable energy comparables.

The challenge now is for China High Speed to deliver on the rich valuations, including moving up the value chain to become a wind turbine manufacturer itself. But that's another story.

Method to the Madness
Financial advisor: Merrill Lynch
When Rizal Risjad, son of Indonesian tycoon Ibrahim Risjad, moved to roll up his 9.3 percent stake in PT Berau Coal to 90 percent in mid-2006, the strategy was to talk down the target's prospects in order to buy additional shares at a reasonable price. So the fact that the costs of Indonesia's fourth-largest coal mine were US$19/ton versus US$12-17 at Indonesian comparables was played up, along with the company's legal problems and Kafkaesque ownership structure comprising multiple shareholders and creditors. End result: Rizal got the shares at 3.62 times 2006 EBITDA, lower than the valuation of 4.5 to 7.6 times of comparables in Asia.

Six months later, in December last year, Rizal was ready to refinance the US$279 million in one-year loans and two-year collaterized equity leveraged loans securities (CELLS) he used to fund the purchase. The chosen vehicle was a US$325 million five-year dual tranche high-yield bond issued by a Singapore entity and guaranteed by PT Berau. This time, the aim was to showcase PT Berau's prospects and creditworthiness in order to get the most favorable interest rate.

So the talk was about PT Berau's new cost structure, which at US$20.61 per ton freight on board was 48 percent lower than the U.S. average and 22 percent cheaper than Australia's. All the lawsuits had been settled, the ownership structure had been simplified, new management had been installed, and the coal industry was on the upswing.

End result: 9.37 percent annual interest on the fixed-rate tranche and 375 basis points over Libor for the floating rate tranche, versus 800 basis points over Libor for the CELLS. And the book was nine times oversubscribed. "PT Berau is now wellplaced to consider future strategic alternatives," says Jon Pratt, head of debt capital markets, Asia origination, at Merrill Lynch.

Transparent as Water
Financial advisor: ABN Amro
The Philippines privatized the supply of water, sewage, and sanitation services in metropolitan Manila in 1997 by entering into 25-year concession agreements with two privatesector firms, one of them Maynilad Water. But the Asian financial crisis later that year and other problems wreaked havoc on Maynilad's finances. In 2003, it sought court protection after defaulting on its loans. In 2005, the court approved an agreement between creditors and shareholders that gave MWSS, the water authority, an option to subscribe to 83.97 percent of Maynilad's equity.

MWSS proceeded to auction off its option in 2005, in effect re-privatizing Maynilad. Everyone knew it was going to be a tough sell. Maynilad was in shambles and there was considerable skepticism about government transactions in general, many contracts having been marred by delays, capricious and opaque processes, and charges of corruption and rigging.

Financial adviser ABN Amro designed an auction process for MWSS that emphasized transparency and fairness. "Throughout the entire selection process, we held discussions with each of the stakeholders to understand their respective issues," says Jason Rynbeck, ABN Amro's head of mergers and acquisitions, Asia. Regular public updates were issued through the two year process that ended this January, when local companies DMCI Holdings and Metro Pacific Investments won MWSS's option for US$503.9 million.

The room erupted in cheers and some MWSS officials were in tears when the bid amount was announced. The water authority had expected the top bid to equal US$100 million, at most. The minimum bid had been set at US$56.7 million, the amount the rehabilitation court said was due to MWSS. Any amount beyond that would be earmarked to repay creditors, which will take Maynilad out of rehabilitation, and to fund capital expenditures, strong incentives for the seven international and four local companies to make high bids.

The Maynilad deal has created a template for future privatizations in the Philippines, says Rynbeck. It also shows that, if the process is done right, local and international investors are ready to bet on the country. This thesis will be tested soon: Manila is due to privatize the national power transmission infrastructure before the year's end.

Goodbye, Singapore
Financial advisor: UBS
Want Want Holdings felt unloved. The snack food and beverage company has 85 percent of China's rice cracker market and 40 percent of the children's drink market. Yet its stock in Singapore was trading at just 18 times estimated 2007 earnings and its last 12 months average daily trading volume was less than one percent of its total share register. In contrast, comparables in Hong Kong boasted a P/E of around 39 times and were traded briskly. Two key reasons were advanced: the lack of Chinese food and beverage comparables in Singapore and Want Want's investments in non-core hospitals and hotels.

On May 14, company chairman Tsai Eng Meng and his board issued an interim announcement on the voluntary delisting of Want Want at US$2.35 per share, 41 percent higher than the average price in the 180 trading days to the announcement. It was the first time in Singapore that a delisting announcement included an offer price. Regulators had queried this deviation from usual practice. Want Want explained that it wanted to make sure minority shareholders, who held 27 percent of the stock, would not lose out by selling their shares at prices lower than what it was offering.

UBS, Want Want's financial advisor, structured the privatization as a voluntary offer rather than a scheme of arrangement, to minimize taxes, speed up the process and reduce regulatory obstacles. In a voluntary offer, all shareholders can vote and blocking the proposal would require 10 percent of voted shares. In a scheme of arrangement, the blocking vote is 6.7 percent, but only minority shareholders can participate; with low voter turnout, a group representing only 2-3 percent of shareholders can shoot down the privatization.

In the end, more than 99 percent of shareholders voted to accept the offer. Want Want's share price did move up in the 30 days leading to the May 14 announcement, to the point where the offer price represented just an 18 percent premium to the average trading price during the period. The pre-emptive announcement of the offer price may have prevented speculators from driving the stock higher, which could have pressured Want Want into increasing its offer.

A private company again, Want Want plans to spin off its hotel, hospital and property development interests to make itself a pure food and beverage play once again. It is also considering relisting in China or Hong Kong. UBS, BNP Paribas, and Goldman Sachs arranged an 18-month US$850 million bridge facility secured against 51 percent of Want Want. The intention is to refinance the bridge through a longer-term debt facility or through equity proceeds. From a seeming dead-end in Singapore, Want Want now has a set of options that could transform its valuation fortunes going forward.

Hello, Vietnam
Financial advisor: Credit Suisse
There's a lot of hype surrounding the sale of 10 percent of Vietnam Insurance (BaoViet) to HSBC Insurance, but there is substance too. Touted as a trailblazer for the future privatization of Vietnamese state-owned enterprises, the deal was the first M&A completed under Decree 109, a new regulation implemented in June this year that aims to reduce government involvement in business by equitization of shares in state-owned companies. The decree also allows foreigners to become strategic investors in the state sector.

But the sale required a lot of agile footwork. "It was a new thing both for the country and the company, so there was obviously going to be teething problems," says Andrew Leo, vice president of the financial institutions group at the investment banking department of Credit Suisse, Bao Viet's financial adviser. One challenge was the timing — the sale process started in January, well before Decree 109 was signed. By the time BaoViet received binding bids in May, there was still no clarity as to what the law would require. A key concern was a proposed clause that would require strategic investors to pay a price not lower than the IPO price for domestic investors. There was no saying whether the offers BaoViet received would comply with Decree 109.

The logical choice would have been to schedule the bidding after the IPO price had been determined and Decree 109 had become law. But BaoViet was under pressure to move fast. Under a separate set of regulations, a state-owned company would lose the right to equitize if it does not execute its approved equitization plan within a certain time period. BaoViet decided to move the IPO forward to May, even though Decree 109 had not yet been issued. The Dutch auction resulted in a price of 71,918 dong (about US$4.65) per share.

BaoViet asked the bidders to amend their offers and at least two — neither BaoViet nor Credit Suisse would say exactly how many — came back with bids of US$4.65 per share, exactly at the IPO price. In September, three months after Decree 109 became law, BaoViet signed a definitive agreement to sell a 10 percent equity interest to HSBC Insurance for US$254 million, as well as an option to sell 8 percent more after 18 months, subject to HSBC meeting performance benchmarks under the Technical Services and Capability Transfer Agreement it signed with BaoViet.

These days in Vietnam, technology transfer is as important, if not more so, than the financial windfall to state-owned enterprises, says Leo. Companies that are looking to participate in the economic resurgence of the next China, as Vietnam describes itself, will do well to keep this in mind.

Counting on Private Equity
Financial advisor: Macquarie Securities (Asia)
Teh Bong Lim's dilemma is familiar to many Asian entrepreneurs. For several years now, the company he founded in 1989, Singapore-listed MMI Holdings, has been trying to diversify its customer base and expand its products beyond the machining and sub-assembly of electromechanical components for hard disk drives. But a venture into mobile phones did not succeed and the effort to sell to other companies, in addition to U.S. storage giant Seagate, was not showing results. So when Macquarie Securities proposed a buyout by private-equity investors and strategic players, Teh was receptive. The hope was that the new investors would succeed where MMI on its own had failed.

To maximize competitive tension, Macquarie introduced a number of investors to MMI, and then conducted a formal sale process with qualified bidders to get the highest price and most advantageous terms. In April, Precision Capital, a special purpose company owned by funds affiliated with and advised by U.S. private- equity specialist Kohlberg Kravis Roberts (KKR) paid US$664 million for all of MMI's shares. The deal valued MMI at US$1.14 per share, 51.3 percent higher than the stock's volumeweighted average price in the 12 months to February 8, 2007, the day before MMI announced it had received expressions of interest in a possible buyout.

As part of the post-deal agreement, Teh and his management team reinvested part of what they received from KKR into the now-private MMI. They continue to manage the company, with KKR providing advice and, more important, introduction to its vast network of international players that might become partners and customers of MMI.

Atin Kukreja, Macquarie's executive director, sees similar deals in Singapore going forward. "Ten years ago, if you asked a Singaporean businessman if he wanted to cede control, he would throw you out," he says. "That whole mindset has changed." Some entrepreneurs are facing another familiar problem — none of their children are interested in the family business. If done right, says Kujera, a private-equity buyout would get them top dollar for their life's work, and at the same time protect most of their employees by ensuring the survival of the enterprise.

A Deal to Watch

Financial advisors: Citi, UBS

It is by no means a done deal. Shareholders of U.S.-based 3Com have yet to vote on the sale of their company to American private-equity firm Bain Capital and China's Huawei Technologies for US$2.2 billion, although 3Com signed a definitive agreement with the consortium in September. Approval by the Committee on Foreign Investment in the United States (CFIUS) may also be needed, even though 3Com does not sell its voice and data networking solutions to defense and intelligence agencies.

Still, investment bankers and Chinese executives are intrigued by the possibility that one more option has been added to the limited number of ways that mainland enterprises can successfully acquire assets in the United States. Because Bain, an American private-equity firm, will control the majority of 3Com shares (Huawei will own about 16.5 percent), the theory is that the deal will not ruffle too many political feathers, unlike the US$18.5 billion bid by Chinese oil company CNOOC for America's Unocal, which failed in 2005 because of strong political antagonism.

Bain has taken pains to preempt opposition. It has said, for example, that it would voluntarily submit the transaction to a national security review. The 12 White House and cabinet-level officials who sit on CFIUS will likely focus on whether Huawei will have access to 3Com technology, and if so, whether that technology has national security implications and whether Huawei will become the majority owner when Bain exits the investment in three to five years, as private-equity firms generally do.

There's no side agreement, explicit or implicit, that Huawei will have first dibs on 3Com upon Bain's exit, says Matt Hanning, head of M&A at UBS, Huawei's financial advisor. "It will be very unwise for any Chinese company going into these kinds of deals to think that a financial sponsor is somehow going to warehouse the shares for them." He characterizes the partnership with Bain as purely commercial: Huawei is essential to Bain's plans for 3Com because the Chinese firm is a key customer of H3C, 3Com's wholly owned Chinese subsidiary that is far more profitable than any of its U.S. assets.

Huawei sold its 49 percent in H3C to erstwhile joint venture partner 3Com for US$882 million last year. If Huawei decides to stop sourcing equipment from H3C, that would be a financial blow to 3Com, which is why Bain made sure to rope in Huawei when it made the bid for 3Com. In agreeing to partner with Bain, Huawei gets the chance to learn the ins and outs of doing business in the United States, a market it intends to crack after making inroads in Europe. If 3Com's shareholders and CFIUS say yes, that is. — C. B.

To see a listing of the "Deals of the Year" award winners, click here

Total deal values in Asia, 2007
Effect of the U.S. subprime crisis on bond offerings in Singapore, August through mid-October 2007