CHINESE Reverse Mergers for 2007
China’s State Administration of Foreign Exchange issued a rule entitled Circular 106 which went into effect in the summer of 2007. The new rule required Chinese companies that set up offshore entities for domestic investment to receive approval from Chinese regulators prior to establishing such offshore jurisdiction. At first it was anticipated that the new rule was established to halt Chinese based companies from going public outside of China but this was not the case.
In 2007, sixty nine (69) companies went public in the US via a reverse merger. This number represents almost 33% of the total n umber of reverse mergers last year. The numbers reflect a 30% year to year increase with 28 mergers in the fourth quarter of 2007 alone. The Chinese deals as an aggregate were valued at almost $1.5 billion with a third of those numbers occurring in the fourth quarter of 2007.
The Chinese reverse mergers are very appealing to funding sources because the valuations of the companies are funded at low PE ratios and thus provide substantial upside for potential investors. I believe we will see a substantial number of new deals coming out of China in 2008. Additionally, deals from other parts of Asia are starting to trickle into the US markets.
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