With so much attention on Chinese stocks, something that gets very little attention: U.S.-listed Chinese companies that went public through the back door.
The back door, in this case, is reverse mergers. No IPOs. No road shows. No real regulatory vetting. Just one company from China getting merged into the shell of another created in the US and—presto!—it’s public. And it’s all perfectly legitimate.
By my count, more than 70 of these Chinese reverse mergers trade on the Nasdaq; about two-dozen on the Amex and less than a dozen on the NYSE.
And while most are mini or micro-caps, at least one is valued at more than $1 billion; in total their market value is an estimated $30 billion.
Here’s what investors need to know: Just because they trade on exchanges doesn’t necessarily mean their fundamentals have received some sort of seal of approval.
Just ask Richard Heckmann, chief executive of NYSE-traded Heckmann Corp., a so-called “blank check” company that he formed several years ago to make acquisitions. Heckmann is no stranger to deal-making. As CEO of United States Filter, a rollup sold in 1999 to Vivendi for $5 billion, he did more than 300 deals.
In 2008, when he paid more than $600 million for China Water & Drinks—a bottled water maker—Heckmann thought he knew what he was doing. China Water was a reverse merger via UGODs, a Nevada shell. Heckmann hired two bulge bracket investment banks, a leading law firm and a large accounting firm to dig into the company.
As much as they dug, however, he claims he was bamboozled. Now the two sides are engaged in a legal battle: The founder of China Water, Xu Hong Bin, claims he is owed money by Heckmann; Heckmann Corp., in a counterclaim, insists that it had become the victim of “financial misconduct.”
When I asked Heckmann whether he would be leery of Chinese reverse mergers, he said that he wouldn’t avoid just reverse mergers, but all Chinese companies, because it’s simply too hard to determine the real numbers. One reason: He says he believes, from his experience, a primary goal of Chinese companies is tax avoidance.
Mark Dixon, a founder of the1.com, which advises companies on acquisitions, said something similar last August in the New York Times' Dealbook. He wrote that he was hired by a company to help value a Chinese company.