I think such comments are not one-sided and biased, and there are misunderstandings about the choice of entrepreneurs and the operation and characteristics of private equity funds. In my opinion, comments on the Mengniu incident should be based on an in-depth investigation of the specific circumstances of the incident. More importantly, the domestic investment community and the government should get corresponding enlightenment from this case, and devote themselves to building a financial environment that is more conducive to the growth of local enterprises in China, rather than staying at the level of one-sided questioning of overseas investment institutions.
As a professor in a business school, I have conducted in-depth research on Mengniu's private placement case and conducted a lot of interviews with Mengniu's private placement investors, listed intermediaries and senior management teams. I might as well take this case as a reference to talk about my views on the private equity investment market in China.
How did Morgan and CDH enter Mengniu?
According to Mengniu, they wanted to set up a joint-stock company at the beginning of their establishment and then go public. Except for some funds invested by original investors in the early days, Mengniu basically had no large-scale financing before private placement. If we want to seize the opportunity of the rapid development of dairy industry and build a nationwide production and marketing network, Mengniu has a great demand for funds.
For Mengniu, a little-known private enterprise and a business model that values brands over assets, bank loans are of course limited.
Starting from 200 1, they began to consider some listing channels. First of all, they studied the Shenzhen Growth Enterprise Market. At that time, it was rumored that the Growth Enterprise Market would be established, but the idea was shelved before it was made. At the same time, they are also looking for the possibility of A-share listing, but for Mengniu, a private enterprise with no background at that time, it may take several years to go to A-share listing, and Mengniu simply can't afford it.
They also tried private financing. However, after an investigation by a well-known domestic company, Mengniu team was informed that they had to demand a controlling stake of 5 1%, but Mengniu disagreed. Another big company was ready to vote, but was persuaded by Mengniu's competitors; There is also a listed company that originally planned to invest in Mengniu, but the result was shelved because the top leader was suddenly transferred to the mayor of a city.
At the beginning of 2002, both the shareholders' meeting and the board of directors agreed to go public on the second board of Hong Kong under the guidance of Paris Peregrine. Why can't I get on the motherboard? Because Mengniu had a short history and a small scale, it did not meet the requirements of the main board. At this time, Morgan Stanley and CDH (private equity fund) found Mengniu through relevant relationships and asked to meet with the Mengniu team. After the meeting, Morgan and others suggested not to list on the second board in Hong Kong. As we all know, except for a few companies, the liquidity of Hong Kong's second board is poor, institutional investors are generally not interested, and it is very difficult for enterprises to refinance. Morgan and CDH suggested that the Niu Gensheng team should bring in private investors, get the funds in place, help enterprises to grow and standardize, and to some extent, go public directly on the main board in Hong Kong.
Niu Gensheng is a shrewd entrepreneur. He consulted many experts on Morgan and CDH's private placement suggestions, including Peregrine Zhu Dong (currently its executive director) who is going to be listed on the second board in Hong Kong. Seeing that the fat on hand will be taken away by private placement, Zhu Dong gave Niu Gensheng objective advice professionally. He thinks it is feasible to go to the main board after private placement. (In fact, Zhu Dong has mentioned the advantages of Hong Kong's main board to Mengniu before this. This is a great support for private investors.
What did private investors bring to Mengniu?
I think besides money, private investors such as Morgan provided Mengniu with two value-added services.
First of all, private investors have prepared for Mengniu's listing. After Morgan and others came in, they helped Mengniu reorganize its legal structure and financial structure, and standardized its financial, management and decision-making processes. As far as the decision-making of the board of directors is concerned, in the words of Mengniu management, before the private placement comes in, people often put forward different opinions and have heated discussions. However, after investors come in, the way to discuss problems is more appropriate, and the questions investors ask are more acute because they see more enterprises. Investors effectively used their veto power over major decisions. For example, Mengniu once thought that a proposal that deviated from its main business was discouraged by private investors. It is one of the contributions of private investors to help enterprises design a clear business model that can be optimistic about the stock market. It should be pointed out that not all enterprise founders are willing to accept such standardization and change.
In addition, the whole process of Mengniu's listing in Hong Kong is mainly led by private equity funds. Mengniu management team knows that private equity funds are consistent with their interests and have professional abilities that they do not have, so they are quite open to Morgan and others. The brand of private equity fund and its investment in Mengniu make institutional investors in the stock market feel more at ease.
Years of financial research have proved this point. When high-quality venture capital funds or other private equity funds enter a company before listing, the listing process of the company will be more stable, smooth and successful. Private investors are the bridge between companies and ultimate institutional investors in the stock market. Indeed, the equity sold by private investors when they withdrew from Mengniu recently was taken over by a group of world-class institutional investors, which laid a good foundation for Mengniu's future refinancing.
In addition to promoting Mengniu's listing, private equity brands such as Morgan also helped improve Mengniu's credibility. It also helps Mengniu get government support and other resources. In addition, for Mengniu, which suffered from the pressure of informal competition in the early days, attracting private equity brands such as Morgan can also bring some political support and protection. Unfortunately, private enterprises in China need the participation of foreign capital, which is supported and protected by the government.
Morgan Stanley's brand is very important, but it is not enough. In order to take an enterprise with China characteristics overseas for listing, foreign investors need to have a deep understanding of China's laws and national conditions in addition to their ability and credibility, and can solve various difficulties in communication, negotiation and trust with the company through various technical means. Judging from the feelings of Mengniu team, they believe that CDH CEO Jiao Zhen has played an extremely critical role in solving these problems.
In the process of financing, Morgan's brand is the biggest attraction of Mengniu. However, it is worth mentioning that Morgan, as the gold brand of investment bank, has little help to Mengniu. In other words, investment banks with good brands are not necessarily good private investors. There may be a small misunderstanding in the minds of some domestic entrepreneurs: China enterprises and China entrepreneurs have always felt that listing is a demand for people, and enterprises have long sought investment banks in the A-share financing environment. In fact, this truth doesn't make sense in the United States and Hong Kong. Overseas, as long as your enterprise is of good quality and can attract investors, it is the investment bank that comes to you. It is difficult for us to verify whether overseas investment banks such as Morgan took advantage of this misunderstanding in the minds of domestic entrepreneurs and seized their demands for listing in the negotiations, thus making the negotiations beneficial to them. However, investment banks such as Morgan did bring their brand effect to the extreme in the private equity market in China.
Is Mengniu sold cheaply?
I think, to judge whether Mengniu was sold cheaply, there are two things that should be clear:
First of all, the price is determined by the supply and demand relationship in the financing market at that time. Niu Gensheng and other Mengniu teams did their best. The negotiation process is quite long. As far as I know, Niu Gensheng got up several times and stopped talking, and always reserved the right to contact other investors. It can be seen that both sides have made great efforts on the price issue. Finally, Morgan and others bought Mengniu shares at a price of about 9.5 times (calculated after financing), which was not low in the private equity financing market of traditional industries at that time. In this regard, we might as well look at it this way. If Niu Gensheng could attract more suitable investors with higher prices and better schemes, they would certainly be willing to sell at a high price. It can be said that the P/E ratio of 9.5 times is a reflection of the relationship between supply and demand in the private equity market at that time.
If we think that foreign capital really earns more today, the fundamental reason is that the domestic capital market has not developed well, and Mengniu has failed to raise funds locally, so we can only consider limited foreign private equity funds interested in traditional industries in China. However, this situation is gradually improving. A few years before Mengniu, some investors entered Chinese enterprises with a price-earnings ratio of 4 times or 6 times. After the success of private investment in Mengniu, international private equity funds are more interested in traditional private enterprises in China. Now a good traditional private enterprise wants to raise funds, and it is easy to face the choice of several good international private equity funds, and the P/E ratio has also increased. So in this sense, we should thank the case of Mengniu, whose success has attracted more funds to enter the China market to participate in the competition.
As for the "gambling contract", as far as I know, it is a common means in private equity investment. Its role is to encourage management to make more objective predictions during negotiations and work harder after financing. It is not worth making a fuss about.
Second, it's not cheap to sell, and we can't just look at the performance afterwards. For private investors, every project has certain risks. Mengniu is just an example of their success, and other projects are far less successful than them, or even completely unsuccessful. Moreover, even in Mengniu, private investors bear great risks. For example, if the Mengniu poisoning crisis worsens, private investors will almost lose all their money. Now everyone sees Morgan and others get huge returns through Mengniu, thinking that their shares are too low and too harsh on management. This argument is illogical.
More importantly, I think the win-win situation between investors and financiers is the most perfect result. In Mengniu's case, the return on investment of private investors did reach 500%, but the original shareholders such as team Niu Gensheng got 5000%.
I don't think investors such as Morgan earn too much, but I think investors in China have been earning too little. Some domestic financiers do not intend to let investors make money at the beginning of financing in A-share or private equity market. In China, are there few stories about being cheated by enterprises into venture capital and direct investment? Why doesn't anyone write such a story? Now that investors have made money, they will be questioned. Isn't this putting the cart before the horse?
Competitive disadvantage of local investors
In fact, as a scholar, I think what is more worth asking than whether Mengniu was sold cheaply is why Mengniu tried its best to attract such investment terms. In other words, why didn't domestic investors eat the "fat" of Mengniu? It is worth mentioning that Mengniu is not the only one. Many successful private high-tech enterprises have achieved high return on investment after IPO, and most of them have been acquired by foreign investors, such as Shanda and Baidu. The fundamental reason is that local investors have two major disadvantages when competing with overseas investors:
First, local investors still lack a good brand, experience and reputation for enterprises that want to go public overseas, so the value-added services they bring to enterprises are limited, and the trust of enterprises in them is limited. I want to emphasize here that the process of investment is actually a process of mutual trust between management and management. There are many legal and financial details in the investment process. In this regard, the information of management and management is asymmetric, and the former is clearer. For example, at that time, Morgan Stanley and CDH said that in order to list red chips in the future, Mengniu needed to put its equity abroad through a series of legal restructuring. There are some worries and doubts within Mengniu. Their teams are all local, and they were not very clear about private placement at that time. But Niu Gensheng said that Morgan is a world-famous century-old shop, and I don't believe it will cheat us and ruin their own brand for our little money. So, are the reputation and platforms of many domestic investment institutions the same?
Second, our domestic investors can only operate in the legal environment of China. Due to foreign exchange control, imperfect legal system, inflexible investment tools and inadequate protection of employers' rights and interests, domestic investment has been relatively restricted. Overseas investors can use perfect overseas laws to "pull out" enterprises, protect the interests of enterprises and create various good incentive mechanisms.
Therefore, the starting point of competition between local investors and overseas investors is unfair. But should we blame Morgan for making too much money? Should Niu Gensheng be accused of selling cheaply? It is strange that our country's legal system and financial market development are too backward. In the end, the domestic capital market failed to meet the demand for funds for enterprise growth. If the government develops the domestic financial market more actively, and if the protection of investors' rights and interests can be strengthened in China, so that more and more investors are willing to invest in our enterprises, the financing of China enterprises will become easier and fairer. Otherwise, in a few years, we will see more "fat meat" eaten by foreign investors. At that time, people should not be surprised by this result.
Source: China Entrepreneur Author: Huang Ming