The Carlyle Group's interminable wait to acquire Xugong, a Chinese construction firm, has arguably now crossed the line from frustrating to farcical. In the time it has taken for the Chinese authorities to ponder whether or not the Washington DC-based private equity house is a suitable buyer, Carlyle might have expected not only to have bought the company but also be well on the road to an exit.
But as things stand, the Xugong deal still hasn't been approved. And to add insult to injury, the Rubenstein-led global titan is now being forced to endure another China crisis – though one that has its roots not on the mainland, but in Taiwan. Back in November last year, Carlyle and an as-yet unnamed group of other investors entered exclusive talks over a proposed $5.4 billion buyout of Advanced Semiconductor Engineering (ASE), a Taiwanese firm that is also the world's largest chip packager.
The move provoked complaints from some Taiwanese opinion formers about domestic companies falling into foreign hands. To which it would be easy to respond with a yawn. After all, haven't we heard that one before? But there was a more intriguing twist to this particular tale. The “foreign hands” were not necessarily the hands you might think. The major concern, it transpires, was whether the deal would breach rules governing the transfer of sensitive technology to the PRC. Given the, ahem, ‘awkward’ relationship between Taiwan and the mainland, this was always likely to be a situation fraught with peril.
What's more, Taiwan's scandal-plagued reform government of President Chen has appeared determined to remain staunchly independent of the mainland. It has clung fast to two restrictions relevant to ASE – despite pressure by opposition politicians to drop them: a limit on a Taiwanese company's investment in a mainland company to 40 percent of its net worth; and a second limit on Taiwanese investments in Chinese semiconductor factories to those using techniques not more advanced than those that were considered state-of-the-art back in the last decade.
These rules could be circumvented should ASE fall into foreign hands. As a result, the government's suspicions of Carlyle's motives were not slow to surface. Reportedly “startled” by the announcement of the deal, President Chen paid a visit on December 5 to ASE chairman and CEO Jason Chang to seek assurances that the limits described above would not be broken, and that the tie-up with Carlyle was absolutely necessary.
In relation to the first of these two points, Carlyle revealed that it was preparing to buy ASE through a Taiwanese subsidiary, meaning that it would remain a local company and subject to the government's limits. On the second point, Chang reportedly told Chen that, in order to remain globally competitive, ASE had “no choice” but to take part in the global integration of the semiconductor industry – a process that would be greatly assisted by Carlyle's involvement.
However, despite Chang's insistence that the deal was in ASE's best interests, signs soon emerged that the company was beginning to waver. In early February, it revealed that it had established an ‘evaluation committee’ headed by former director TC Cheng. The committee, in turn, appointed several advisers to bring their perspectives on how ASE should proceed: namely, Morgan Stanley as financial adviser, Davis Polk & Wardwell as US counsel and LCS & Partners as Taiwan counsel.
On 16 February came the news that the committee had voted to cancel the exclusive bidding arrangement with the Carlyle consortium and recommended that ASE open up the bidding process and invite other offers. For the record, Taiwan's Commission and Ministry of Economic Affairs had by this time threatened to intervene in the deal, suggesting that Carlyle may have broken market rules by failing to warn the regulator of its potential bid for ASE – though any attempt to weigh up the impact of this threat on the committee's decision would be speculative.
At the time of going to press, Carlyle had not withdrawn its bid – though it had agreed to terminate exclusivity, together with agreements relating to expense reimbursement and break fees. If it presses ahead, Carlyle now faces the prospect of a time-consuming and competitive auction process. Nothing, it seems, will come easy to the firm in this part of the world.