Bottom line: A surprise bid by China’s XIO Group for JD Power is unlikely to succeed due to lack of experience and possible concerns over a regulatory veto, but could force rival bidders to raise their offers slightly.
In what’s becoming an increasingly common occurrence, an obscure Chinese company has entered the bidding for a major western asset, with word that a buyout firm called XIO Group is eyeing US-based car industry consulting giant JD Power and Associates. I’m not too surprised by any of these bids these days, since many Chinese companies are flush with cash and under orders from Beijing to diversify beyond their home market.
These bids are pushing up the prices for global assets quite a bit, even as many such acquisition attempts ultimately fail. Both of those elements are present in this latest story, since Chinese bidders have become famous for attempting to buy top names like JD Power at any price, regardless of fundamentals of the acquisition target. But in the end, most of these Chinese bids are failing due to lack of experience and concerns about such foreign ownership.
We’ll explore what’s likely to happen with this latest bid towards the end of this post, but first let’s review the new report that has Reuters saying that XIO has joined a group of private equity bidders that includes Advent International in its pursuit of JD Powers. (English article) The report doesn’t include any mention of price in the talks, but quotes sources saying the company could be worth as much as $1 billion.
This is the first time I’ve heard of XIO, which also appears to be a Chinese private equity company without any particular focus in its global acquisition strategy. The firm is based in Shanghai, Hong Kong and London, and has $5 billion in assets under management. Its previous recent acquisitions include its $510 million purchase of a Israeli medical laser company Lumenis, and its purchase of fertilizer company Compo Expert last year for an undisclosed sum.
Anyone trying to figure out the connection between medical lasers, fertilizer and now car consulting is probably scratching their head. But this kind of scattered and unfocused acquisition strategy isn’t that unusual for Chinese companies, many of whom are new to the global acquisition game and simply look for well-known brands that seem to have good potential.
Famous Auto Consulting Brand
In this case, JD Power certainly seems to fit that description, as the company’s name is synonymous with its car rating and reliability surveys in the US. JD Power now employs 7,000 people in 12 global offices, and has annual revenue of about $350 million. It was purchased in 2005 by the much larger McGraw-Hill Financial (NYSE: MHFI), which is now looking to sell the unit part of a broader overhaul of its vast holdings that also includes ratings agency Standard & Poor’s.
This kind of pursuit of global assets by relatively obscure Chinese companies is fast becoming a trend. This year alone the unknown Chinese insurer Anbang made a bid for US hotel giant Starwood (NYSE: HOT), and the consumer products-oriented China Resources tried to buy US microchip maker Fairchild Semiconductor (NYSE: FCS). Both bids ultimately failed, the former most likely due to resistance from China’s insurance regulator and the latter due to concerns the deal might get vetoed by Washington in a national security review.
All of that brings us back to XIO, and what’s likely to happen next in its pursuit of JD Power. I suspect that Morgan Stanley, which is advising McGraw-Hill on the deal, will take advantage of XIO’s interest to try and get a higher price for JD Power than others were previously willing to pay. But the western bidders will also probably realize that XIO’s bid could easily collapse due to lack of experience, and refuse to pay a big premium. At the end of the day, I doubt XIO’s bid will be taken very seriously, though its participation could force other bidders to raise their offers slightly.
(NOT FOR REPUBLICATION)