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Tide Turns After a Flood of Chinese Listings The Wall Street Journal


HONG KONG—When U.S. investors clamored for exposure to China's booming economy, attorney Mitch Nussbaum steered dozens of Chinese companies onto the U.S. exchanges. As the markets turned hostile, he embraced another role: helping some of these companies go private.

Mr. Nussbaum, a partner at the U.S. law firm Loeb & Loeb LLP who splits his time between New York and Beijing, is part of a cottage industry of lawyers and bankers forced to shift their business mix as investor appetite wanes for U.S.-listed Chinese companies. Investment banks such as Halter Financial Group and Roth Capital Partners LLC, which were instrumental in helping Chinese companies access the U.S. securities market, are also now helping companies leave the market, after years of pitching clients the benefits of going public.

Demand remains weak for U.S.-listed Chinese companies, says Mr. Nussbaum, who chairs the firm's capital markets and Asia practice. "Investors don't want to invest, the stocks don't trade. If Chinese companies don't see the financing, why are they going to go through the process?"

The development comes as the U.S. Securities and Exchange Commission brings an administrative proceeding against the Chinese affiliates of five major accounting firms that audited U.S.-listed, China-based companies. It's another sign that the era of reverse mergers—a back-door route to the securities market that involves combining a private company with an inactive, publicly traded shell—may have ended. Another has begun: Chinese companies going private.

"Reverse mergers are dead, dead, dead," says Peter Huang, a Beijing-based partner at the law firm Skadden, Arps, Slate, Meagher & Flom, which didn't work on reverse mergers but is helping more than a dozen U.S.-listed Chinese companies go private. "I don't see any future for this space.”

Accounting scandals, regulatory scrutiny and allegations by short-sellers have eroded investors' confidence in U.S.-listed Chinese companies, especially those that employed reverse mergers. Those companies typically undergo less regulatory scrutiny during the listing process than firms that launch IPOs. Many Chinese reverse-merger stocks are trading at a fraction of their levels two years ago.

Although Chinese technology firm YY Inc. YY +1.96%completed a U.S. IPO in November, shares priced at the bottom of the proposed range. While the IPO is a sign that "investor appetite for China-based companies may be slowly coming back," investors will be very selective about buying these companies, says Joseph Chan, a Shanghai-based partner at Sidley Austin LLP. The YY deal was the second in the U.S. this year, after an offering by Vipshop Holdings Ltd. (VIPS).

So far this year, 25 U.S.-listed Chinese companies have announced plans to go private, compared with 16 companies in all of 2011. Some of the larger Chinese companies that have delisted or plan to do so include advertising company Focus Media Holding Ltd., FMCN +0.74%electric motor maker Harbin Electric Inc., and economy hotel chain 7 Days Group Holdings Ltd. SVN +1.49%Analysts say that some Chinese companies may be looking to delist to avoid the scrutiny that comes with being a public company.

None of the Chinese companies responded to requests for comment.

On going-private deals, investment banks advising China-based companies can earn 1% to 3% of the total transaction size, according to bankers. These deals are generally much less lucrative than the 3% to 7% banks earned on the amounts raised for these companies during U.S. IPOs, and the 10% or more earned, including the value of warrants, on capital raised during reverse merger deals on U.S. exchanges.

Tianfu Yang, chief executive of Harbin Electric, which became private in November 2011, told analysts in August of that year "privatization is a choice for the company to continue to be on the healthy path" given the difficult U.S. capital markets and numerous short-seller attacks on the company. His proposal to buy out the company, with financing by a bank and a private-equity fund, dating back to October 2010, would protect shareholders' interests, he said.

The trend of U.S.-listed Chinese companies going private will continue for at least a few years, until U.S. investors regain their confidence in Chinese firms and the capital markets recover, said Donald Yang, managing partner at Abax Global Capital, an asset manager in which Morgan Stanley MS +2.80%owns a minority stake. Abax Global, which oversees $900 million in private-equity and hedge-fund assets in Hong Kong, has provided financing for a handful of companies going private, including Harbin Electric.

Taking companies private has become a major source of new China business for Roth Capital. The Newport Beach, Calif., firm is one of a growing number of banks that have sharply scaled back their mainland operations.

Roth Capital, which has raised more than $3.1 billion in financing since 2003 for China-based companies that went public in the U.S. through IPOs and reverse mergers, was hired this year as a financial advisor to independent committees in the going-private transactions of Yucheng Technologies Ltd. and Shengtai Pharmaceutical Inc. SGTI +0.69%The Chinese companies didn't respond to requests for comment. Both are still in the process of going private.

The board-appointed committees' role is to evaluate the fairness of buyout offers made by the chairmen of Yucheng Technologies, a Chinese provider of information-technology services, and Shengtai Pharmaceutical, a maker of pharmaceutical raw materials such as glucose.

Some in the industry question whether companies seeking to retreat from public markets will want to deal with the same banks and law firms that brought them there.

Companies may think, "Why are you going back to the guy who got you into this?" says Jim O'Neill, co-founder of Jin Niu Investment Management in Beijing, which raises capital for Chinese companies and has advised three firms in the past year on going private. Mr. O'Neill said he has spoken with companies going private that are reluctant to hire the same advisors who took them public.

Roth Capital says it has no prior banking relationship with either company, but declined to comment further.

Argyle, Texas-based Halter Financial is advising Si Chen, chief executive officer of New York Stock Exchange-listed American Lorain Corp., ALN -0.78%a snack-foods company, on a going-private proposal he has made to shareholders. Halter, a major player in helping Chinese companies list in the U.S. through reverse mergers, also advised American Lorain on its 2007 reverse merger.

Halter and Mr. Chen didn't respond to requests for comment. American Lorain, whose stock has lost more than a quarter of its value since January 2012, declined to comment.

Meanwhile, Loeb & Loeb says it has worked on nearly a dozen going-private transactions for companies including Harbin Electric, Fushi Copperweld and Yongye International Inc. YONG +0.69%Loeb & Loeb has an existing relationship with some of these companies: It represented Yongye in its reverse-merger transaction in 2008, and Harbin Electric and Fushi Copperweld in financing deals when they upgraded to the Nasdaq Stock Market NDAQ +2.00%from the OTC Bulletin Board in 2007.

The Chinese companies didn't respond to requests for comment.

Mr. Nussbaum said the firm's role in helping companies access the U.S. securities market years ago doesn't compromise its ability to represent them now.

In privatization transactions, "there's a role for someone who knows the company well," he said.