Chen Tianqiao has placed one of the biggest wagers of his life. And it may finally be starting to pay off.
Chen, through his Singapore investment firm Shanda Asset Management Holdings Limited, has accumulated a large stake in the struggling Tennessee company Community Health Systems. Between early 2016 when Chen first bought shares of the operator of acute care hospitals, and January of this year, the share price plummeted more than 80 per cent, from US$20 a share to below US$4.
The Chinese billionaire is betting he can catch outsize returns on his investment in the distressed US health care provider when its share price improves. To make sure that happens, his investment firm stated last March it intended “to engage with (Community’s) management team regarding (its) business and operations and the status of the ongoing turnaround strategy.”
This month, Community Health’s shares have staged a 37 per cent recovery, hitting US$5.50 this week. If the turnaround eventually comes to fruition as planned, Shanda, whose 24 per cent stake in Community Health makes it the company’s largest shareholder, stands to gain the most.
“We are happy to see recent Community Health System gains and increased investment from other firms such as BlackRock,” Jason Reindrop, a spokesman for Shanda, told the South China Morning Post. “We support the company and take a contrarian position against prevailing market sentiment when needed.”
It is still too early to predict how the investment will pan out. But Shanda’s active involvement in US companies shows how Chinese investors are stepping up in an unprecedented way to seek returns by helping to run businesses. For some US deal makers, Shanda’s approach reflects Chinese investors’ growing acumen in overseas investing.
“They are becoming more confident about investing in sophisticated economies,” said Sheon Karol, managing director at The DAK Group, which advises on cross-border mergers and acquisitions.
Such an active investing style calls to mind a similar strategy employed for years by US investors. In US-style shareholder activism, investors typically urge management to make business changes. This approach is usually more public, involving investors sending critical letters to management and engaging in publicity antics.
“Shanda’s strategy is different from that of an activist,” Reindrop said. “Shanda seeks out and invests in undervalued companies when we agree with their turnaround strategy.”
But US investors and professionals see it differently.
“It will be crazy to get to that level of holdings and stay passive,” said Jeff Gramm, author of Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism, and a professor at Columbia Business School in New York.
“Chinese investors may be more low profile and like to influence things behind the scenes. But they are for sure an activist.”
And it is reasonable for any investor to adopt an activist mentality. “If you are a shareholder in a company that is distressed, the board has a lot of leeway to not to do right by shareholders,” Gramm said.
A spokesman at Community Health did not respond to a request for comment.
Active investors have fared better too. Except for 2017, US funds focusing on activism have annually beat the hedge fund index at least since 2012, according to HFR, a data provider tracking US hedge fund performances.
After the 2008 financial crisis, activism became a much more popular tactic in the eyes of investors looking for better returns.
The amount of US capital dedicated to activism almost quadrupled to US$125 billion at the end of the third quarter last year, the latest figure available, from US$32 billion at the end of 2008, HFR data shows.
“It has now become an alternative that many more shareholders are considering,” said Gerald Brant, a lawyer at Akin Gump. “It has become more than a niche strategy.”
The approach, however, can backfire. Shareholders often can make a quick buck by pressuring companies to shake up the executive suite, pay dividends or sell assets, all of which can damage long-term business prospects. In a worst-case scenario, shareholders and companies both lose.
Billionaire hedge fund investor Bill Ackman, a high-profile US activist who runs Pershing Square Capital, a firm with assets under management of US$15 billion, made a run at distressed retailer JC Penney in 2010.
Pershing Square bought 18 per cent of JC Penney’s shares outstanding and hand-picked Ron Johnson, a star retailer at Apple, as the floundering department store chain’s new CEO. The failure of Johnson, who had been Apple’s senior vice-president of retail operations, to turn around JC Penney cost Ackman hundreds of millions of dollars and sent the iconic retailer to the brink of collapse.
Publicly disparaging management for a fast gain has stigmatised the strategy.
In an attempt to discourage so-called short-term activism, prominent US investors including Warren Buffett and JPMorgan’s Jamie Diamond signed on to a list of suggested changes for companies to adopt, titled “Commonsense Corporate Governance Principles”, in July 2016.
But that is not the only type of activism. For large shareholders less interested in turning a quick profit, another strategy is focusing more on the businesses’ long-term health and engaging with management to improve inefficiencies.
Buffet’s advice to American Express remains a good example of how investors can trade short-term losses for long-term gains.
In the 1960s, American Express was embroiled in the Great Salad Oil fraud, involving a New Jersey company that used water instead of oil as the collateral for its loans. In reality the supplier, Allied Crude Vegetable Oil Refining Corp, had filled salad oil tanks with water and put a few feet of oil on top, deceiving everyone.
The scandal could have toppled American Express, a major lender.
Buffett, then a large shareholder in American Express, called for the company to “compensate parties who were defrauded in the swindle,” pitting himself against some large stockholders that advocated for the company to ignore the issue.
Buffett’s advice allowed American Express to emerge from the scandal with its reputation intact.
For Shanda, its relationship with Community Health has been constructive. In January, as the investor announced it had increased its stake to 24 per cent, Community Health’s chairman and CEO Wayne T. Smith said: “We are pleased with Shanda’s continued support and welcome and value the input of Shanda and all of our stockholders.”
Investing in Community Health may have originally looked like a safe bet since it is the largest US public health care provider. But after Shanda got in, revenue continued to plunge and the company struggled to pay interest on its US$15 billion of debt.
Now, under the Trump administration, the sector is likely to face more headwinds as health care reforms may further chip away at hospital revenue.
It is unclear how much Shanda has put up to buy Community Health’s shares over time. But it is clear the firm took a hit, given the stock’s 80 per cent price plunge during the period. If Community Health files for bankruptcy, Shanda’s entire investment is likely to be wiped out.
Switching to a more active approach may be Shanda’s best defence.
Community Health in mid-December appointed two new members, Michael Dinkins and K. Ranga Krishnan, to the board. One of them – Krishnan – sits on a board with Chen on Access Health International, an Indian non-profit health care think tank.
Following news that the firm aims to push out its debt maturity through a refinancing, Community Health’s stock has risen this month.
Shanda has not stopped at Community Health. Chen and Shanda’s president, Robert Chiu, in February 2017 were elected directors of another US investment company Legg Mason Inc, gaining a say in corporate decisions. (They both resigned in October after selling half the shares Shanda owned.)
In December, Shanda disclosed in a regulatory filing that it held a gigantic 20.6 per cent stake in US peer-to-peer lender LendingClub Corp. That amount of investment gives Shanda a say in the lender’s business.
Chen may be one of the earliest Chinese investors to gain a voice in US boardrooms. But this development may mark the start of a shift in how investors from China relate to US companies as outbound investment continues to rise.
Chinese investment in the US reached US$29 billion in 2017 and US$46 billion in 2016, according to Rhodium Group. Despite a 35 per cent drop last year from the year before, those years were still the largest on record.
“As more wealth is created, more capital is seeking good returns. Over time, you can be sure activism will happen more in China and by Chinese investors overseas,” Gramm said.