China’s Big Takeover Battle

BEIJING — One year ago, it would have been unimaginable to see Wang Shi (pictured), the larger-than-life CEO of Vanke, China’s largest real estate developer, facing investors calling for his head. But on June 27, the embattled CEO offered to step down, signaling a possible end to a months-long battle for control of the $27 billion company he founded. The dispute marks one of China’s first corporate takeover battles, pitting Wang, a real estate tycoon much admired for his public-minded approach to business, against Baoneng, a private insurance conglomerate, which began quietly accumulating Vanke shares last year. While hostile corporate takeovers are common in the West, they remain nearly unheard of in China, where interpersonal relations and a web of government connections continue to govern major boardrooms. Disputes rarely spill out into public view — much less receive comparisons to Game of Thrones. But the fight for Vanke has gotten observers debating core questions about whether Chinese business is, and should be, a capitalist or a socialist animal.

At the center of the dispute is Wang, viewed by admirers as adventurous and erudite. He has climbed Mount Everest, penned several influential books, and took three-year sabbatical to study subjects including Japanese history at Harvard, all while creating one of China’s most recognized brands. Wang styles himself as an alternative to China’s anything-goes business culture; Vanke’s company mission highlights “safeguarding the bottom line of moral values” and “resisting unjust benefits” as among its keys to success. Wang claims he has never given a bribe, a practice almost inseparable from the sticky business of real estate development in China.

Detractors say that Wang, once married to the daughter of a former provincial governor, is a savvy operator who has amassed political connections in a country where having friends in high places yields outsized benefits. Vanke itself started as a subsidiary of a state-owned enterprise (SOE) before becoming a publicly traded business, and Wang has since run it with the support of a small number of trusted, mainly state-owned institutional backers, who have mostly stayed out of his way. That may have given him the comfort to advance headier notions of business ethics.

It also may have made Wang complacent. In 2015, Baoneng, along with two of its subsidiaries, began quietly amassing shares of Vanke on the Shenzhen and Hong Kong stock exchanges. By November 2015, they had together surpassed the second largest shareholder and were on their way to securing a majority stake. Then Vanke’s management, sensing something afoot, sounded the alarm and halted public trading of its shares.

At Vanke’s December 2015 internal meeting, Wang reportedly compared Baoneng to a “barbarian” and criticized the company for being an irresponsible upstart that lacks “credibility” and would “ruin” Vanke’s brand and reputation. For months Chinese media speculated about whether China Resources, a large state-owned conglomerate and longtime faithful Vanke backer, would swoop to Vanke’s rescue. Instead, on March 14 Wang sought out Shenzhen Metro, an SOE that manages the expansion of Shenzhen’s subway, as a white knight to take majority control and let Wang continue to run the show in exchange for lucrative development deals. But the plan would have diluted existing investor shares, a burden few investors seemed eager to bear in order to keep Baoneng at bay. The plan even alienated China Resources. On June 26, an emboldened Baoneng counterattacked, accusing Wang of retaining his CEO salary while on leave at Harvard and calling for an investor vote to dismiss him and Vanke’s top management. On June 27, in what appeared to be a gambit to allow others in Vanke’s top management to keep their jobs, Wang effectively offered to step aside.

The day before Wang’s meeting with investors, an internal Vanke letter, its author uncertain, had leaked, defiantly proclaiming that “Vanke will never be a slave to private capital.” The spectacle of a publicly traded company decrying stockholder control was not lost on social media, where discussion of Vanke was widespread. “What’s a company with Chinese characteristics? It’s one that shouts slogans of socialism, discriminates against private enterprise, and looks down at stakeholder rights, all while relying on political intervention,” wrote one user on Weibo, a microblogging platform.

Others defended Wang Shi’s plight as a statement on the expanding role of private capital in what’s currently a hybrid economy that combines central planning with pockets of market freedom. “China doesn’t lack capital — it lacks people like Wang Shi,” wrote one observer, decrying those “savages” who were “trying to exterminate Wang and his management team.” One web commenter wrote that “Vanke has been good and honest in the real estate industry,” but “in China, the good and honest are weak.”

Mainstream and pro-business voices generally came to Wang’s defense. Qin Shou, the vice-chairman of Shanghai Media Group, bemoaned his friend’s misfortune. “This is an important moment for the whole of Chinese business,” Qin wrote. “Can we balance business performance with ethical practices?” Newspapers across the country ran a cartoon featuring Wang in a losing tussle with a brawny, much larger brute. “Wang Shi gambled that Chinese society would become more civilized and open — that people’s moral standards would grow stronger,” wrote Peking University economist Xue Zhaofeng on state-run Xinhua. Not everyone agreed. “Vanke’s development into the biggest real estate develop is not the work of some mythical Vanke culture, nor is it because of Wang’s noble moral character,” wrote Deng Xinhua, a scholar and economics commentator. Deng believed Wang simply didn’t want to cede control to a large shareholder.

Others disposed to sympathize with Wang nevertheless seemed willing to let the market decide the matter. “Talk all you want about Wang’s contribution to society, or his entrepreneurial spirit,” read one Weibo post. “In the end the capital market has no feelings, only rules and laws.” The CEO of state-owned Sinopec compared Wang’s ouster to Brexit: “The outcome was unfavorable, but the process through which it was reached was mutually agreed upon and legal.” Whether or not Wang retains his position at CEO, it’s clear China’s market economy is here to stay. “The world has changed, but Wang has remained the same,” one commentator opined. “What Vanke does not realize,” the writer continued, “is that these outside invaders are investors, and they’re the real boss.”

Not quite yet. After a long silence, China Resources announced that it would veto Baoneng’s proposal. At least for now, Wang’s position is safe, though it’s unclear how long a battle of attrition between him and his largest investor can last. On July 4, Vanke shares, which resumed trading this week, dropped ten percent on the Shenzhen stock exchange.

In November 2013, China’s ruling Communist Party issued a widely cited communiqué that called for the private market to play a “decisive role” in allocating economic resources. Like many in China, Wang never seemed to embrace that sentiment; in January of 2016, soon after rebuffing Baoneng’s attempt to buy a majority stake in Vanke, he exclaimed that he would never allow a private enterprise to become Vanke’s majority shareholder. Wang reasoned that China is a socialist country — even though Vanke itself is publicly traded. “You live your life in a capitalist country,” one Weibo user wrote, “and [only] now remember socialism.” In the long term, this self-serving logic is unlikely to hold.

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