Will Corruption Sour the GOME-Bain Deal?
This week, Boston-based firm Bain Capital secured a $418 million investment to acquire a minority stake in GOME, China’s second largest electronics retailer. GOME has seen its fair share of global news coverage following the November 2008 arrest of its founder and ex-chairman, Huang Guangyu, over allegations of share-price manipulation linked to drug manufacturer Jintai Group, which was controlled by his elder brother. In the months surrounding police investigation into Huang’s activities, GOME’S share price tanked and speculation of bankruptcy began to circulate. Despite its tarnished reputation, from a profit-sharing perspective Bain Capital’s move to acquire an 18 percent stake in GOME may prove to be a very lucrative one; as reported by Bloomberg.com, shares rose 69 percent in Hong Kong following the announcement of investment by Bain and Merrill Lynch has upgraded the stock to “buy” from “underperform.”
While Bain has structured the GOME deal to protect itself from liquidity concerns with nearly half of its investment reported to be in the form of seven-year convertible bonds, the US private investment firm does not have any management control built into its contract, despite entitlement to three non-executive positions on the board. And, although the deal does possess incredible potential for Bain over the long-term, Huang Guangyu’s corruption legacy will be difficult to extricate from the company’s reputation and among the employees who have remained with GOME. White collar crime in China bears little resemblance to what we’re accustomed to in the West, which is often carried out in secrecy and among a few slick actors involved in the financial services industry. Under China’s traditions of guanxi and “rule of man,” “under the table” practices span all sectors via interwoven business and personal networks as pervasive and shared activities which are too often deemed acceptable by all parties involved.
Given these characteristics, it is difficult to believe that the purge of Huang Guangyu has wiped the slate clean for GOME; Chinese entities that have been linked with corruption have a pretty significant rate of being repeat offenders. While the risks involved in partnering with a company that only months ago found itself under the spotlight of a globally-recognized graft scandal may be miscalculated by a Western-born manager with relatively little experience in the Chinese marketplace, it can be pretty safe to assume that Bain knew exactly what kind of arrangement it was walking into. Jonathan Zhu, Bain’s Managing Director who secured the investment is not just another corporate cowboy trying to lasso a sweet deal in a foreign market. Zhu is actually a Shanghai native who, prior to assuming his position with Bain, served as CEO of Morgan Stanley’s China division- which is also no stranger to corruption scandals. Zhu has an impressive professional history of leading a number of high-profile initial public offerings in China; an online biography cites China Construction Bank, Ping An Insurance, China Shipping Container Lines, China Meng Niu Dairy, China Telecom, China Unicom, Sinopec, China Eastern Airlines, Shanghai Industrial and Beijing Enterprises among them. It is also a fact that the majority of these companies have made headlines for illicit activities, which is unsurprising given the intense crackdown by the CCP in recent years.
Another fact- corruption is endemic in China business and Western-owned firms like Bain need deal makers like Jonathan Zhu to forge successful investments with a comprehensive understanding of the risks involved. As a native-born Chinese with significant experience on both sides of the globe, Zhu has a few highly sought after capabilities that can only come with being born in China, receiving an education at top US institutions (Cornell and Harvard Business School), and simultaneously maintaining identities on both hemispheres. Considering the Huang Guangyu case and the traditions he may have left behind in the offices of GOME, does Bain’s stake come with potential problems down the road? Without a doubt. On the upside, a foreign presence in a Chinese-run company like GOME may lead to better risk management controls overall while encouraging increased accountability among individual employees. With this in mind, the GOME-Bain deal led by Zhu might yield positive returns far beyond the stock market. Of course, there are other possible outcomes. I’m hoping for the former, but we’ll just have to wait and see.
Did Bain make a smart move in securing a minority share in GOME? Is corruption still an issue, now that Huang Guangyu is out of the house? Do American firms which possess Chinese-born deal makers have an advantage in the China market? Have your say in the comments section!


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