A buying spree by a Chinese insurance company that has emerged seemingly overnight is flashing a warning sign.

An alliance led by the Chinese company, the Anbang Insurance Group, has for the moment been outbid for Starwood Hotels & Resorts, the owner of the Sheraton and Westin brands, by Marriott International. But that Anbang is even in the running — and may yet win out — is an indication of deal-making gone awry.

Typically in a takeover battle, a strategic bidder should always triumph over a financial bidder like a private equity firm or Anbang, which has teamed up with two investment firms.

The reason is simple. A strategic buyer is an operating company and almost always can pay more for a target. The strategic buyer can expect to earn more from the target through cost savings. There would be no need for two general counsels, for example.

A strategic buyer should also be able to reap operating efficiencies or other benefits from putting two assets together — what deal makers call “synergies.” Think of the Walt Disney Company buying Marvel Entertainment to put the Marvel characters in Disney’s movies and theme parks. This sort of strategic rationale is what is driving Marriott’s bid.

The last time financial buyers regularly beat out strategic buyers was in the months before the financial crisis as the credit bubble drove a huge private equity feeding frenzy. In those days, Kohlberg Kravis Roberts and Company could acquire First Data for $29 billion, borrowing more than the company was worth the day before the deal’s announcement.

Anbang also announced deals for the Waldorf Astoria in October 2014 for $1.95 billion, 717 Fifth Avenue in February 2015 for an estimated $500 million and Strategic Hotels & Resorts for $6.5 billion from Blackstone only two weeks ago. Blackstone bought the company for $500 million less only three months ago. It’s a nice deal for Blackstone, but one wonders why Anbang would pay so much more only a few months later.

So what gives with all the hotel acquisitions?

Anbang, which was founded in 2004, appears to be trying to build itself into a financial conglomerate along the lines of Warren E. Buffett’s Berkshire Hathaway. Like Berkshire, Anbang is using insurance reserves to buy assets in a variety of businesses such as banking and real estate. It also spent over $2 billion on insurers in Belgium and South Korea in 2015.

And Anbang is funding this spree by selling high-yield investment products to Chinese citizens.

If this type of company existed in the United States, there would be an outcry. It may be reasonable for an Internet company to appear out of nowhere and be a giant after 10 years, but an insurance company? And one that is buying noncore assets abundantly? We’ve seen this story many times before, and it typically doesn’t end well.

But a huge hunger for growth doesn’t quite explain Anbang’s attempt to buy more than $20 billion worth of hotel properties in the space of a year or so. There are the political connections, of course. Anbang’s deal-maker chairman, Wu Xiaohui, is said to enjoy warm relations with the Beijing government. His wife is the granddaughter of Deng Xiaoping, the former leader of China.

The company’s explanation is that it is diversifying. It appears to view global real estate as a high-yielding asset that will allow the company to diversify its assets out of China at a time when China’s economy is slowing. This is particularly important for a life insurer, since China’s population is aging rapidly, so higher returns are a must.

It is easy to compare the shopping spree by Anbang and other Chinese companies to the shopping by Japanese companies in the 1980s. Back then, the emerging giants of Japan sought out trophy properties in the United States, including Rockefeller Center. The Japanese mostly bought at the top and then suffered through the downturn in the early 1990s. Given the price of commercial real estate these days, as well as the price Anbang paid for the Waldorf Astoria — a record for a hotel in New York — one has to think that this might be the case again.

But acquiring Starwood is even a step further afield. In the case of the Waldorf, Anbang entered into a 100-year contract with Hilton to manage the property.

But who would manage Starwood? Anbang has partnered with the private equity firm J. C. Flowers & Company and the Primavera Capital Group. J. C. Flowers specializes in acquisitions in the financial services industry. Primavera is a Chinese private equity firm. Neither appears to have much hotel experience.

Given the state of the hotel industry — with Airbnb shaking up the world — it is hard to see where Anbang would get the necessary experience. One supposes the life insurer could keep on the Starwood team, but Anbang has already had trouble managing its new non-Chinese subsidiaries.

In the case of Anbang’s Belgian acquisition, the management team left after a few months amid complaints of Anbang’s management style.

None of this justifies outbidding Marriott, which has more experience and can reap more savings from Starwood.

Instead, this is probably just a grand currency play. Anbang is willing to overpay because it is converting Chinese currency. As the world knows, there are expectations that there will be a further devaluation of the Chinese currency, the renminbi. By moving its money out of China, Anbang can hedge against such a downturn.

Anbang also buys further protection from interference by Beijing authorities. So even though there is a slow-motion flight of dollars leaving China that Beijing is trying to halt, Anbang is probably trying to get more dollars out. After all, if there is a devaluation, this will benefit everyone in China, at least.

Anbang may have now pushed too far on this front. Caixin, a Chinese business publication, has reported that insurance regulators in China are said to be preparing to block the bids for both Starwood and Strategic Hotels & Resorts, because they would violate rules prohibiting insurers from investing more than 15 percent of their assets abroad. We’ll see how these politics play out.

Should Anbang persevere and come out the winner in the bidding for Starwood, there will certainly be talk about national security and the review process by the Council on Foreign Investment in the United States. This will be akin to the review over Smithfields when it was bought by Shuanghui International Holdings. There will be some hand-wringing about a Chinese buyer, but ultimately there will be no issues except perhaps some forced sales of hotels near strategic areas, like Starwood’s hotel near the White House.

But national security is not the real issue.

The important question is this: If a 10-year-old opaque American financial conglomerate with no hotel experience were to buy Starwood, funding the transaction in part with the sale of high-yield investment products to retail investors, wouldn’t that give us pause?

Not only that, wouldn’t we wonder about the future of Starwood?

One answer is that we wouldn’t. Starwood should be sold to the highest bidder, no matter the circumstance. But lost in all of this are the employees and operation of Starwood, and whether Anbang can even capably run this company. Shareholders, meanwhile, including its two largest shareholders that are activist funds, would probably just take the money.

Perhaps the more prudent answer, one our current financial system doesn’t address, is that there is too much risk here. The acquisition raises all sorts of issues about takeovers and the responsibility to look out for the company itself.

It seems to be a conversation worth having.

Source: http://www.nytimes.com/2016/03/23/business/dealbook/the-unsettling-acquisitiveness-of-a-chinese-insurer-in-the-us.html?WT.mc_id=SmartBriefs-Newsletter&WT.mc_ev=click&ad-keywords=smartbriefsnl&_r=1