The China Vortex

The very dramatic unwinding of Bear Stearns and the purchase of its shares at a fire sale price by JP Morgan Chase has raised some very interesting questions.

Put simply, American assets are going to have to go at fire sale prices. We’re not talking about the Japanese buying Rockefeller Center, I mean real valuable and sometimes tangible assets. Remember that? And they will be denominated in US dollars, which most American banks still take. So this means a bargain on America for buyers smart enough to move quickly and take advantage of America’s double troubles on the banking and currency levels.

The Japanese in the eighties thought that real estate prices could only go up. Sound familiar? They learned that that wasn’t true in the nineties; it’s called “The Lost Decade” in Japan. Then US mortgage lenders sold the same crock of shit to Americans in 2002-2006 while the US Fed and Treasury passively looked on. Maybe someone can explain to me why there should not be at least a “Lost Couple of Years” in the US. Anybody who is thinking about buying US real estate now before the market has hit rock bottom needs their head examined.

Tom Foremski’s Silicon Valley Watcher has a very interesting article about how the investment banking crisis will freeze Silicon Valley M&A deals. According to the article, the Bear Stearns debacle means that many of the recent startups will run out of financing, which is now done by US investment banks, and may even go belly up because they are unable to obtain funding.

This represents an excellent buying opportunity for cash-rich Chinese corporations, venture capital firms and private equity firms to buy companies which have good intellectual property and/or business/sales relationships at very good prices. It would also be a good release of all that capital floating around in China, and is mostly going into real estate and other junk investments in China which don’t offer good ROI, especially with rising inflation.

There are three ways to do this: Chinese VC and PE firms could set up shop in SV and do the due diligence and offer term sheets and see what they come up with. So far, I have not seen any Chinese firm which has the people with the kind of capability to pull this off. There is a strong cultural component in dealmaking and most Chinese who have grown up and worked in China don’t have a feel for US dealmaking.

Or, they could partner with SV VCs, set up joint funds which the Chinese would fund, and which the American partners would do the due diligence on.

The third way would be if China Investment Corp. got really smart for a change and decided to buy several of the top-tier Sand Hill venture capital firms, funded them up, put in Chinese general or limited partners and/or board members, and started hearing pitches from entrepreneurs. The current crop of SV startups will start getting really desperate in 6-12 months, and that would be the best time to offer term sheets at favorable terms for the VC firms. (I’m willing to bet that even the leading US social networking sites will be going at low prices because they have not been successful in generating meaningful ad revenue even in fat times.)

To complete the M&A/IPO cycle, the Chinese would have to have partial ownership, preferably with a board seat/s, of one investment bank.

With all the mess on Wall Street, all they have to do is wait until the time is right.

Everything comes to he who waits (and has cash when nobody else does).

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