20 Jul 4 WAYS CHINA’S TYCOONS CAN KEEP CASH FLOW PUMPING
Are Chinese regulators turning off the cash flow spigot? For Wanda and LeEco it seems the well has run dry.
This week’s headlines touted how Chinese regulators have ordered banks to stop lending Wanda money for overseas acquisitions. The article “Wanda Boss Clarifies Debt Position as Criticism of Deal-Making Grows in China” reported that “Wanda now looks to be on shaky ground with authorities’ intent on punishing and shaming Wanda for its aggressive overseas deals, which appear to have breached the government’s recent capital controls.”
Wanda’s Chairman, Wang Jainlin leapt onto the world stage with his aggressive buying spree in Hollywood (Legendary Entertainment, AMC, Odeon & UCI Cinemas Group). In addition, in a 2015 speech to Harvard Business School, Wang said the Chinese president’s brother-in-law Deng Jiagui was a shareholder of one of Wang’s unlisted units (now since sold).
That may have irked some higher-ups in the Communist Party According to the article “China Puts Wanda Under Spotlight, Closes Off Loan Options For Breaching Investment Rule” Shaun Rein, founder of the China Market Research Group said “People forget that businessmen need to ensure they are low profile, and always give credit to the Communist Party first. Sometimes as these guys get richer, they forget who’s really in charge.”
What’s worse is LeEco’s situation. Dubbed the “Netflix of China” who is currently in a corporate “death spiral”. According to the article “Tencent Co-Founder Brands China’s LeEco A “Ponzi Scheme” LeEco “…began a wild expansion from its core Internet video business…burning through billions as it launched costly mobile phone and electric car divisions…Nearly all of this expansion was fueled by deep borrowing.”
If you’re on a mergers and acquisitions spree – you need to make sure normal revenue will cover your costs. Otherwise you dig yourself deeper into debt.
In the article “China Takeover Tycoons’ Cash Wall“ it reported that “The real engine of these firms isn’t the drudge-work of making profits from selling goods and services, but the art of persuading financiers to fund their investment ambitions.”
So how can Tycoons keep the cash flow pumping?
- Avoid over-expansion: Wanda can forget the theme parks and LeEco can drop the electric cars. Focus on getting butts in theater seats.
- Combat poor financial management: Create a timeline of milestones and objectives before you splash the cash for that shiny new acquisition.
- Use financial forecasting based on predictable revenue: Know your bottom line and pay your people on time. Otherwise you (like LeEco) will need bodyguards at your next board meeting.
- Know who is really in charge: It’s not you – Mr. Tycoon, it’s the Communist Party. Keep a low profile.