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Rocky waters for China's US acquisitions
By David M Lenard
HUA HIN, Thailand - China's much-ballyhooed attempts to purchase overseas
companies ran into trouble on two major fronts Wednesday.
First, the attempt by the Chinese oil company CNOOC to purchase
California-based Unocal appeared to be faltering, as an 11th-hour counterbid by
rival Chevron was accepted by Unocal's board on the grounds that the CNOOC bid
was "too risky". A few hours earlier, William Blair & Co, which had been
the largest single private investor in CNOOC, announced that it had sold all
its CNOOC shares in recent weeks due to concerns that the company would overpay
for Unocal.
Second, at almost exactly the same time, Qingdao-based electronics manufacturer
Haier announced that it would drop its prior bid to purchase Maytag, the US
maker of major appliances. Taken together, these two incidents showed that the
attempted purchases of US companies by Chinese firms were facing unexpectedly
strong opposition, both political and financial.
One-two punch leaves CNOOC bid on the mat
Until just a few hours ago, CNOOC appeared to be in strong contention for
Unocal. Last Thursday, the Unocal board had instructed its management to
continue negotiating with CNOOC, and expressed its willingness to continue
considering the Chinese offer if several conditions were met; these
included financial guarantees to Unocal if CNOOC withdrew its bid, or the bid
was blocked by the US government. Early this week, media reports indicated that
CNOOC had responded to these concerns by setting aside US$2.5 billion in a US
escrow account that would be available to Unocal shareholders if CNOOC walked
away from the deal. CNOOC further pledged an additional $500 million "break-up
fee" to be paid to rival Chevron if its bid was accepted; this was a necessary
step because the Unocal board had already provisionally accepted the earlier
Chevron bid.
Despite widespread rumors that CNOOC planned to raise its bid from $67 per
Unocal share to $69, this step never took place. According to a CNBC report on
July 19, CNOOC demanded that, in exchange for raising the share offer to $69,
the Unocal board change its current recommendation to shareholders to accept
the Chevron bid, and instead actively support the CNOOC offer. But, in what may
have been the final nail in the coffin for CNOOC's attempted takeover, the
Unocal board could not accede to this request because company lawyers felt it
conflicted with provisions in Unocal's merger agreement with Chevron that
prohibited the company from taking any steps to support CNOOC, even if board
members considered CNOOC's offer to be superior.
Meanwhile, Chevron's bid had actually declined in value to approximately $60 a
share, because it consisted mostly of Chevron shares rather than cash, and
Chevron shares had been declining in recent days due to investor fears that the
company would be, in effect, caught in a bidding war with the Chinese
government, the major stakeholder in CNOOC. Partly because of this, Chevron,
which had been strenuously denying for weeks that it planned to raise its bid,
did so late Tuesday night, sweetening the offer to about $63 per Unocal share.
Although this brought the Chevron offer up to about $17 billion, which was
still considerably below the final CNOOC offer of $18.5 billion, the added
inducement was apparently enough to sway the Unocal board, which finally voted
to accept Chevron's improved offer, avoiding the political and legal obstacles
inherent to the CNOOC bid.
As of July 20, the fate of Unocal had still not been completely resolved. The
ultimate decision will be taken at a Unocal shareholders' meeting scheduled for
August 10, and it is still possible for CNOOC to raise its bid further in order
to convince Unocal's shareholders to choose its bid over Chevron's. But many
analysts considered this unlikely. DBS Vickers Hong Kong Ltd analyst Gideon Lo
noted in an interview with Bloomberg that "Chevron's offer is probably high
enough to force CNOOC to give up its bid...CNOOC has to offer at least 5-10%
more, or Unocal will probably prefer'' Chevron. "The political situation in the
US favors Chevron's bid," added Lo. "If CNOOC continues [to pursue Unocal], the
market may react negatively. CNOOC is already offering too much.''
Shareholders flee at 'resource acquisition' strategy
A significant development on Wednesday both confirmed Lo's speculation and
constituted another blow to the CNOOC bid. David Merjan, a portfolio manager at
Chicago-based William Blair & Co, announced that the company had sold off
its $160 million worth of Unocal shares. Blair was CNOOC's top non-government
shareholder as of March 31, when it held slightly more than 0.5% of CNOOC
shares. Many foreign investors had considered CNOOC a good investment because
the company, led by USC-educated Fu Chengyu, was well known in Chinese business
circles for being significantly better managed and more
shareholder-return-oriented than the typical Chinese state company.
But according to Merjan, the Unocal takeover suggested a change in strategic
direction for CNOOC that worked against shareholder interests. "They thought
they would be able to continue down the path of organic growth and that
acquisitions wouldn't be necessary...[the Unocal bid] showed a change of
course," Merjan told the Washington Post. The William Blair manager also shared
the perception, increasingly common in the US, that CNOOC was in effect acting
as an arm of the Chinese government to acquire energy assets: "We were
extremely uncomfortable when the Chinese government took a more active role in
CNOOC...we look at this as securing assets as opposed to doing what's in the
best interest of shareholders.'' It has been hard to argue against this
perception given that CNOOC is, in fact, 70% owned by the state-controlled
China National Offshore Oil Corporation, and according to the company's own
website, all four of its executive directors are Communist Party members.
Still, CNOOC officials have maintained that their motivation is solely
commercial. CNOOC chairman Fu Chengyu even personally contributed to the debate
over the CNOOC bid, in a remarkable editorial published in, among other
publications, the Asian Wall Street Journal and China Daily. Fu stressed the
"friendly" nature of the offer, repeated CNOOC's public commitments to continue
to sell US oil assets in the United States, and emphasized his company's focus
on shareholder value: "We believe this merger will offer our shareholders,
which include many leading US institutional investors, tremendous growth
opportunities...Our company has grown shareholder value from a market cap of $6
billion when it listed [on the stock market] four years ago, to $25 billion
today. I will continue to focus on bringing value to CNOOC shareholders and am
convinced that the acquisition of Unocal can help us. I will also be focused on
providing our better offer for Unocal shareholders, bringing oil and jobs to
the US, and on our assurances that we will be an open and responsible
participant in the process."
Some experts acknowledged that CNOOC has a better-than-average corporate
governance reputation for a mainland Chinese firm. Stella Leung, a
Shanghai-based partner with Los Angeles-based law firm O'Melveny & Myers
LLP, said that "compared with other Chinese oil companies, CNOOC is probably
better-run and more progressive". But such talk made little impression on
ex-investors like Merjan, who noted that to acquire Unocal, CNOOC probably
would have to increase its bid beyond what he already considered an inflated
price.
Three's a crowd for Haier
Just as the Unocal takeover saga appeared to be nearing its climax, another
attempted takeover of a US company by a Chinese firm fell through. On June 21,
Haier, a major mainland electrical appliances manufacturer based in Qingdao in
northeast China, announced a $16 per share bid for Newton, Iowa-based Maytag.
The Chinese offer, which was organized in cooperation with financiers Bain
Capital LLC and Blackstone Group LP, topped an earlier bid of $14 a share by
buyout firm Ripplewood, which, backed by GS Capital Partners of Goldman Sachs
Group and the J Rothschild Group, had been trying to acquire Maytag since at
least December 2004.
In contrast to the Unocal offer, the Maytag buyout aroused little controversy
(or indeed, interest) in the US, and prospects for the deal appeared good. But
on July 17, Whirlpool, a Maytag competitor based in Benton Harbor, Michigan,
unexpectedly upped Haier's offer with a $17 per share, $1.37 billion bid.
Although Whirlpool's purchase of Maytag would raise antitrust issues in the US,
given that the combined market share of the two companies for many categories
of major appliances would approach 50%, Whirlpool officials have expressed
confidence that their offer would not be disallowed on antitrust grounds. As
for Maytag, on July 18, Maytag officials said that directors will consider the
new bid from Whirlpool, but added that directors have not changed their
recommendation that shareholders approve the proposal from Triton, an entity
organized by the New York investment company Ripplewood Holdings LLC.
The sudden appearance of yet another Maytag suitor appears to have driven off
Haier. Late on July 19, Maytag said in a statement that Haier America, a Haier
Group Ltd subsidiary, had informed Maytag that the company and its partners
would no longer pursue their bid. The specific reasons for Haier's action are
not known, since Maytag did not release the letter from Haier, and Maytag
spokesman John Daggett declined further comment. Haier officials contacted at
the company's headquarters in Qingdao also refused to elaborate. However, the
most logical explanation is that Haier simply concluded it did not make
business sense to attempt to outbid Whirlpool, which is a much larger company
than Maytag. In addition, Haier already owns US factories (for example, one in
Camden, South Carolina), and its brand name has a reasonable reputation in the
US market, particularly in the small refrigerator sector, so its need to
acquire Maytag's manufacturing facilities and brand name is less than
compelling.
Conclusion
The sudden spate of acquisition attempts by Chinese firms in the last year has
several causes. Chinese companies are, consistent with China's rapid growth,
becoming larger and more sophisticated, and to some extent the acquisitions are
a natural outgrowth of this. Another cause is the very weak reputation of
Chinese brands. Acquiring an overseas brand name is a short cut to
respectability that can potentially allow Chinese firms to avoid the very
expensive, decades-long brand-building effort that other respected Asian
companies like Sony and Samsung have had to go through.
However, there are short-term causes as well. China has accumulated a huge
amount of foreign exchange reserves, particularly US dollars, and if the
Chinese government plans to revalue the yuan upward, it has an enormous
incentive to spend those US dollars on something before they decline in
relative value as a result of a revaluation. Regardless of whether a particular
Chinese company is state-owned or not, because of the absolute primacy given to
economic development by the Chinese government, there is no question that the
major companies in the country operate in a close enough association with the
government to make the term "corporate state" difficult to avoid. So, one
interesting interpretation of the acquisitions would be that the Chinese state
is simply attempting to boost its position in industrial assets while at the
same time reducing its position in US dollars. If the much-anticipated
revaluation proceeds, the former would retain their value while the latter
would decline, making the acquisitions appear to be simply a sound
asset-shifting move, one any astute investor would make under the
circumstances.
To be sure, most of the nativist reaction in the US that has clouded the CNOOC
bid is simply absurd. Regardless of whether one believes CNOOC's pledges to
continue to sell US-derived oil in the US, it would be economically ridiculous
for the company to do otherwise. Why ship oil products all the way across the
Pacific when they can be sold just a few miles away for the same price? Having
said that, the Chinese government has no one but itself to blame for much of
the backlash against CNOOC. Non-Chinese know perfectly well that Chinese firms
are ultimately subservient to the unelected regime in Beijing, and the efforts
of Chinese companies to expand through overseas acquisitions will always remain
vulnerable to "China threat" scare-mongering until the Chinese government
decides to stop delaying serious political reform. Sadly for CNOOC and other
would-be Chinese acquirers, president Hu Jintao has thus far shown himself to
be as timid in this regard as his predecessor Jiang Zemin. But clearing the way
for China's own globalizing enterprises is but one of the many ways that
political reform could boost China's economy.
David M Lenard is a correspondent for Asia Times Online in Thailand.
(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us
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