U.S. and China start an M&A Cold War
Zhang Guobao didn’t mince words. More than 18 months after U.S. lawmakers killed an attempt by China National Offshore Oil Corp to buy Unocal in 2005, the senior Chinese official gave the American ambassador a piece of his mind.
“If the United States would not allow CNOOC to purchase Unocal, will not itself guarantee China a steady energy supply and opposes Chinese purchases of Iranian oil and gas, how can China survive?” he asked, according to a summary of his comments in a U.S. diplomatic cable obtained by WikiLeaks and made available to Reuters by a third party.
The decision to block the purchase of the California oil company “will have many after effects,” Zhang said in the February 2007 meeting with Clark Randt, then U.S. ambassador to China.
His warning was worth heeding.
Ever since strident political opposition killed the $18.5 billion Unocal deal on the grounds that it could damage U.S. national security, deal making between the world’s two largest economies has been in limbo. A series of planned acquisitions have died in the hands of bureaucrats or politicians in Beijing and Washington, and other ideas haven’t seen the light of day because of fear they will also be blocked.
Last year, U.S. companies in China struck dozens of small deals but they were collectively worth just $3.2 billion, while Chinese companies spent only $3 billion on U.S. acquisitions, Thomson Reuters data shows. That is a remarkably trivial amount given the two nation’s deepening economic relations: China is one of America’s top creditors and the U.S. is by far China’s largest export market.
Last week, China’s biggest metals trading firm, Minmetals Resources, said it had offered more than all those deals put together — $6.5 billion — to buy one company, but it wasn’t American. It was the Sydney and Toronto-listed African copper producer Equinox Minerals.
All told, Chinese companies made larger investments in countries such as Brazil and Argentina last year than they did in the United States.
The optimism that led to deals such as the acquisition by China’s Lenovo Group of IBM’s ThinkPad PC unit in May 2005, despite questions from U.S. regulators, seems very distant now. What has emerged instead can be likened to an M&A Cold War.
And it’s not just bankers who are suffering. The lack of dealmaking could prevent the two countries from shifting to a more mature relationship that doesn’t just depend on Americans buying massive amounts of cheap Chinese goods and the Chinese buying American debt to fund a huge U.S. budget deficit.
The Cold War will also likely hamper U.S. companies as they try to penetrate the fast-growing Chinese market.
For its part, China is missing out on not just unfettered access to the American consumer market but the chance to pick up global brand names, technology and management expertise.
The diplomatic cables reviewed by Reuters underscore Beijing’s growing frustration with the situation.
Zhang, who recently stepped down as China’s top energy official and was at the time of the cable a vice chairman at the powerful ministry-level planning body, the National Development and Reform Commission (NDRC), had taken the CNOOC rejection personally, in the view of U.S. officials. He had approved the energy company’s bid for Unocal after being told by consultants in the United States that there wouldn’t be any problems, the cable indicates.
This was no ordinary Chinese technocrat who had been snubbed. A self-described humorous raconteur, he told the ambassador he would often walk out of meetings early after having his say, or if he felt forced to stay he would write poetry rather than take notes.
“Zhang, who clearly relishes his reputation for success, would appear to still feel the sting of that very public failure,” the cable concluded.
Such bitterness is shared among a lot of those involved in thwarted deals who appear in dozens of U.S. diplomatic cables written between 2006 and 2010 and recently reviewed by Reuters. The pattern has begun to resemble Mutually Assured Deals Destruction — that is, each time a deal gets killed it seems to have repercussions for the next.
Some of the sources who provided information to U.S. diplomats have not been fully identified in this report for their own protection.
BEATEN TO A PULP
China had its turn in 2008, when Coca-Cola Co made a $2.4 billion bid for Chinese juice maker Huiyuan.
Initially, the soft drinks behemoth was confident there would be no major problems. After all, it had the backing of Huiyuan’s largest shareholders, had offered a 200 percent premium and the fruit drink business was officially listed as a sector where foreign investment was encouraged. It even thought a new anti-monopoly law in China would work in its favor.
Coke had heard informally that the Ministry of Commerce planned to take a “market-based view” of the bid, Coca-Cola Pacific Deputy Group President Paul Etchells told U.S. officials in a September 17, 2008 meeting.
Coke didn’t see the need to lobby senior Chinese government officials. “It was so obviously not a national security issue,” was Etchells’ view.
But U.S. embassy officials saw problems with that view stemming from the M&A Cold War — as well as Coke’s ignorance. They noted in a cable at the time that Coca-Cola “troublingly was unaware” whether the Ministry of Commerce would consider just the anti-monopoly law for its competitive effects or also look for its impact under regulations that govern takeovers of famous Chinese brands and transactions that impact China’s “national economic security.”
“Coca-Cola may not fully appreciate the range of problems the proposed transaction could encounter,” U.S. officials concluded.
On March 18, 2009, the deal was officially dead, rejected by the Ministry of Commerce, which cited competition concerns. The headline of the cable from the embassy got straight to the point — “Coca-Cola’s bid for juice maker Huiyuan beaten to a pulp.”
Later a senior Chinese foreign policy scholar told U.S. officials the decision to reject the bid was motivated by concerns about domestic food security as well as popular opinion that saw the sale of a well-known Chinese brand as a matter of national pride.
Coca-Cola said last week that it was “disappointed that we did not succeed in obtaining approval for the acquisition of the Huiyuan juice business, but we respect the Ministry’s decision. We are now focused on the growth of our existing brands, including in the juice segment.”
POLITICAL FOOTBALL
In October 2005, just months after the Unocal bid was foiled, U.S. private equity giant Carlyle Group proposed to buy an 85 percent stake in Xugong Group Construction Machinery Co.
The buyout shop first ran into “pushback from bureaucratic interests” and had to revise its offer down to buying a minority stake, but after three years of wrangling it abandoned the bid, according to the cables.
In a June 21, 2007 cable, a Shanghai consulate official quotes a well-connected Chinese businessman as laying the blame on bureaucratic infighting between officials at the Ministry of Commerce and the NDRC.
The ministry had recommended approving the bid to the State Council. A series of other government agencies, including the China Securities Regulatory Commission, also supported it, the businessman told U.S. officials.
But the NDRC threw a spanner in the works, arguing that it should be the entity responsible for approving the bid rather than the Ministry of Commerce. And it forced Carlyle and Xugong back to the negotiating table over the ministry’s objections, the cable said.
“Carlyle was tired of being punted around like a political football while the ministries fought over who had control of the deal and the investment approval process generally,” the businessman said.
Adding to the intrigue, one source with knowledge of the deal told Reuters recently the deal fell apart because privately owned domestic rival Sany Heavy Industry Co had “fanned the flames of anti-foreign sentiment” because it too had its eyes on Xugong. Sany’s bid also failed after being rejected by Xugong.
“China welcomes private equity capital and is a great market for Carlyle,” the private equity firm’s spokesman Christopher Ullman said. “We’ve invested more than $3 billion in equity in 50 transactions and are firmly committed to investing for the long-term in China.”
NDRC and Ministry of Commerce did not respond to a request for comment for this article.
Sometimes, it is Beijing itself that has killed bids for American companies by Chinese companies.
In June 2009, a little-known Chinese maker of special-use vehicles and bridge and highway components, Sichuan Tengzhong Heavy Industrial Machinery, emerged as the surprise bidder for General Motors’ Hummer brand.
The only problem — for the Chinese government it was the wrong deal at the wrong time by the wrong company. Acquiring and then producing a brand built on macho, gas-guzzling vehicles flew in the face of Beijing’s push for greener and cleaner technologies.
Eight months later, the proposed takeover collapsed.
Hummer’s Detroit-based government affairs representative Wei Shen told U.S. embassy officials days before the deal fell apart that the Ministry of Commerce determined the transaction did not qualify for China’s “technology transfer” regulations and refused to accept the application.
Other forces appear to have been at play as well. A vice minister opposed the transaction because of his connections to Chinese automaker Dongfeng Motor Corp, which produced a rival product to Hummer, according to one cable.
Hummer’s Shen also said there was some “bad blood” between Tengzhong and officials in its home province of Sichuan in southwest China that might have hampered the proposal.
GM declined to comment for this article. Sichuan Tengzhong did not respond to a request for comment,
By Paritosh Bansal, Soyoung Kim and Benjamin Lim
NEW YORK/BEIJING | Tue Apr 12, 2011 3:39pm EDT
