Special Report: The U.S. and China start an M&A Cold War

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  • Posted on April 12, 2011

    By Paritosh Bansal, Soyoung Kim and Benjamin Lim

    NEW YORK/BEIJING (Reuters) – 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.


    By Paritosh Bansal, Soyoung Kim and Benjamin Lim

    “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.


    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.”


    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.


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