2005-08-03

CNOOC made the right call

CNOOC finally demonstrated it can act on rational business decision making. It did not fall into Unocal's trap in coercing for a "China premium". Unocal is a good log, but there will not more trees down the road. CNOOC may have lost a battle, but it has learned its lesson for a relatively small price and certainly earned considerable sympathy for future deals from other Chinese corporations.

CNOOC's mistake, as stated in an earlier discussions, was its failure to submit its bid in April. It was consequently caught in the dilemma of compensating Unocal for the $0.5Bn break-up fee and fighting political interference against a deadline - it is an impossible deal if there is still uncertainty over who pays for the break-up fee. (See comment below for impact of this term)

Going forward, we expect to see more M&A activities from Chinese corporations. We also expect opposition from protectionist, xenophobes and neo-conservatives among the US politicians to persist. China has a long way to go to convince the latter two its genuine interest in fair play. Therefore, there will still be a "Chinese premium" to be paid in these games. But future activities would be better planned (e.g. sounding out to the Board earlier regarding such important decisions). The Haier/Bain/Blackstone model may serve as a good model.

The Chinese may still overpaid, as the Japanese did. It is inevitable for a new comer. The over-priced deals will be less severe thanks to better information availability and a more efficient market. But the challenge lies in the post-acquisition management, as demonstrated at many failed PMI (post merger integration), even for companies from the same country. But it may not be in the best interests for the American (or the world) that Chinese acquisition fail, as it would lead to job lost and waste of resources.

Economist has a good coverage, as usual. However, the comments in the last paragraph "multinational...doing business in China is far from easy....and often not very profitable" are not entirely accurate. "Far from easy", true. "Often not profitable", false. There has been a labyrinth of traps for foreign investors in China, but these traps are not insurmountable. Plenty of MNC today are very successful in China, to quote a few:Volkswagens, GM, J&J's Janssen and 90% of the Pharmaco's, Coca-cola, P&G, and even the most recent entrant Dell, etc. Early failures are mostly due to crucial mistakes in strategy (wrongly judged competition, sent obsolete product line managed by incompetent managers, and more often, just mis-management. e.g., Whirlpool, Glaxo's early years. Some others have significantly understated their profit by overstating costs, especially if one could play the transfer price game (Coca-cola and many Pharma JVs, plus the over-pricing of equipment for many manufacturing ventures). Today China already boast one of the most invetment friendly environment among developing countries, as "voted" by FDI.

We should trust the judgments of the businesses, as they would quickly retreat to limit loss if an investment seems to lead to nowhere. In other words, Darwinism wins and you will eventually see more of the profitable ones.

I strongly doubt if China would retaliate by limiting US investment. But when there is competition between US and EU/Japan for business, you know which side the balance will tilt. Expect an uphill battle for US insurance companies in China, and that for a few other sectors, for example. Perhaps an "American premium" in selected "demonstration" areas.

China should resort to WTO to fault US for unfair competition in this particular case, if it can find such pathway in the WTO terms. Otherwise, there is no reason to act irrationally just because US forgo a good price for its citizens. As widely discussed, China (and CNOOC) also has another card to play, to pursue opportunities more aggressively in Iran and other US "enemies" - something the world prefer not to see.

10 comments:

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nate said...

Unocal was a bad test case of how future Chinese M&A can be expected to play out because the deal involved oil, which at present has a "national security" connotation to lawmakers.

I expect that you're spot-on that the Haier-Maytag model will be a much more typical as Chinese manufacturers of consumer goods try to find a shortcut to posessing developed brands in foreign markets.

On the other hand the post-acquisition management will be very poor as Chinese firms learn the strategic and conceptual ins and outs of negotiating the front end of hardgoods in developed markets. Haier's experiences with Wal-Mart are a good example of things to come.

Sun Bin said...

I was actually a bit surprised at the trust and willingness to seek help from Haier's part, in the partnerhsip with the private equities. Chinese managers learn faster (and are more willing to accept western management ideas) than I had thought.

CNOOC could have had a fair chance had them not missed the Apr deadline -- the opposition would be less fierce and more importantly, Unocal would not have to face the $500M penalty, and receive another $500M in payment. Moreover, the delay in CFIUS approval would only be a small opportunity cost for Unocal (no cash penalty). It amounts to $1bn difference in total, CNOOC could have still won the shareholder vote.

nate said...

I'm guessing that the Blair-Blackstone connection met Haier through their reverse merger ambitions. I wonder who approached who? Zhang Ruimin is a bit exceptional in his ability to trust his foreign management. The M&A scene will really start when smaller companies that Haier and CNOOC learn to follow suit.

Sun Bin said...

I guess Haier probably met Bain Capital throught Bain Consulting, who has worked with Tsingtao Beer, also located in Qingtao.
Zhang has begun his overseas effort almost 10 years ago (got burned in its 1st factory in Indonesia right before the 1997 crisis). Now he probably learned a lot and become more confident.
Only people who are confident in their own ability would not be afraid of taking new appraoch and strong partners. That probably applies for other Chinese enterprises as well.

Anonymous said...

http://www.taipeitimes.com/News/editorials/archives/2005/08/05/2003266518

You will enjoy this article, sun bin. I do agree with much of it. My real quarrel is with the way wealth is distributed...but from a slightly different perspective than yours.

Stormy

Sun Bin said...

stormy,

thanks for the link.
Unfortunately the link is truncated and does not work

Anonymous said...

http://www.taipeitimes.com/News/editorials/archives

/2005/08/05/2003266518

I suspect wordwrap is truncating the line. I broke the line with a CR.

Stormy.... sorry.

Sun Bin said...

Thanks stormy

this is the link

I agree with most of the points raised by Philip Wallbridge. I think he wrote and good a well-balanced article, and he understood what is happening underneath.

If I were the Chinese government, I would not mind if US gov't is subsidizing $1bn to sell food to my people. I think the Chinese government is mainly concerned about being too reliant on import and one day this cheap source of food might be shut off and they would be screwed. So they want to make sure sufficient numbers of their farmer stay on the land and that they can feed their people in such circumstances.
Meanwhile, they have been turning their arable lands into factory. Such processes are not easily reversible (once you covered the fertile land with cement). They are not doing China, or our earth any good.

I also agree with him that the Chinese farmers and workers were exploited (by the 'capitalist' and to some extent their compatriots in cities). Unfortunately there is not much we could do about it. And this is the lesser evil compared with, say, N Korea (aks pre-1980 China). Sad and painful transition to have to go through, like English workers in Dickens' era.
That is the main reason I hope a small (or moderate) appreciation of RMB should be tested, gradually.

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