For Yang Hua, defeat was completely unexpected — and the memory of it still stings. As chief financial officer of the Chinese National Offshore Oil Corp. (CNOOC), the third-largest oil company in China, he was a key figure in last summer's failed attempt to purchase Unocal. CNOOC's bid to acquire America's ninth-largest oil company set off a storm of controversy here. Politicians and pundits fretted that the Chinese were seeking to strip the nation of vital energy supplies just as prices were soaring. Ultimately, CNOOC lost in a bidding war to U.S. oil giant Chevron, largely because of the fierce political backlash. Even now, months later, Yang puzzles over the failure of the $18.5 billion bid.
Despite the deal's huge risks, Yang says, he was "very, very surprised" not only by his company's loss but also by the near-hysteria the bid set off in the United States. Only three years earlier, Yang had been CNOOC's lead negotiator in a bid to acquire Indonesian oil and gas reserves from Spain's Repsol. That $585 million deal came off without a snag. No political firestorm. No China bashing in the local or national press. No costly media campaigns to win public support for the deal. Indeed, CNOOC is managing its new subsidiary these days with a very light touch. Initially, CNOOC sent only two managers to oversee the unit. Today, just 20 of the 900 employees are Chinese. There were no layoffs and few, if any, other changes in the unit.
In retrospect, says Yang, CNOOC's bid for Unocal suffered from a fatal flaw: the company did not effectively communicate its benign intentions to the United States. That's unlikely to happen again, as the company will no doubt sharpen its negotiating skills before targeting another acquisition. Despite last summer's defeat, Yang says his company could make another bid for a company in the United States. After all, he says, CNOOC has the same goal as any other capitalist enterprise. "It's not like we're going to take over your jobs or take your resources back to China," says Yang, 44, who spent a year studying business American-style at Massachusetts Institute of Technology, earning his executive MBA there in 2003. "We're only here to make money," he says. "We're happy to just take our profits and deliver them to our shareholders."
That's the philosophy behind a potentially massive wave of acquisitions by the Chinese in the United States, Europe, and elsewhere in Asia. The Chinese are new to the art of the international deal. Just five years ago, mainland companies didn't think of shopping for assets beyond the walls of the Middle Kingdom. Now, flush with cash and armed with gold-plated deal-making expertise from the world's top investment banks, the Chinese are launching a shopping spree. Straszheim Global Advisors, a consulting firm in Los Angeles, estimates that Chinese firms will invest some $80 billion overseas in 2005 and 2006. Despite the setback suffered by CNOOC, "this trend will continue," says Jack Zhai, head of global corporate finance at Deutsche Bank in Beijing. Adds Ed King, managing director of Asian M&A at investment bank Morgan Stanley in Hong Kong: "At this stage in China's development, large local companies are completely capable of using their competitive advantage to really go international and continue doing these deals."
Get Ready
What does the buying binge mean for American CFOs? Among other things, it means there are more potential buyers studying their companies and their competitors for possible acquisition. For that reason, finance chiefs have to be prepared for bids from companies they may never have heard of. Markets are going to be disrupted. Prices may fall dramatically. Supply-chain dynamics may change. As it broadens into more sectors and gains momentum over the next two years, Chinese M&A is likely to roil markets further.
Through acquisitions, the Chinese will seek to build on strengths and shore up weaknesses, namely in the areas of branding, sales, marketing, and technology, says Kalpana Desai, managing director for M&A at Merrill Lynch in Hong Kong. There are other forces at work as well. "The domestic market is very competitive," says Desai. "It makes sense for Chinese companies to expand their product reach beyond their own borders." In a classic case of turnabout-is-fair-play, the United States looms as a natural target for the Chinese because of the vast size and wealth of its market. China is encouraging companies to go abroad by providing ample low-cost loans to companies.
Most of the Chinese acquisitions in the near future are likely to involve natural resources, such as oil, natural gas, metals, ores, and coal, according to investment bankers involved in evaluating target companies for the Chinese. Just days after CNOOC gave up its bid for Unocal, China National Petroleum Corp. (CNPC), an oil company fully owned by the state, announced it had bought PetroKazakhstan, a Canadian firm that is a major oil producer in the Central Asian country of Kazakhstan, which borders China. That $4.2 billion deal followed a string of other multibillion-dollar deals by Chinese government firms to develop oil and gas fields in countries such as Sudan, Venezuela, and Australia. China is "reaching out beyond its borders to procure assets, in particular, reserves that will be important for its future development and growth," says Mark Renton, head of Asian investment banking at Citigroup in Hong Kong. (Citigroup advised CNPC on the transaction.)
Reader Comments» Post a comment