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Hard to Swallow

For Asian companies planning to make acquisitions in Europe or the United States, securing the deal may require more than the highest bid.
Bennett Voyles, CFO Asia
November 26, 2007

Right this minute, chances are good that somebody in Hollywood is writing a screenplay about an evil Asian corporation that will stop at nothing to take over a wholesome American company. You already know what this movie will be like. There will be a villainous CEO, probably with a white cat and a Chinese accent, henchmen in big black cars, an Irish-American cop, a fast-kicking Asian woman who won't make it to the last reel, and a blonde American woman who will.

What does this scenario have to do with Asian corporate acquisitions in the West? Quite a bit, as it happens. Experts say that economic reality — the kind of reality that business people work in — often has surprisingly little to do with the political realities that determine whether an acquisition is approved. And those political realities are often driven more by the kind of vague fear that sells movie tickets than dispassionate economic calculation.

"If an Asian company or fund goes in and just thinks it can win the battle for a company or an asset on economic grounds or business grounds, it is bound to lose," says Hans Kribbe, a former European Union staffer whose posts included the offices of the competition commissioner and internal market and taxation commissioner, and currently an account director for GPlus Europe, a lobbying and public relations firm.

Barriers to foreign acquirers — particularly those from Asia, Russia, and the Middle East — are starting to rise in the West. Anxious about economic and military competition from China, the U.S. Congress is turning its attention to foreign acquisitions in areas such as natural resources, ports, and technology. In the EU, politicians are considering whether to draw up a list of "strategic" industries, requiring foreign buyers to seek government approval for acquisitions in those areas.

This is bad timing for Asian companies, since the obstacles are appearing just when many are shopping abroad for acquisitions. Sovereign wealth funds such those maintained by Singapore and Malaysia have raised large sums, and China recently launched its own US$200 billion fund. Overseas purchases are also surging and experts predict even more deals in years to come. For just the first 10 months of 2007, for instance, the total value of deals announced in the U.S. by Asian acquirers totaled US$33 billion, up from US$16 billion for all of 2006. Deals bound for Europe have also been on the upswing over the past few years (see "Dealmakers on the Rise" at the end of this article).

For companies basing their expansion plans on buying into Western markets — and many are — the challenge is by no means insurmountable. But, say M&A experts, the increasingly chilly environment will require a new degree of political sophistication and public relations savvy.

Rising Anxiety
For their part, Western regulators deny any anti-Asian bias. "Companies are dealt with under the Merger Regulation [rules] on a totally objective basis, irrespective of their geographical origin," says Jonathan Todd, European Commission spokesman on competition, in an e-mail. Only criteria regarding the potential adverse effects on competition are considered, he says, such as whether a merger would restrict consumer choice or increase prices.

And to be sure, some deals sail through without much trouble. But other transactions have run aground on political and national security concerns. In 2005, the Chinese National Offshore Oil Corporation (CNOOC) lost its US$18.5 billion cash bid for Unocal. A bipartisan Congressional group helped sink the bid, citing security risks — never mind that Unocal constituted less than 1 percent of U.S. production.

In 2006, DP World, a state-owned company in Dubai, also failed in its plan to buy a U.S. company, in this case, the port management businesses of six U.S. ports. Sixty-four percent of Americans came to oppose the deal, according to the Rassmussen Report, and a U.S. House of Representatives panel voted to block the acquisition 62-2. More recently, Huawei, the Chinese telecommunications equipment manufacturer, and Bain Capital ran into some opposition to their bid for 3Com, although they managed to close the US$2.2 billion deal in late September.

The European Union, which as a confederation of 27 countries might seem to know something about different cultures, also sometimes makes decisions on considerations that have nothing to do with the numbers. In Europe, in 2005, even the rumor of a bid by PepsiCo for Danone, the French food company, was enough to push the French to pass legislation restricting takeovers in 11 strategic areas, and encouraging the EU to do the same. Areas included such commonsense industries as defense — and some surprises, such as casinos.

Sovereign funds are a particular focus of Western concern. Such funds have been around for a while, but they're getting bigger, as foreign exchange reserves pile up in many parts of the world. At the moment, the top 20 alone currently hold more than US$2 trillion in assets, more than the entire market capitalization of the Hong Kong Stock Exchange, according to a recent study by Standard Chartered Bank. And now that China and Russia are launching funds (Russia will start its own "National Well- Being Fund" in early 2008) there is concern that investments, especially in areas such as infrastructure and technology, may not have purely economic motivations, but political or military ones, as well.

European politicians are already alarmed by the stakes that Russia's state energy company Gazprom has taken in the continent's power companies, allegedly to help keep Europe reliant on Russian energy resources. They fear that the new sovereign funds might also be used as a political weapon. Angela Merkel, Germany's pro-market chancellor, has agreed to set up a government panel to vet foreign acquisitions and is pushing for the EU to adopt a common policy for reviewing acquisitions.

The Subcontinental Divide
Not surprisingly, many Asian M&A experts believe that government intervention is likely to be the biggest sticking point for deals in the near future: 21 percent of North Asian and 27 percent of Southeast Asian M&A professionals rated government intervention as the biggest obstacle to M&A growth, according to a survey of 202 Asia Pacific M&A professionals conducted this past September by Intralinks, an M&A services company.

But the higher level of scrutiny isn't being applied to all Asian acquirers evenly. Korean companies don't seem to be having difficulty getting their mergers approved, either in America or in Europe, according to Yong G. Lee, a Hong Kong-based M&A attorney for Cleary Gottleib Steen & Hamilton, who works frequently on Korean deals. Indian companies also seem to be having a better time right now compared with their Chinese peers.

"My own experience on this has been that the reception has been exceptionally good," says Kalpesh Kikani, head of the global investment bank division of ICICI Bank, India's dominant M&A bank. "I can tell you without exception the reception from local authorities, from the sellers, and from the workers in a lot of these factories has been amazing."

The Mumbai-based executive offers several reasons for the positive response to his Indian clients, on deals that have ranged from as little as US$20 million to as much as a few billion dollars. He says Indian companies have, in general, chosen to exercise control in a hands-off manner through a board of directors — making them popular with management and unions, which may be giving them an edge over private equity funds or other Asian buyers.

He also believes there may be more cultural similarities, at least when it comes to business. "The overall way of approaching business is very similar in India compared to a lot of these countries," Kikani says. Its English-language proficiency gives India an edge, as does its legal and accounting systems, which are based on British models.

Still, Indian companies don't always have an easy time. When Mittal Steel bought European steel maker Arcelor last year for US$25 billion, the move initially sparked strong opposition from France, Spain, and Luxembourg, with the CEO of the embattled Arcelor claiming that the company's "European cultural values" wouldn't be compatible with ownership by a foreign company such as Mittal.

China Bears the Brunt
Clearly, experts say, most Western anti-merger concern seems focused on China, which like India is increasing its appetite for foreign acquisitions rapidly — net foreign investment continues to grow about 60 percent a year, and reached US$21 billion in 2006, according to the country's National Bureau of Statistics. That figure will rise higher, as the China Investment Corporation (China's sovereign fund) starts spending more of its cash hoard.

Joël Ruet, an economist at the Center of Industrial Economics at the École des Mines de Paris has discussed China's acquisitions with some of Europe's regulatory leaders. He argues that the suspicion of China stems from the murkiness of the ownership of the country's largest corporate groups, many of which are still majority owned by the state. It's unclear just what control the Chinese government exerts in such companies. With the communist leadership still in place, European regulators get nervous at the idea of a Chinese state-controlled company buying a European company.

What would make Europe more comfortable with China? One of several things, says Ruet, whose specialties include government-industry relations. China's state-owned companies need not be privatized, he says, but if the government continued to hold the title, they would have to target non-strategic industries. Beyond that, he says, China must clarify its corporations' governance structure. "I'm not saying that they must adopt an Anglo-Saxon governing structure," he says, "ÂÂÂ…but the rules should be clear." A third way would be for the government to encourage private mid-range companies to expand internationally instead of only the largest companies, as occurs now.

Bring Your Map
But for many companies in China, if not most of Asia, the greatest barrier to a foreign acquisition may simply be not knowing the lay of the land. The biggest problems that companies in Korea and other emerging economies face, Lee believes, are the product of language difficulties and other cultural barriers, and a general lack of understanding about Western regulatory processes.

"There isn't a long history of Asian companies going after and trying to acquire companies outside of their jurisdiction, let alone in the U.S. or the EU," Lee says. "When companies embark on this process they're often completely unaware of what is involved in this kind of transaction."

Antitrust concerns are a particular source of misunderstanding. Many Asian companies often don't anticipate the degree of scrutiny that such transactions generate, and are unprepared for the massive amounts of information that needs to be gathered to mount a defense. Europe's complex labor concerns are also a new experience for most Asian firms, which haven't had to deal with the continent's thicket of laws related to worker protection, benefits, and health and safety regulations.

Politics present a thornier set of challenges. First, dealing with government officials is very different in Europe and the United States than in most Asian countries. "The companies here know exactly who they have to convince," when they want to make a domestic acquisition, he says. That's not true in the States or Europe, where authority is far less centralized. In Asia, governments often look at mergers less in terms of anti-competitive effects than in terms of whether they advance a national agenda, according to Lee. "If they view it as good for the economy or good for the country, they'll act in very strategic ways and be very flexible."

In the United States, securing the necessary approvals may well require knowing state governments, local governments, federal agencies, and key politicians — and knowing how to please the politicians' most important constituencies. "It's much more complex and political and you have to plan for that. It's not something you can do on your own," Lee says.

Securing approval in Europe is less complex, but poses difficulties of its own. In Europe, there is more left-versus-right politics, and buyers need to know how to navigate and appease both sides. "There is a spectrum of views that you have to deal with, whereas in Asia it's usually not the case," says Lee.

But perhaps the biggest adjustment is learning to operate with more patience. Westerners may have a stereotype about Asian companies working with infinite patience as they execute plans that span decades. But some companies may in fact need to slow the pace down. "They say 'we want to get this done in a month or two months,' where it's a transaction that in our view, if it's done right, will take six months," Lee says.

This is especially true in Korea, where "everything can be expedited — the financing, the regulatory approvals," Lee says. A Korean company, for instance, might not line up financing ahead of making a tender offer. That may work in Korea, where a big company receives priority treatment from local banks, but it's less practical when dealing with an international bank.

Don't be a CNOOC
Chinese computer-maker Lenovo, despite the fact that it was taking an icon offshore, managed to snag IBM's PC business. CNOOC, on the other hand, encountered a five-alarm political firestorm when it tried to take over Unocal. So how does a company ensure that it's a Lenovo and not a CNOOC?

Not surprisingly, most experts suggest hiring experts like themselves. An outside advisor can help an acquirer navigate government regulations, comprehend political intrigues, and avert public relations disasters.

Being as open as possible about the company's finances and about the goals of the acquisition may also help. That's especially true for a sovereign fund, which may have a harder time convincing regulators of its honorable intentions.

For a sovereign fund, the key is to be able to prove that the decision to buy an asset is based on a business case, not a political one, says GPlus Europe's Kribbe. One thing that can go a long way toward helping assuage suspicion is to be able to display a past record of deals that were clearly economically-driven. "Of course, there is probably an amount of suspicion that you can never really take away, but there is a lot you can do to fight it."

But greater understanding will only go so far, and political conflicts over East-West mergers are likely to continue. Ruet argues that the economies of Europe, the U.S., China, and India will always have uneven levels of state involvement. And where the government is involved, there's bound to be barriers to cross-border M&A. "The world is not flat," he says.

Bennett Voyles is a Paris-based business writer.

Outward Bound
Largest 2007 announced U.S. and European acquisitions by Asian acquirers
United States
Target (Date) Acquirer Name Nation Value
(US$ billion)
Novelis (2/10) AV Aluminum (HINDALCO) India 5.8
Ingersoll-Rand, Bobcat operation (7/29) Doosan Infracore South Korea 4.9
Solectron (6/4) Flextronics International Singapore 3.2
Blackstone Group (5/20) China State Investment China 3.0
Target (Date) Acquirer Name Nation Value
(US$ billion)
Barclays (7/23) China Development Bank China 3.0
FL Selenia (9/20) PETRONAS Malaysia 1.4
Whyte & Mackay (5/16) United Spirits India 1.2
Chapterhouse Holdings (6/20) GIC Real Estate Singapore 9.5
Source: Thomson Financial

European and U.S. acquisitions by Asian companies
Percent of China M&A spending abroad, by region