M&A

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 VoylesNovember 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
Europe
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 companiesPercent of China M&A spending abroad, by region