Reuters has published a “Special Report” entitled: “The U.S. and China Start An M&A Cold War.” You’d think that hyping something by calling it a special report would have been predicated with some decent research and logical thinking. Such is not the case with this one.
Here’s the article’s thesis:
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.
OK, right off the bat I have a problem with the timing of all this. The title says that the US and China are starting an M&A Cold War, not that it’s been going on for a while. Beginning with the Unocal deal is a bit problematic, therefore, since that proposed acquisition was shot down in 2005. Six years ago, not exactly a trend that is just now starting, and that’s assuming there is one.
On to substance. Calling something a “Cold War” suggests to me that there is a conflict. In other words, these two countries are engaged in some sort of struggle against one another. In the context of M&A, it would mean that the deals are not being approved because of the nationality of the acquirer, and not for other reasons.
So what deals does the Reuters piece use as evidence of this conflict? I’m not familiar with all of them in detail, so I’ll just pick out a couple.
1. Coca-Cola – Huiyuan: Coke submitted its bid to take over Huiyuan to China’s competition law authorities. The deal was rejected. Reuters uses this as example of an unreasonable regulatory action, noting that Coke originally thought it would sail through the approval process.
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 per cent premium and the fruit drink business was officially listed as a sector where foreign investment was encouraged.
Ridiculous. Sure, the price, the support of Huiyuan and the industry sector were important, but this was a competition law review. The case ultimately was rejected because the authorities were concerned about market dominance and Coke’s future ability to force tying arrangements. Now, one could argue that MOFCOM’s reasoning was flawed (e.g. it defined the specific market sector incorrectly), but these objections would be based on application of law, not obvious protectionism.
Throughout the article, Reuters uses diplomatic cables in an attempt to justify its shoehorning of a few failed deals into a “Cold War” narrative. With the Coke deal:
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.
I hope this is a misquote or something, because it makes Etchells look like an idiot. Sure, national security could have been brought up, but this was a competition law case regarding market concentration/dominance first and foremost, and it was rejected on those grounds.
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.”
OK, let me unpack this. The anti-monopoly law (AML) review process is a competition law matter. The Coke deal clearly fell within the scope of that law and therefore it had to be submitted for review.
The issue of takeover of famous brands stems from a provision in the 2006 M&A Law, which is a separate law and contains different standards. If Coke was unaware of M&A Law restrictions, then their lawyers should have been fired. Whether MOFCOM was ultimately going to look into the famous brand provision is a separate matter — one look at the M&A Law tells you that they had the legal ability to do so.
So what does this deal tell us about this so-called “Cold War”? Absolutely nothing. Legal commentary that I’ve read (written by competition law professionals) splits on whether this was a poor decision by MOFCOM, and even if it was, it could very well have been an error made by a regulatory body applying a relatively new law. The case that the Coke deal was a clear example of local protectionism against an American company (for that reason) has never been made persuasively.
2. Tengzhong – Hummer Acquisition: this deal was ultimately rejected by MOFCOM on technology transfer grounds. Is this a good example of a conflict between the US and China? Hardly. When Tengzhong’s interest in Hummer was announced, many commentators (myself included) predicted that the chances of this going through were extremely low. This prediction was not based on a perceived US-China problem, but a China environmental policy matter.
The Reuters article even includes this in the reasons the deal was rejected:
[F]or the Chinese government it was the wrong deal at the wrong time by the wrong company. Acquiring and then producing a brand built on macho, gas-guzzling vehicles flew in the face of Beijing’s push for greener and cleaner technologies.
Look, I don’t understand the logic here. A “Cold War” means bilateral conflict. If a deal fell through because of environmental concerns, that has nothing to do with conflict between the two nations. Am I missing something here?
3. Huawei & 3COM or 3Leaf: Huawei has been thwarted several times now by the US CFIUS review process. I’ve written about this ad nauseum. In short, the US government has nixed these deals because it believes Huawei has ties to the People’s Liberation Army, among other perceived problems. As I’ve said before, I believe that the US government is being ridiculously paranoid when it comes to Huawei, but that because these rejections are so wrapped up in Huawei’s specific history and situation, we should not expect that CFIUS will act the same way towards other Chinese enterprises looking to invest in the US.
The Reuters piece uses lots of diplomatic cables to make its case. Reuters uses lots of hearsay and innuendo incorporated in diplomatic cables in an attempt to make its case, but this is not persuasive. Citing the opinion of some person in the Chinese government or a corporate executive as to why a deal was rejected is not definitive evidence, it’s rumour and speculation.
FYI, you might wonder why this special report did not use any statistical evidence to describe a growing trend of M&A problems, for example the huge wave of AML-based rejections that have followed the Coke deal. Wait a minute, that would have difficult, since it hasn’t happened!
How about the spike in US CFIUS rejections of China deals following CNOOC and Huawei? Despite all the news and commentary, the numbers are tiny, and certainly not enough to cite a trend, much less a “Cold War”.
The Reuters piece does argue that many deals these days are not even being submitted, or even considered, because of the chilly regulatory climate. This is a convenient argument, as I cannot even begin to prove that negative. Without any hard numbers to show a trend, I can’t go any further.
Are M&A deals difficult? Absolutely. Are the regulatory hurdles much higher than they were just a few years ago? That’s undeniable. Finally, have both countries rejected deals because of local protectionism? Certainly.
But are these few rejections sufficient evidence of a trend, a conflict between the US and China that could be likened to a “Cold War”? Sorry, but I don’t see it.