After a week of mixed fortunes for State-owned firms involved in major international acquisitions, industry analysts have warned the nation’s CEOs will have to shrug off their “China Inc” tag before they can make any significant expansion into the West.
Bosses at China Minmetals Non-ferrous Metals Co were celebrating on June 11 when shareholders at OZ Minerals, a major international mining firm based in Australia, voted overwhelmingly in favor of accepting a 1.386-billion U.S. dollars buyout offer.
But it did little to erase the memory of Chinalco’s failure to gain an improved stake in mining giant Rio Tinto just days earlier.
If successful, it would have been China’s largest foreign investment. Chinalco would have paid $12.3 billion for stakes in debt-saddled Rio’s key iron ore, copper and aluminum assets, and $7.2 billion for convertible notes that would double its equity stake in Rio to 18 percent, Reuters reported.
The offer was opposed by the Rio Tinto shareholders, who were worried China, Rio’s biggest customer, would gain influence over pricing of key commodities like iron ore. In the end, Rio Tinto, which has head offices in London and Melbourne, snubbed the $19.5-billion offer and pumped for a joint venture with former rivals BHP Billiton.
The failed bid raised serious questions over the challenges Chinese enterprises face when attempting expansions overseas, say experts, especially as they are often perceived as government vehicles.
“There will always be political pressures on big business investing overseas,” said Dr Dylan Sutherland, a scholar in contemporary Chinese studies at Nottingham University in England. “Chinese enterprises have to accept, being State-run companies, any offer they make will need to be very attractive.
“How to break these ‘China Inc’ perceptions? There is simply no easy way to mitigate these risks, other than perhaps being more upfront about them.
“Constantly refuting links with the State does not necessarily help, in fact it only hinders the process, creating an impression of dishonesty in the eyes of many observers.”
A statement from the Ministry of Industry and Information Technology (MIIT) said on Tuesday the alliance between Rio Tinto and BHP Billiton had a “strong monopolistic color”, and that Chinese firms would be watching closely to find ways to cope with it.
China imported 440 million tons of iron ore last year, half of the world’s total, which means any change to the market, albeit slight, would have a knock-on effect for the nation’s steel manufacturers.
“Anti-monopoly laws in China should apply to the proposed deal,” said Chen Yanhai, head of the raw material department of the MIIT at an industry meeting in Anshan, Liaoning province, recently.
If the joint venture proves to be monopolistic, “we will seek new policies and regulations to allow Chinese companies to have a bigger say in iron ore pricing”, said Chen, without elaborating on how this would be achieved.
Ministry of Commerce spokesman Yao Jian backed the comments on Monday, adding if the revenue from the Rio Tinto-BHP Billiton deal reached “a certain amount,” China’s anti-monopoly law would come into play.
The rules stipulate a company must get approval from the central government before consolidation if its global revenue exceeds 10 billion yuan ($1.4 billion) and its revenue in China exceeds 2 billion yuan.
Many industry analysts, when talking about the failed Chinalco deal, have referred to a similar scenario in 2005, when political obstacles blocked China National Offshore Oil Company’s (CNOOC) $18.5-billion attempt to buy Unocal, at the time a major petroleum enterprise based in the United States.
After a vote in the U.S. House of Representatives, the bid was referred to then-president George W Bush on the grounds it had implications to national security.
CNOOC withdrew its offer shortly after, while Unocal was instead merged with the Chevron Corp later that year.
“The Chinalco debacle followed the same pattern as the aborted CNOOC-Unocal deal four years ago,” said Yao Shujie, an economics professor who heads the school of contemporary Chinese studies at Nottingham University. “It not only marked the collapse of a strategic partnership between two independent transnational corporations, but also reflected the competition and compatibility between Western powers and a rapidly growing China in politics, culture and economy.”
The breakdown of the Chinalco-Rio Tinto deal has been met with anger and disappointment in China, with many of the country’s experts blaming a prejudice against State-owned companies.
However, Yao argued that a notable factor was the lack of experience in foreign investment among many of China’s business leaders. He said: “The speed of global expansion has given Chinese companies little practice of the pitiless realities of Western-style acquisitions.”
Xiong Weiping, chairman of Chinalco, said his firm worked hard to respond constructively and engage with Rio Tinto to amend the transaction terms announced four months ago, but the result was completely out of its control.
But Yao disagreed and blamed the company’s management for their insufficient understanding of the concerns of big Western resource companies, as well as the possibility of a stock price resurgence and its consequences.
“Chinalco should have pressed its negotiating advantage harder and not given Rio time to seek alternatives,” he said. “Besides, a 1-percent break fee for a $19.5-billion deal makes breach of contract too easy.”
Yao’s colleague in England, Dr Sutherland, added: “The complicated deal Chinalco proposed created a long gestation period and opened up possibilities for market corrections and greater political scrutiny.
“The major lesson is to keep trying. The markets moved against Chinalco. It may have opted for a simpler equity deal and acted faster, but it is not clear then this would have given it exactly what it wanted.”
In the deal with OZ Minerals, a last-minute decision by Minmetals to sweeten its offer with an extra $180 million proved decisive in winning over the Australian miner’s shareholders. It also helped Minmetals see off two rival bidders.
Minmetals was given the green light to take over OZ Minerals with a revised offer in April. The Australian government rejected a previous bid over national security concerns, while the improved terms simply excluded a flagship mine located near a military installation.
China began to encourage domestic enterprises to invest abroad in 2000. Figures from the Ministry of Commerce last year showed direct outbound investment by Chinese firms had reached $52.1 billion, up 96.7 percent year-on-year.
In April, the government launched a guidebook to help domestic companies invest overseas and, in May, the State Administration of Foreign Exchange unveiled a draft regulation aiming to simplify examination and approval procedures for investing abroad to solicit public opinion.
However, Yao noted: “But China should realize that even with the support of the State banking sector, even with the damage the global financial crisis has inflicted on Western business, China cannot expect to implement its investment strategy unopposed.”