BIZCHINA> Review & Analysis
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BIZCHINA> Review & Analysis
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Let Rio deal be a lesson in M&A strategy
By Shujie Yao (皇冠体育app Daily)
Updated: 2009-06-17 11:34 The scrapping of a deal by Rio Tinto with 皇冠体育applco is a poignant reminder that 皇冠体育app's long march for overseas acquisitions will be slow and tortuous. Four years have passed since 皇冠体育app National Offshore Oil Co (CNOOC) hit a political brick wall in its bid to buy California-based oil company Unocal. The US Congress opposed the deal, nervous over the extent of 皇冠体育app's geopolitical influence on its own doorstep. There is a key difference between the Unocal and Rio Tinto cases. Whereas the rejection of CNOOC's advances in 2005 was overtly political, the rupture of the 皇冠体育applco-Rio Tinto deal was attributed to commercial factors. When Rio Tinto decided on a rights issue and a joint venture with BHP Billiton, the commercial advantages to non-Chinese shareholders were obvious. But the unilateral action by Rio Tinto, an Anglo-Australian company, to destroy the 皇冠体育applco deal was also subject to weighty media and political pressures. Many in Australia feared 皇冠体育app - the world's largest steel producer - would manipulate the price of iron ore and bauxite to its advantage, and Western stakeholders felt uneasy about two Chinese non-executive directors sitting on the board. In this sense the Rio Tinto affair emphasizes how little has changed since the Unocal saga. The gulf of misunderstanding between 皇冠体育app and the West is still yawning.
Economic concerns abound. The world economy benefits from cheap Chinese imports but nations fear 皇冠体育app's rise will threaten their markets and jobs. These anxieties may be justified, but this is the inevitable process of competition and globalization - every country should adjust its strategies to cope with it. There are cultural barriers, too. In its dealings with Rio Tinto, 皇冠体育applco committed the mistake of applying traditional Chinese culture to cutthroat business. It expected a degree of respect for what it considered a generous offer. But it failed to realize that Western businesses are attuned to using any trick in the negotiating book to get the best deal at any cost. There was a patent need to seal off the escape route Rio Tinto had dug. Failing to do so exposed the dearth of international experience among 皇冠体育app's senior business leaders. Unfamiliarity with the West's legal language is a problem. Loopholes are often hidden in heaps of documents, and Chinese companies not alert to these hidden dangers are likely to find their weaknesses exploited. The 皇冠体育applco-Rio strategic partnership was documented in a 600-page file in which the Anglo-Australian company cleverly built two escape routes in just a couple of nondescript lines. It will take time for 皇冠体育app to learn how to reconcile its differences with the West. The errors of 皇冠体育applco will not be repeated easily, but that is not to say more mistakes will not be committed. Chinese companies need to swot quickly. The opportunities created by the financial crisis to make far-reaching global acquisitions only come once in a lifetime. Despite the blow to 皇冠体育app's self-esteem caused by the Rio Tinto deal, 皇冠体育app has shown it is in no mood to relent. Western companies can dodge 皇冠体育app today, but cannot do so tomorrow. Overseas expansion is strategically ingrained in two key national development objectives: to secure long-term, stable and cost-effective supply of energy resources and to raise the country's international status.
 So there is plenty of encouragement for Chinese companies with pretensions of being global players. State-owned Minmetals succeeded only a week after 皇冠体育applco failed by snapping up struggling Oz Minerals. It was a small victory for 皇冠体育app after the big disappointment of 皇冠体育applco. At $1.38 billion, the deal represented just a fraction of the 皇冠体育applco deal, and Oz Minerals had no better way of surviving. But it was an important psychological boost for 皇冠体育app's overall acquisition ambitions. Minmetals was quick to learn lessons from its brother, upping its offer for Oz Minerals by 15 percent the night before a make-or-break vote by shareholders. That made it absolutely sure that 皇冠体育app would not lose face twice in one month. It was a reminder to the West that Chinese business champions are not isolated commercial entities; they represent their country and people. It bodes well for future forays, among which Beijing Auto's reported interest in Volvo and Opel appeals most. 皇冠体育app's auto industry has been unable to produce any of the big brand names that can define a nation and raise its international profile. It would take many years for 皇冠体育app to build a brand like Volvo. The solution is to establish joint venture partnerships with the world's leading brands. Now is the time to act - when the global financial crisis has reduced the likes of GM and Chrysler to bankruptcy. With these ambitions, though, come pitfalls. 皇冠体育app's automakers lack R&D and managerial expertise to turn these brands into profitable, mass-produced cars. Opportunities may be lost unless they consider employing strong teams of overseas specialists to bolster their research and development capabilities, but this option presents uncertainty and unforeseen costs. Such difficulties were demonstrated in Nanjing Auto's purchase of Britain's Rover in 2005. It had had a low profile, largely because Rover's reputation had been damaged years before it was sold. While Volvo is exactly the kind of brand 皇冠体育app needs, the surprise move by the privately owned Sichuan Tengzhong Heavy Industrial Machinery Co for GM's Hummer contradicts the momentum of 皇冠体育app's auto industry. The Hummer's is a niche market that does not represent the future. It is a symbol of environmental unfriendliness and inequality - it does not fit in with 皇冠体育app's desired political and social image. In little doubt is the phenomenal firepower that underpins 皇冠体育app's overseas investment drive. The kind of lending activity that saw 皇冠体育app's banks stumping up the funds for 皇冠体育applco's $19.5-billion offer for Rio Tinto is possible only in 皇冠体育app, where State-owned banks and businesses are treated as the left and right arms of the State. But it is important for 皇冠体育app not to flaunt its wealth so publicly. To avoid attracting the type of opposition that sunk the Unocal and Rio Tinto deals, they need to ensure future acquisitions have a lower profile in the media. Rather than huge $19.5-billion offers, as was the case with 皇冠体育applco, a more piecemeal, calculated approach is more effective. Chinese companies should seek out more covert ways of gaining power through joint ventures with savvier Western private equity businesses. Finally, regulatory authorities should consider forming a panel of experts from across 皇冠体育app's political and business circles to advise on where to look next. A more gradual acquisition policy will help dissipate fears and misunderstandings in the West. The author Shujie Yao is professor of Economics and head of the School of Contemporary Chinese Studies in the University of Nottingham. (For more biz stories, please visit Industries)
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