Acquired by BRICS
Ten years ago one could hardly imagine that companies from the BRICS countries would become key players in global mergers and acquisitions transactions, capable of investing hundreds of millions – even billions – of dollars into various assets around the world. Now transactions of this magnitude are performed on a routine basis.
When China National Offshore Oil Corporation (CNOOC) offered $18.5 billion for Unocal in 2005, the news sent shockwaves through the political establishment and business community in the United States, and the broader American public was simply appalled. As if uprooting U.S. producers was not enough for the Chinese, this time a company controlled by the country’s communist government was about to get a foot in the door in an industry that had strategic significance. CNOOC’s bid was strongly rejected, and Unocal was later bought by another U.S. international, Chevron, despite the fact that the latter offered a lower bid.
Powers of Persuasion
Confucius teaches us that our greatest glory is not in never falling, but in picking ourselves up every time we fall. CNOOC learned two lessons of patience from this defeat. First of all, making small steps toward a big goal is always better. Instead of chasing another major ‘trophy,’ and running the risk of losing it again, the company started collecting relatively minor assets in different regions of the world, including North America. Secondly, mega-deals in such sectors as oil and gas cannot be pulled off if you just show up with big money. They require careful groundwork and detailed discussions with core politicians. Having learned the lesson well, CNOOC turned into a ‘straight-A student,’ and its recent acquisition of the Canadian company Nexen, completed this February, seems to confirm that premise. An investment to the tune of $15.1 billion had to be agreed not only with Canadian authorities, but also with the U.S. government. The acquisition became the largest international deal ever to be closed by a company from China.
Investors from the People’s Republic are honing their mergers and acquisitions (M&A) skills not just in the oil and gas industry, but also in other politically sensitive sectors. Their readiness to engage in a constructive dialogue and agree to a reasonable compromise tends to be viewed positively by the host countries. For instance, this January the U.S. government approved a bid put forward by Wanxiang Group – a manufacturer of automotive components – to acquire A123 Systems – a bankrupted manufacturer of batteries – in spite of the fact that dozens of members of Congress spoke out against the deal.
“In part the Chinese buyers got what they wanted because the deal was thoroughly structured: Any assets relating to dual-use technologies were taken out of the equation,” says Mao Tong, a partner at the law firm Squire Sanders, who consults on international M&A. “As for the Nexen acquisition, CNOOC had to give up control of its assets in a Canadian company operating in the Gulf of Mexico – otherwise, the American government would not agree to hand them over to a Chinese investor. Each of these deals had a number of intrinsic difficulties, but the fact that both were successfully closed goes to show that the appetite for such agreements is improving.” According to Mao, this trend is likely to persist, and not only because buyers are getting more experienced. Authorities in Europe and the United States are developing more consistent and transparent regulations setting out criteria that outlaw specific transactions on grounds of national security.
According to Ruben Israelyan, Director of Transaction Advisory Services for Russia and the C.I.S. at Ernst & Young, the situation has changed dramatically compared to the early and mid-2000s: The West is trying to overcome a number of challenges, with economic growth remaining low or even negative.
“On the one hand Western companies need some serious cash and investments; on the other hand investors from the BRIC countries have much to offer. What is more,” he points out, “the latter countries managed to reduce the gap in many areas including technologies and corporate management.”
In Europe in particular, the financial crisis made the Old Continent more amenable to accepting buyers from the BRICS countries. For instance, Chinese companies participated aggressively in the privatization of electrical power grids in Portugal. They managed to acquire large shareholdings in Energias de Portugal (EDP) and Redes Energéticas Nacionais (REN) without making much noise at all, which used to be hard to even imagine in the old days.
Good Things Catch On
It is widely believed that transborder M&A deals rarely meet investors’ expectations. In 2008, when the Indian company Tata Motors acquired the UK-based Jaguar and Land Rover (JLR) from Ford for $2.3 billion, few people believed that this venture would be a success. Both brands were already sustaining heavy losses, and the global financial crisis that ensued six months later reduced their chances to succeed even further, making this exercise nearly futile. Skeptics chanted that Ratan Tata had once again paid too much for yet another European ‘toy’ – hinting at the colossal deal in the steel sector between Tata Steel and the British-Dutch company Corus. However, the arrival of a new investor worked in the case of Jaguar Land Rover. Tata Motors invested billions of dollars in the newly acquired luxury brand, and JLR managed to drastically cut costs and focus on emerging markets such as China. As a result of these efforts the company became a veritable gold mine for the Indians. According to the credit rating agency Moody’s, in the fiscal year that ended in March 2012, the JLR Division yielded Tata Motors nearly two thirds of its consolidated income, maintaining earnings before interest, taxes, depreciation and amortization (EBITDA) at more than 70%.
“Despite the fact that over the last 24 months M&A activities have slowed down across the globe, companies from the BRICS countries have increased their overall share in mergers and acquisitions in Europe and the United States,” says Gerd Sievers, partner at Roland Berger Strategy Consultants. “In many cases investors from the BRICS succeeded in implementing their long-term strategies with respect to businesses they acquired, and now they are perceived on a par with investors from other regions.”
Another classic example is the acquisition of IBM’s PC-making division by the Chinese company Lenovo. Prior to closing the deal, the buyer enjoyed but a marginal share on the global market and was virtually unknown outside its country of origin. Today Lenovo is recognized all over the world and is responsible for nearly 15% of all PCs sold globally, second only to HP. What is more, in this very tough market, dominated by five leading companies, Lenovo remains the only one that has managed to maintain its sales at a stable level.
Brazil also contributed to the pool of high-profile M&A deals raising the status of the BRICS countries in the world of global investments. Every time the average American buys a Budweiser to wash down a sandwich purchased at Burger King, he or she unwittingly works to enrich Brazilian Jorge Paulo Lemann, the man behind the famous 2008 merger of beer giants InBev and Anheuser-Busch. InBev paid an astronomical $52 billion for Anheuser-Busch, and Lemann now owns the controlling interest in the merged company. He also single-handedly arranged the 2010 deal to buy Burger King, for $4 billion. Then, this February, 3G Capital – a direct investments foundation headed up by Lemann – partnered with Warren Buffet to acquire the famous ketchup manufacturer Heinz (price tag: $28 billion).
On the one hand Western companies need some serious cash and investments; on the other hand investors from the BRIC countries have much to offer
It is also worth noting that every year, apart from these mega-deals, companies from the BRICS countries take part in small and medium-size M&A transactions. The difficult situation that the world economy finds itself in seems to be here to stay, and that forces buyers to tread with caution and act more selectively than before the crisis.
“Interestingly, apart from acquisitions in the raw commodities sector (which still remain large-scale), Indian corporations are starting to focus more on small and medium-size assets,” notes Sourav Mallik, Senior Executive Director of the M&A Division at Indian-based Kotak Investment Banking. “We expect that this trend will continue because, as a rule, deals of this sort are strategic in nature and rarely involve large-scale debt financing.”
It is hardly a surprise, therefore, that in many countries attitudes toward the ‘new investors’ are becoming more even-keeled. From exotic newcomers, they have transformed themselves into a permanent fixture. Contrary to expectations, they take what they deem to be theirs, falling back on their great number, and their skills.
China Learning the Ropes
Mikkal Herberg, Research Director on Energy Security at the U.S. National Bureau of Asian Research (NBR).
The attitude toward Chinese investments is gradually improving in the West. The attempted CNOOC-Unocal deal was very uncoordinated and poorly planned, which played into the highly charged atmosphere with respect to the issue in Washington, D.C. CNOOC bid late after the Chevron offer, it did not discuss the possible offer with key people in the U.S. capital ahead of time, and it did not have a proactive strategy for addressing concerns that would inevitably have been raised. After all, it was a first attempt, which was doomed to be controversial.
CNOOC learned those lessons and applied them in the Nexen case. They quietly discussed the potential offer with both Canadian and U.S. officials. The Chinese offered to maintain the company HQ in Canada, and keep the management and staff in place. Moreover, Nexen had existing well-known management problems, and challenges with their oil-sands projects that needed new capital investment. Importantly, the investor offered a very strong premium price that made shareholders quite happy. In other words, the Chinese anticipated concerns and addressed them right up front in the offer.
I think the atmosphere is also improving as Asian oil companies invest in minority shares as partners in numerous shale gas and oil projects that do not attract the same concerns as before, and gradually some comfort is developed based on the knowledge that these companies are not behaving any differently from other international oil companies.
That being said, there is still very serious sensitivity to large investments from state-owned oil companies. Fundamentally, there remains deep suspicion that they are potentially instruments of Beijing’s strategic intentions – stalking horses for Chinese state policy.
In the U.S., I would argue that any attempt by a Chinese national oil company (NOC) to acquire a medium-size American oil company would still be very controversial. Much would depend on how the NOC handled the attempt, but the atmosphere on Capitol Hill remains very skeptical. The Canadian policy decision that approved the Nexen deal made very clear that future acquisitions of this type would be generally unlikely to succeed. Apparently, similar concerns exist in places like Australia when it comes to resource acquisitions. There is a certain ambivalence on the part of local authorities over how to manage the scale of potential Chinese resource investment and still maintain national control over resource development. In the U.S. it is not so much about the potential scale, since the U.S. oil and gas industry is huge. It is more about the overlay of strategic distrust that feeds suspicion about the role of Chinese state companies, especially in energy and resources.
I expect that the Chinese resource acquisition spree is likely to continue. China will continue to need more oil and gas, as well as other resources, and the available capital to make these large investments is huge and very low-cost. Moreover, the NOCs are willing to pay very large premiums for their acquisitions that are hard for the international oil companies (IOCs) to compete with. The NOCs do not have shareholders demanding strong market returns for their investments, as the IOCs do.
NOCs are seeking to become increasingly sophisticated in order to compete effectively in a very challenging global oil industry: they are rapidly moving up the skill and technology curve as they become more experienced; they are increasingly looking for value in their acquisitions, targeting key areas for investments, and are not just buying anything that might be available – as was the case in the past; and they are deal-making to get into global liquefied natural gas (LNG), shale oil, shale gas, deep-water exploration and production – all of the areas where the majors have critical competitive advantages.