The Gold Standard  

‘Outmanoeuvred’ by Jamil Anderlini and Sundeep Tucker in FT is a good article on the failed deal between Chinalco of China and Rio Tinto of Australia. It has many parallels to what happened in the China National Offshore Oil Corporation (CNOOC) bid for Unocal in the US.

I am almost done with James Kynge’s ‘China shakes the world’, first published in 2006. I would recommend that book highly to any one, to get a good insight into how the country works, its goals, its strengths and its limitations.

CNOOC was 70% owned by the Chinese government’s wholly owned parent company. The CEO of CNOOC Fu Chengyu was also the head of the parent company. His predecessor Wei Liucheng was running the company one day. The next day he was appointed to the senior government post of Governor on the southern island of Hainan (from pages 133-134 of James Kynge’s book)

Quite amazingly coincidentally, Xiao Yaqing, the polished president of Chinalco and driving force behind the deal with Rio Tinto, was promoted to the State Council, China’s cabinet.

Further, like CNOOC, Chinalco had lined up concessional funding from State-owned banks.

 Indeed, four state-owned banks agreed to provide Chinalco with $21.5bn at an interest rate that was just a fraction of what any commercial bank would have been able to offer. [More here]

CNOOC appointed Goldman Sachs and J.P. Morgan as advisors to the deal with Unocal. Look at the composition of the non-executive directors on the Board of CNOOC: a former Shell senior executive, a former Swiss ambassador to China, a Goldman Sachs banker and an Australian solicitor. According to James Kynge, they were asked to sign off on the 18 billion dollar bid for Unocal on the back of an envelope. Apparently, they refused. One director, Erwin Schurtenberger, the former Swiss ambassador who had warned of a backlash in US public opinion, resigned. (p. 135 of ‘China shakes the World’).

The Board composition is a revelation and explains quite a few things. We shall leave it at that.

In the end, these are the situations where the rubber meets the road:

 … companies that do want to act need to sell the proposed deal to Beijing as being in line with the strategic objectives of the state and the party – while doing their best to convince the outside world they are making acquisitions for purely commercial reasons. [More here]

For an unrestrained, passionate and even angry reaction to the failure of the Chinalco-Rio deal, check this Op-ed out in FT:

Chinese leaders have been reminded of the challenges they have to face in making foreign acquisitions and strategic partnerships. 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. But this will not be the last time its investment strategy creates a global furore. The dragon has woken and learnt it needs to be brutal – Chinalco’s failure to press home its advantage is unlikely to be repeated. [More here]