In an article in this month's
Global Entrepreneur Magazine, China's merger king Wang Wei dissects the missteps CNOOC took in its bid to acquire Unocal to determine precisely who should be blamed for dragging politics into the mess. He doesn't mince words in suggesting that Chinese companies need to grow up and take responsibility when they encounter failure.
Such business news is not typical fare for this site, but Wang compares CNOOC to Danwei's favorite online publicity junkie, Sister Hibiscus, so we can't help but run a translation here.
Who Politicized the CNOOC Takeover Bid?
by Wang Wei
During all the clamor over CNOOC's bid for Unocal, I was in Europe on a road tour. For China's business sector, this was our symbolic first entry into the international marketplace - although there had been no lack of international acquisitions by Chinese enterprises over the last two years, they had all been relatively small-scale takeovers of troubled consumer electronics and IT firms; only petroleum was a true strategic national resource. During my half-month long road trip, I passed through the Netherlands, Italy, England, and France, and I read many local media reports as well as online reports from home. The strongest impression I got was that the two sides had different understandings of the situation.
One of the major differences between the Chinese and foreign positions was to whom they assigned responsibility for the politicization of the CNOOC takeover bid.
Domestic media spoke with one voice, saying that the American side (the business competetor and the government both) had politicized a matter that was pure business, so we could not go through with our acquisition. And in quite a number of the post-mortems in the domestic media, you can find a feeling that the takeover bid was "correct" from start to finish: at the beginning of the year when CNOOC was not the first to submit a bid, caution was correct; going in after Chevron was correct in its decisiveness; later on all manner of stumping was correct; and everything, even the withdrawal at the end, was strategically temporary.
While you cannot deny that the nature of this takeover bid gave it fame even in failure, a question still remains: if this commercial acquisition, reaching US$18.5 billion and taking half a year, had proceeded to be unsuccessful, would we have been able to admit "this was a failure"? To this day, half a month after the resolution of the bid, CNOOC has not publicly addressed the outcome in any way. Compared with the way they chatted away courting the foreign media, they have been disdainful to the public at home.
Any takeover, if it is successful, will reveal lots of little mistakes when it is reviewed afterwards. So when looking at our methods, we cannot neglect to break things down afterwards, like Zhuge Liang examining skills after a battle. From another perspective, technical questions are easy to solve, but attitude problems are much bigger. If we cannot admit that this acquisition bid was a failure, how can we think about it correctly?
What worries me is that domestically, whether in business or in the media, we are trapped in a problem zone: our own actions are correct from start to finish, and everthing is rational; no one need to assume any responsibility, since our opponents are the ones who reacted incorrectly and irrationally. Fundamentally we have forgotten that we are moving into the mainstream marketplace, and at this point in time what is needed is not someone to understand us, but business operations, administration, and strategies that are on track with the world.
In my opinion, if you want to call CNOOC's takeover bid politicized, it stems in part from something that we created ourselves; it was not entirely the Americans' doing.
Acquisitions have their own rules, and Chinese firms expecially who want to acquire overseas must first answer a whole series of questions from a foreign firm they have no understanding of. Are you a state-owned firm? What is your relationship with the government? Are you running at a loss domestically? Where did you get financing for this acquisition? Is this a competitive market price?
What made this bid different was that in the past Chinese firms that acquired overseas had bought capital. Whether it be Lenovo buying IBM's computer services or TCL going in with Thompson, the target was well-defined - specific technologies, brands, and products - and there was no attempt to take over an entire enterprise. But buying a company is a completely different matter, especially when you consider that Unocal was the ninth largest oil company in the world. If you want to get a hold of that, you have to have a well-defined plan to realize greater value in the future.
Americans innately oppose big business and big government, so they were especially nervous about CNOOC, a "big business from a big government." CNOOC should have first taken some actions to clarify of its goals.
In actuality, CNOOC never gave a straight, business-level answer, but rather strongly emphasized its uniqueness among Chinese state-owned enterprises. This was indeed necessary, but if you don't give answers to those fundamental questions, it will seem strange to American businessmen. They may believe that you are unwilling to talk business with them, and for that reason they will only talk politics.
Even when Fu Chengyu ran a letter titled "Why is America Worried?" under his own name in the Wall Street Journal, there was never any talk about how integration would occur after the takeover, or plans for improving efficiency. Although it did say that "Nearly 70% of Unocal's reserves are near our exploration areas in the Asian market, and for this reason it is an extremely suitable takeover prospect," business strategies and operating principles of the future company were never explained clearly in the logic of the takeover.
CNOOC moved at an inopportune moment: over the past few years, America had been uneasy about the Chinese economy because of the RMB exchange rate and problems over textiles. The name CNOOC did not come up often in the US, so for it to suddenly put out a US$20 billion bid came as a great surprise to Americans, no question. CNOOC should have been fully prepared: when Haier bid for Maytag, it invited private investors to bid alongside it. It should have had early plans for the resources Americans were most worried about, like how to split off Unocal's American division. And it should have worked on public opinion as early as possible.
It's really too bad that after it came up against the pressure of negative public opinion, CNOOC overreacted as badly as it had been underprepared. When the US made known its unease about the takeover, CNOOC immediately explained that it could separate off the American portions, and it would retain all workers. But at the same time, CNOOC also said that it could increase its bid price, preserving its unyielding sense of inevitability.
To the American business world, this was very hard to understand. Even in a takeover you have to consider value. If you don't lay off workers, and if you turn down larger profits, then there is no reason to take over a company. No legitimate corporate takeover would portray itself as quite so inevitable; this would remove any area for discussion amongst competitive bidders. The more you disregard all costs in pursuit of an acquisition, the harder your opponent will find it to comprehend your motives, the more he will understand it as coming out of political goals, and the more he will see you as an arm of the government. The entrance of China's foreign ministry on the scene dealt another blow to the deal.
Finally, even CNOOC's withdrawal was done in a style typical of Chinese business. In victory, speak of friendship, and in defeat, blame the politics of the opposing side. Your board of directors simply won't accept a higher price - where did such whimpering come from? Who will want to go up against Chinese firms in the future; they may think long and hard about politics. This is an unfortunate precedent.
In my opinion, the reason this takeover bid produced so many problems was that we had a vast misunderstanding of international rules: we thought that with capital, we could recklessly buy whatever we wished. Having cash enables us to buy a theater ticket, but we must not forget that within the theater there are rules.
In addition to this, we must strengthen supervision of state-owned companies' acquisitions and mergers with foreign companies. In comparison to private enterprises, state-owned firms have vaster resources and more opportunities to enter an unfamiliar market or sector on a much larger scale. But this advantage can easily change into an outward impulse. If this impulse becomes a general feeling of volatility, its negative effects on the Chinese business arena will outweigh the positives.
In my view, the Chinese government unquestionably has an important role to play in the future, but it may be a supporting role rather than a driving role. For example, organizational experts analyzing national risk may construct an international information system open to industry and the public, they may set up insurance structures for overseas investment, collect together experience and lessons, or push marginal sectors to unify their strategies.
At the same time we must not forget that although the wave of global acquisitions has arrived, the battleground is in China. To overemphasize the drama of Haier, or CNOOC's bid for Unocal, or MinMetals, is to lead us to a mistaken conclusion that what matters most is China's entry onto the global stage for acquisitions and mergers, while in fact western companies have already been acquiring firms in China for over a decade. Domestically, several industries have already been monopolized, and this is more worthy of attention. By putting more energy into this has another benefit: we have an opportunity to formulate merger standards here rather than being forced to act as we see others do.
As described above, the two largest lessons we can take from CNOOC's takeover bid are first, we must deepen our understanding of ourselves, since I believe that Chinese enterprises abroad must not be self-deluded like Sister Hibiscus; and second, we must further understand the international rules. We must master them, and then use China's great strength to change them.
Originally published in the September 2005 issue of Global Entrepreneur Magazine.
Links and Sources
一百年前，太后预备立宪，《泰晤士报》驻华记者莫理逊把这个消息传遍了全世界。莫理逊这些中国通，在很多方面其实是外界理解紫禁城的很少的管道之一。一百年后的今天，诸多驻华外电也继续承载着这个管道的功能，填补了中国媒体无政治新闻的空白。其中，路透社中国部的林洸耀先生可以算当代莫理逊中的翘楚，耕耘多年，他发出关于中南海的消息向来准确，广受关注。
