In less than a week, two big Chinese state-owned companies, both eyeing foreign expansion, saw completely different outcomes of their "going west" moves.
On June 11, shareholders in OZ Minerals overwhelmingly approved a 1.386 billion-U.S.-dollar offer from China Minmetals Non-ferrous Metals Co. to buy most of the indebted miner's assets.
The news could hardly alleviate the bitterness felt in China the previous Friday when Rio Tinto dumped Chinalco's planned 19.5 billion-U.S.-dollar offer for an improved stake in the mining giant and turned to a joint venture proposal with former rival BHP Billiton. The deal could have been China's largest foreign investment so far.
In the latest response, an official with the Ministry of Industry and Information Technology (MIIT) said Tuesday that the proposed alliance of Rio Tinto and BHP Billiton had a "strong monopolistic color" and Chinese firms would watch it closely and find ways to cope with it.
Last year, China imported 440 million tonnes of iron ore, half of the world's total, so any slight market changes would affect Chinese steel makers. China's anti-monopoly law should apply in the proposed deal, said Chen Yanhai, head of the raw material department of MIIT at an industry meeting held in the northeastern city of Anshan, Liaoning Province.
If the tie-up proved to be monopolistic, "we have to seek new policies and regulations to allow Chinese companies have a bigger say in iron ore pricing," said Chen without elaborating.
On Monday, spokesman of the Ministry of Commerce Yao Jian said if the revenue of the joint venture reached "a certain amount," China's anti-monopoly law would apply.
That law requires a company to get government approval before consolidation if its global revenue exceeds 10 billion yuan (1.47 billion U.S. dollars) and its revenue in China exceeds 2 billion yuan.
Anger from China
The failed Chinalco deal has been frequently linked with a similar scenario in 2005, when political obstacles blocked China National Offshore Oil Company (CNOOC)'s 18.5 billion U.S. dollar attempt to acquire Unocal, a U.S. energy company.
"The Chinalco debacle followed the same pattern as the aborted CNOOC/Unocal deal four years ago," Yao Shujie, professor of economics and head of the School of Contemporary Chinese Studies at the University of Nottingham, told Xinhua by e-mail.
"It not only marked the collapse of a strategic partnership between two independent trans-national corporations, it also reflected the competition and compatibility between Western powers and a rapidly growing China in politics, culture and economy," he said.
The Chinalco debacle has aroused anger and disappointment from many Chinese. Many believed that the failed deal showed prejudice against China's big state-owned enterprises.
Draw more lessons
But Yao said a notable factor in the case is the international inexperience of China's business leaders.
"The speed of global expansion has given Chinese companies little practice of the pitiless reality of Western-style acquisitions," he said.
Xiong Weiping, Chinalco's chairman, has said that Chinalco had worked hard to respond constructively and engage with Rio Tinto to appropriately amend the transaction terms announced four months ago, but the result was completely out of the company's control.
Yao said Chinalco's failed attempt was due to its management's insufficient understanding of the concerns of big Western resource companies, their governments, public and shareholders with China's entering into the foreign resource sector, and of 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. Besides, a 1-percent break fee for a 19.5 billion-U.S.-dollars deal makes breach of contract too easy," he said.
Yao's opinion was shared by his colleague, Dr. Dylan Sutherland, a scholar in Contemporary Chinese Studies at the University of Nottingham.
"The complicated deal Chinalco proposed created a long gestation period and opened up possibilities for market corrections and greater political scrutiny," Sutherland said.
"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 between China's Minmetals and Australia's OZ minerals, Minmetals' last-minute decision to sweeten its offer with an extra 180 million U.S. dollars proved decisive in winning over OZ Minerals shareholders. The improved offer helped Minmetals see off two rival bids for the miner.
Minmetals won Australian government approval in April to take over OZ Minerals with a revised offer after the previous bid was rejected on national security grounds. The new offer excluded one of OZ's flagship mines located near a military range.
"There will always be political pressures on big business investing overseas," Sutherland said. "Chinese enterprises may have to accept, being Chinese state-run companies, that any offer they make will need to be very, very attractive."
"China Inc" risk?
Sutherland said one of the main risks to these state companies is that they are perceived as being vehicles for "China Inc."
"How to break these perceptions? There is simply no easy way to mitigate these risks, other than perhaps being more upfront about them," he said.
"Constantly refuting the links with the state and government does not necessarily help, in fact it only hinders the process, creating an impression of dishonesty in the eyes of many observers," he said.
The Chinese government started to encourage domestic enterprise to invest abroad in 2000. In 2008, direct outbound investment by Chinese enterprises reached 52.1 billion U.S. dollars, up 96.7 percent year-on-year.
In April, China unveiled an investment guidebook to help domestic firms make foreign investment. In the following month, the State Administration of Foreign Exchange publicized a draft regulation aiming to simplify examination and approval procedures for domestic companies' investment abroad to solicit public opinion.
Economists agree that the Chinalco debacle illustrates how the financial crisis has severely affected Western trans-national corporations and their profits and many have large debts they cannot service.
"This is a window of opportunity for China's national champions. 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," Prof. Yao said.
(Xinhua News Agency June 17, 2009)
