HONG KONG (Reuters) - Beijing is taking a father-knows-best approach to mergers and acquisitions, weighing not only commercial considerations but also political and other factors as it chooses which deals to approve.
The country’s paternalistic approach to M&A was on display this week, as failure to win the government’s blessing sank a bid by Tengzhong, an obscure Chinese maker of heavy equipment, to buy General Motors’ GM.UL gas-guzzling Hummer brand.
In the aftermath of the collapse, Chinese media were awash in commentary on the deal’s many faults, signaling Beijing may continue to exercise a hands-on approach to foster deals in line with its policies and with a good chance for success.
“The Chinese government, when it decides on these deals, is making them on a policy basis and not just purely on the grounds of an objective regulatory standard,” said Antony Dapiran, an M&A specialist at the law firm Freshfields Bruckhaus Deringer in Beijing.
“It’s much more than in other countries like the U.S., where you have issues like national security. The scope for subjective review in China seems much broader,” he said.
The official Xinhua news agency, often seen as a government mouthpiece, questioned Tengzhong for pursuing a deal that flew in the face of global trends to promote green technology.
“For anyone who is concerned about the environment and the development of the auto industry, the death of Tengzhong’s Hummer bid is only a good thing,” Xinhua said in a Chinese-language analysis published on Friday.
The deal is just the latest in a series of high profile cases that have failed to win the government’s support.
Last year, two of China’s biggest privately held media companies, Sina Corp (SINA.O) and Focus Media FMCN.O called off their merger after repeated stonewalling by the regulator over their application.
In addition to environmental concerns, many observers believed Tengzhong Heavy Industrial Machinery’s inability to win government backing was due to its lack of international experience and high chance of failure.
In contrast, Zhejiang Geely Holding, parent of Hong Kong-listed Geely Auto (0175.HK), has said it has the support of Beijing in its efforts to buy Ford Motor Co’s (F.N) Volvo car unit. Geely, China’s largest non-state auto firm, will gain Volvo’s highly regarded brand and technology in a deal more in line with China’s goals.
Mei Xinyu, a researcher with a think-tank under China’s Ministry of Commerce, wrote in a commentary that the Tengzhong case was “clouded with doubts” from the beginning, and that government supervision was necessary for other future deals.
“Even if these dishonest speculators can gain short-lived fame, they will pay a price at the end of the day,” Mei said.
Observers noted that while Tengzhong and the other two deals had their own circumstances, each involved a case of Beijing exercising its better judgment against the applicants’ wishes.
Policy issues aside, Tengzhong’s failure may also have reflected government wariness of buying big foreign brands, after unsuccessful deals such as Lenovo’s (0992.HK) purchase of IBM’s (IBM.N) PC assets and SAIC Motor’s (600104.SS) purchase of Korean carmaker Ssangyong Motor (003620.KS), which later filed for bankruptcy.
“The Chinese have come to see the reality that every time the Chinese touch a well known brand it turns bad immediately,” said Li Qiang, an M&A lawyer at O’Melveny & Myers in Shanghai. “There’s also the realization that these brands, if they don’t come with the technology, they don’t mean that much.”
By comparison, the government has been much more supportive of recent overseas acquisitions by energy and resource companies, as such deals are in line with government policy aimed at procuring the materials China needs to feed its economic growth.
“So long as the government is involved, it’s not left solely to the market for the parties to decide on the merit of the deal,” said Allen Wong, an M&A lawyer at Simmons & Simmons in Hong Kong. “I believe the government is trying to set the direction for outbound investments or acquisitions.”
The Coke-Huiyuan and Sina-Focus rejections may also reflect different government priorities from those parties involved.
In the Coke case, many believe nationalistic concerns about a famous local brand being acquired by a foreign firm may have played into the government decision, on top of the anti-trust reasons cited.
Some analysts believe the Sina-Focus deal may have met with resistance because it would have created a new giant in the sensitive media sector, traditionally dominated by state-run firms that take their orders from the government.
“Generally speaking, there’s been a theme of what they call ‘The state advances and the private sector retreats,’” said Freshfields’ Dapiran. “At the policy level there’s been more support for state-owned companies.”
Others pointed out that China is not the only country that weighs non-commercial factors, citing the case of China’s CNOOC (0883.HK) withdrawal of its bid to buy U.S. oil firm Unocal after it became apparent the United States would block the deal.
“China is not the only country that has blocked acquisitions,” said Simmons & Simmons’ Wong. “In other places there are similar procedures ... Similar considerations exist in every jurisdiction.”
Additional reporting by Simon Rabinovitch in Beijing; Editing by Lincoln Feast