Tonight, I thought I would pepper a thoroughly boring discussion on mergers and acquisitions with a spig of my political philosophy. If you doze off tonight or quit reading part way through my blog entry tonight, I won’t blame you one bit. Who knows, maybe I can even make it interesting to read (let me know if I do). I’ll end with a few, hopefully more interesting tidbits from today. I was debating about what to write tonight, and this topic rose to the top of the heap. Maybe it will be more interesting than my riveting future entry on why I’m disappointed with Major League Baseball. I will defer that blog topic to another night because I wrote about the Olympics yesterday.
I thought of the topic of mergers and acquisitions (M&A) when I read about two multinatiional corporate acquisitions, one of which has already been scrapped. Last month, CNOOC, a Chinese, state-run petroleum company based in Hong Kong, announced that it bid to acquire Unocal, a U.S.-based petroleum company. Today, German-based adidas, the athletic shoe and apparel maker, announced plans to acquire Reebok, a U.S.-based petroleum company. CNOOC faced an immense amount of political opposition to its plans to acquire Unocal for two primary reasons: 1) Its majority owner is the Government of the People’s Republic of China; and 2) U.S. gas prices are sky high, and many feared that the Unocal acquisition would benefit China at the expense of the U.S. (Right now, petroleum really is a zero-sum game.) Yesterday, CNOOC withdrew its bid for Unocal, and U.S.-based ChevronTexaco will now likely acquire Unocal. CNOOC cited the fact that its acquistion would not pass U.S. regulatory scrutiny as the primary reason why it withdrew its bid. Now adidas, the world’s second largest athletic apparel company, has bid for #3 Reebok. It will also face anti-trust scrutiny, because its acquisition of Reebok could foster a Nike and adidas-Reebok duopoly. I think it will pass anti-trust scrutiny in both the European Union and the United States, especially since adidas spun off its Salomon sporting goods unit. Is it fair that CNOOC’s bid failed while adidas’ will likely succeed? Is it politically-motivated because CNOOC is Chinese and adidas is German, and because petroleum is considered a strategic commodity? Yes, I suspect.
Was it wrong to prevent the Chinese from buying Unocal, while the Germans will likely prevail and buy Reebok? I don’t believe so, and here’s why. I have a very simple litmus test when it comes to whether I think an international merger and acquisition is fair. I believe in a level playing field. I think that if a foreign government has a substantial stake in the acquiring company (greater than 25%), then it gives that company an unfair advantage. The playing field is skewed because that government is essentially the acquiring company’s largest shareholder, with very deep pockets to support and nurture that company. It essentially pits one large shareholder, the foreign government, against private investors who have equity in the acquired company. No doubt the company owned by a foreign government would be the stronger party in an acquisition. Rarely do you see the reverse situation occur; that is, a private corporation buys a quasi-government-owned company. Public corporations generally cannot purchase government-owned entities until they privatize. I realize that all countries, including the U.S., have strategic interests they need to protect, and nations have a right to develop their economies with government assistance. However, I firmly believe that quasi-government corporations need to privatize before they morph into multinational corporations and go on acquisition sprees. To me, assessing whether a merger is fair should be based more on government ties than on where the company is headquartered or whether the industry is considered strategic. The latter concerns are often the result of the fact that company is owned by a foreign government.
In the German case, adidas is a public corporation. The German government does not have a sizable stake in adidas. Therefore, adidas will buy Reebok without the German government’s backing. If CNOOC purchased Unocal, it will have done so as a largely government-owned enterprise. Likewise, Beijing-based Lenovo Computer, which has a much smaller percentage of government ownership, recently bought IBM’s PC division. This is acceptable, in my opinon, because it meets the simple litmus test. On the same note, DHL, a division German-based Deutsche Post, purchased U.S.-based Airborne Express. Deutsche Post is Germany’s postal service. It is unacceptable to me that DHL functions as a multinational corporation while its largest stakeholder is the German government. This is akin to the U.S. Postal Service purchasing Federal Express using U.S. taxpayer dollars. Another case in point–Deutsche Telekom is Germany’s national telephone provider. T-Mobile is its mobile phone division. A couple years ago, T-Mobile purchased U.S.-based VoiceStream Wireless. European nations are notorious for supporting corporations through large equity stakes, and Germany and France are especially notorious for promoting corporate protectionism. Most European companies have long since passed the point where they needed government support, yet European nations still champion quasi-government enterprises. At the same time CNOOC bid for Unocal, Chinese-based Haier bid for Maytag, an appliance manufacturer. Haier also withdrew its bid partly because of political pressure. I do not know what percentage of Haier is owned by the Chinese government, but I believe it is much lower than CNOOC’s. As a result, I would be more apt to support a Haier buyout of Maytag than a CNOOC buyout of Unocal. No Chinese company should be discriminated against based on the fact that it is Chinese. On the other hand, if the company’s largest shareholder is the Chinese Government or the People’s Liberation Army, then it should privatize before expanding globally.
OK, now for some tidbits from today. Thanks for wading through my meandering blog entry. Today was a fairly quiet day at work, a much welcomed change from the previous week. I worked on wrapping up a few miscellaneous cases and spent some time working on my operations management project. I butted heads with someone on the community association board about losing our single largest customer. We lost substantial revenues, and this person essentially blew it off. La de da. Who cames if thousands and thousands of dollars just walked away from the table, right? Forgive me for sounding harsh, but they just don’t get it. They won’t be on the board much longer because they’re moving on to another place. I’m mulling whether to run for the board chair position in September. The board needs more direction. I have to admit that I’m not as dynamic a leader as I could be, but right now what the board needs more than anything is direction and purpose. There are still a couple of big personalities who tend to dominate the board. I much prefer consensus. One is a great asset, and I would hate to lose them, but they also need to understand that we all need to work together to make joint decisions.
From the "Things that Make you Go Hmm" Department: Tonight I went to the grocery store and stocked up on groceries. I thought it funny that the grocery bagger kept saying, "Merry Christmas." Apparently, that’s the only English phrase he knows. Never mind that it’s only August! The grocery checker confided in me that she is very tired of his incessant references to the Yuletide. I told the bagger, "Happy New Year," and he laughed. Apparently he knows at least two English phrases. When he loaded the grocery bags in my car, I gave him a tip and told him, "Merry Christmas." He laughed. Perhaps he knows the secret to a happy life–treat every day like Christmas and you will always be merry.
Note to reader Dome Mountain: Thanks for your words! I took a look at your blog too. That is quite the structure you are building. I love doing handyman projects, but I don’t think I would have the resolve to do what you’re doing. More power to you! I built a retaining wall, shed, and deck on our house in Seattle a few years ago, and it took me a long time to finish. Your task is nothing short of monumental. Good luck!