Why companies must beware of Chinese buyers

epa05219537 Photo shows building offices of Anbang Insurance Group in Beijing, China, 19 March 2016. Reports stated that Starwood Hotels & Resorts Worldwide, which runs the Sheraton and Westin chains, has come to an agreement to be acquired by China?s Anbang Insurance Group in a 13-billion US-dollar deal, that is potentially the biggest Chinese acquisition of an American company to date.  EPA/ROLEX DELA PENA

You have to give credit to China’s Anbang. Only days ago, the Chinese insurance group was shoved aside in its long quest to acquire U.S. hotel operator Starwood. A rival suitor, U.S. hotelier Marriott, had recaptured Starwood’s affections with a sweetened bid. Undeterred, Anbang roared back on Mar. 26 with an even juicier offer. Obviously, the company is not easily denied.
At first glance, there would appear to be little reason for concern over which company wins the bidding war for Starwood. Who runs hotels doesn’t seem like a matter of grave consequence to the U.S. economy. And the fact that Chinese companies are looking to invest in the U.S. should be seen as a big positive. Foreign investment, no matter what the source, can help create jobs.
Yet Americans should indeed be concerned about Anbang’s latest acquisition attempt, and for that matter, many of those being pursued in recent months by newly aggressive Chinese companies. The fact is Chinese companies operate differently than their Western counterparts, and the deals they make deserve a different degree of scrutiny.
Such cautions may sound like nothing more than anti-China scaremongering. To many Americans, China has become the hobgoblin of the global economy — a sinister force stealing jobs, pilfering technology and sapping U.S. economic strength. Singling out Chinese acquisitions may suggest the kind of paranoid protectionism spewed by the likes of Donald Trump.
But the U.S. and other Western market economies shouldn’t be naïve, either. China presents a special challenge to free- market ideals. The recent binge of overseas deals by Chinese companies is driven not just by commercial impulses but political ones — including the desire to acquire technology and expertise in strategic sectors. Sadly perhaps, that means it requires a nonmarket — in other words, a government — response to protect U.S. economic interests.
First of all, politically connected Chinese companies can access financing on a large scale. That means they can fund and complete acquisitions based not entirely on their merits, but on politics. There are indications, for instance, that Anbang is upping its offer for Starwood even though it has a very high- risk financial model. Potentially, this advantage in fundraising can also give Chinese acquirers an unfair edge over other, more commercially oriented, suitors. That may be what’s happening right now in the contest over Starwood.
More critically, managers at Chinese companies, especially those owned by the state, can ultimately answer to their bosses in the Communist Party, and that means acquisitions could be used to serve national, not commercial purposes. Take, for instance, state-owned ChemChina’s proposed $43 billion acquisition of agriculture giant Syngenta. China could quite easily take steps to give Syngenta’s seeds and other products preferential treatment in the Chinese market over competitors from other countries.
Then there’s the critical issue of transparency. Anbang is both one of China’s more acquisitive and more mysterious firms. Its English website offers few clues about its financials or management. In fact, Anbang at one point withdrew its bid for Starwood after the hotel company’s managers pressed the Chinese for information on how they planned to finance the deal. How can boards and regulators judge if these companies have the financial and managerial heft to operate their new assets, or what their real intentions might be in buying them, unless they reveal more to the world?
Perhaps shareholders will, in the end, care more about cashing out at the highest price than the future of what they’re selling. But the employees, suppliers and other stakeholders of Syngenta or Starwood most certainly do care. And so should everyone else. What Chinese firms choose to do with their newly acquired assets will have a direct bearing on the future of U.S. jobs, research and development, and the competitiveness of the U.S. economy.
That’s why the U.S. needs to investigate more rigorously acquisitions by Chinese firms — or for that matter, any companies that are opaque or buying U.S. assets that provide significant benefits to the U.S. economy.
A mechanism is already in place: the Committee on Foreign Investment in the United States, known as CFIUS, an inter-agency group tasked with investigating foreign acquisitions. Its mandate is limited to determining if a deal would pose a risk to U.S. national security, so CFIUS’ scope might have to be enlarged to take into account China’s growing ambitions.
Or, the concept of “national security” may need to be expanded to encompass a wider range of economic interests. Sen. Chuck Grassley and other U.S. lawmakers are doing just that in calling for a more extensive CFIUS review of the Syngenta deal. “It’s clear that China is looking at these recent purchases of companies with food production expertise as part of a long-term strategic plan and a component of their national security,” Grassley said. “We need to be looking at it the same way.”
An expanded CFIUS process should not become a protectionist tool that randomly blocks Chinese companies from doing business in the U.S. Instead, it should be seen as an adjustment to a China that, due to the nature of its political system, doesn’t always play by the same rules as market economies do. Unfortunately, that requires the U.S. to change a few rules of its own.
— Bloomberg

Michael Schuman copy

Michael Schuman writes about Asia and global economic issues as a correspondent for TIME in Beijing, China

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