A Warning to Foreign Companies Entering “Sensitive” U.S. Markets

I. Introduction

While the
United States generally pushes for more open access for its investors
to foreign markets, the sight of foreign companies trying to invest in
"sensitive" areas of the U.S. economy has drawn a very different
reaction.  Two recent acquisition attempts illustrate this point:
CNOOC's, a Chinese oil and gas company, attempted acqusition of Unocal
and Dubai Ports World's attempted takeover of security for a number of
eastern and southern ports.

II. Analysis

June 23, 2005, CNOOC announced its attempted acquisition of Unocal, an
California-based independent oil and gas company. [1]  The Chinese
company's offer was $18.5 billion, which was roughly $2 billion more
than Chevron,the next highest bidder, offered, reflecting a premium of
about $1.5 billion over the value of Chevron's offer. [2]  CNOOC made
an all-cash offer of $67 per share compared to Chevron's lower combined
cash and stock offer of $61.26. [3]

Even before the offer was announced, lawmakers in Washington
announced that the deal deserved additional scrutiny: "As the world
energy landscape shifts, we believe that it is critical
to understand the implications for American interests and most
especially, the threat posed by China's governmental pursuit of world
energy resources. The United States increasingly needs to view meeting
its energy requirements within the context of our foreign policy,
national security and economic security agenda.'' [4]  Even the
Secretary of Energy hinted that the deal would receive heightened
scrutiny.  [5] 

Even though the CNOOC offer was much better for Unocal shareholders,
the increased scrutiny of the deal served as a major roadblock to
shareholder approval.  The bid forced Unocal's shareholders to weigh
the higher offer "against the risks the deal face[d] in Washington."
[6]  In addition to the standard process, the proposed deal would be
subject to approval by the Committee on Foreign Investments in the
United States ("CFIUS"), a Federal multiagency group that can "prevent
any foreign investment on the grounds of national security." [7]  This
standard procedure, for which CNOOC started the paperwork in early July
2005 was put into jeopardy by House legislation that would disallow
funding for any government review of the deal. [8]  CNOOC eventually
abandoned its takeover bid on Aug. 3, 2005 after the Senate included a
provision that would have delayed any government consideration of its
bid for several months.  [9]  While the company blamed the abandonment
on political pressures, part of the blame should be placed on the
company's own missteps, including missing a crucial deadline for an
initial offer before Chevron's had been accepted. [10]

In 2006, Dubai Ports World (DPW) faced similar problems in its bid
to takeover Peninsular and Oriental Steam Navigation Co., a U.K.
company that handled port security at a number of U.S. ports. [11]  Not
long after the announcement, U.S. lawmakers requested that the White
House review the national security implications of having an Arab
company running U.S. ports. [12]  Soon after, it came out that the
CFIUC had already approved the deal. [13]  This disclosure outraged
U.S. lawmakers who threatened to block the deal because of security
concerns. [14] Moreover, neither an additional, more stringent review
of security concerns [15] nor an unprecedented package of port security
measures was enough to mollify the objectors. [16] In the wake of
legislation that would have blocked the deal, DPW agreed to divest
itself of any U.S. holdings acquired in the deal. [17]

U.S. lawmakers are not alone in objecting to foreign ownership; they
are in the company of the new populist government of Bolivia which is
seeking to renationalize major areas of its economy. [18] While the
Republican party has been anxious to avoid anything that even smacks of
the word "French", it is imitating France's economic protectionism.
[19]  Experts are worried about "an undercurrent of anxiety about the
global economy that has become a general political phenomenon." [20]
This concern has spread to other European countries including Spain and
England. [21]  This spread engenders worries that "protectionism
remains the greatest threat to global growth." [22]

These two failed takeovers serve to warn foreign companies looking
to invest in "sensitive" areas of the U.S. economy that they must
consider more than the economics of the transaction.  Even though
CNOOC's offer was worth significantly more than the eventual sale
price, the delay and the chance that the merger would be rejected were
enough to sway institutional shareholders against approval. [23]  Asked
what lessons he had learned from the failed attempt, CNOOC Chairman Fu
Chengyu responded, "We learned we need to be more prudent in terms of
public relations and political lobbying when dealing with such a big
deal … the first things you need to go for are public relations and
lobbying. And then if those work out, you turn to talk about the deal."
[24]  While some have raised concerns that the trouble was stirred up
by Chevron in an attempt to scotch the deal [25], the numbers don't
seem to bear that out.  Only slightly over half had received campaign
funds from Chevron in the past two years. [26]  Even the letter writer,
Rep. Pombo, had only received $13,500 from Chevron, barely a drip in
the bucket.

Even given the concerns raised by these failed acquisitions, be
ready for many more takeover attempts by Chinese and other third world
firms.  This piece is less worried by the idea that the uproar was
related to political donations than to the fears of the unknown.  While
the idea of working at a Chinese or Indian firm may cause alarm,
economists warn that in the long run we should be ready for an
increasing number of these takeover bids. [27] Given the level of
China's dollar holdings, we should not be surprised that it is seeking
to diversify its portfolio.  That has shown itself in CNOOC's attempted
purchase of Unocal and another Chinese firm's attempted purchase of
Maytag. [28]  In fact, in economic terms, the U.S. may be better off
because direct investment is less likely than treasury investments to
be pulled out quickly leaving a mess behind. [29]

The biggest losers in these two cases were not the buyers.  In the
CNOOC-Unocal deal, the shareholders received approximately $1 billion
less under Chevron's offer. [30]  The biggest losers in the DPW deal
might be American citizens: DPW was the first internaitonal maritime
shipping company to have its security management systems ISO certified.

III. Conclusion

While it is important to have transparent, public reviews of these
deals, as opposed to a review by an "obscure committee of second level
officials." [32]  However, review before Congress, as some have
proposed, is also inappropriate. [33] A more appropriate approach would
require a stringent approach to security done in a public, transparent
manner, but prevent politicians from using the deals to score cheap
political points.

"While the Unocal and Maytag contests may prove to be setbacks for
two of China's star companies that are seeking to become global
corporations, they and others are expected to return to the fray."

[1] David Barboza and Andrew Sorkin, Chinese Oil Giant in Takeover Bid for U.S. Company, N.Y. Times, Jun. 23, 2005, at A1.

[2] Id.

[3] Id.

[4] Id. (quoting letter from Rep. Hunter and Pombo to President Bush).

[5] Id.

[6] Leslie Wayne and David Barboza, Unocal Deal: A Lot More than Money is at Issue, N.Y. Times, Jun. 24, 2005, at C4.

[7] Id.

[8] Jad Mouawad, Chinese Company Asks U.S. To Review Its Bid for Unocal, N.Y. Times, July 2, 2005, at C4.

[9] Matt Pottinger, Russell Gold, Michael M. Phillips, and Kate Linebaugh, Oil Politics: CNOOC Drops Offer for Unocal, Exposing U.S.-China Tensions, Wall St. J., Aug. 3, 2005 at A1 (hereinafter Oil Politics).

[10] Id.

[11] Dubai Ports Wins Bid for P & O, Wall St. J., Feb. 11, 2006, at A4.

[12] A.P., White House is Urged to Review Dubai Deal, Wall St. J., Feb. 16, 2006 (available at Lexis).

[13] Greg Hitt, White House Agrees to Re-examine Ports Deal, Wall St. J., Feb. 27, 2006, at A2.

[14] Id.

[15] Greg Hitt and Neil King, Jr., Dubai Firm Bows to Public Outcry, Wall St. J., Mar. 10, 2006, at A1 (hereinafter Public Outcry).

[16] Neil King, Jr., Politics and Economics: DP World Tried to Sooth U.S. Waters, Wall St. J., Mar. 14, 2006, at A4.

[17] Id.

[18] Greg Ip and Neil King, Jr., Ports Deal Shows Roadblocks for Globalization, Wall St. J., Mar. 11, 2006, at A1.

[19] See generally id.

[20] Neil King, Jr., Politics and Economics: When Security, Foreign Investment Collide, Wall St. J., Apr. 10, 2006, at A4.

[21] Heather Timmons, Nations Rebuild Barriers to Deals, N.Y. Times, Feb. 28, 2006, at C1 (hereinafter Rebuild Barriers).

[22] Id.

[23] Oil Politics, at A1.

[24] Shai Oster, Boss Talk: China's Offshore Oilman, Wall St. J., July 31, 2006, at B1.

[25] US Lawmakers Meddle in CNOOC's Unocal Bid, China Daily, July 6, 2005, available at http://www.chinadaily.com.cn/english/doc/2005-07/06/content_457677.htm.

[26] Id.

[27] Rebuild Barriers, at C1.

[28] Jesse Eisenger, What's Lost in the Fuss About Cnooc's Unocal Bid, Pittsburgh Post-Gazette, July 6, 2005, available at http://www.post-gazette.com/pg/05187/533664.stm.

[29] Id.

[30] Editorial, China Paranoia, Wall St. J., Aug. 3, 2005, at A10.

[31] Press Release, DP World First to Meet Recognised International Standard for Security Management, DP World, Sept. 17, 2006, available at http://www.dpworld.com/fullnews.asp?NewsID=57.

[32] Editorial, The Dubai Ports Deal, N.Y. Times, Mar. 2, 2006, at A26.

[33] Douglas Holtz-Eakin, You Can't Be CFIUS, Wall St. J.,
July 13, 2006, at A8. (Proposed Senate legislation would require
notification of Congressional delegations and state governors of
proposed purchaes in their states).

[34] Jad Mouawad and David Barboza, In Takeover Dance, the Chinese Miss a Step, N.Y. Times, July 21, 2005, at C1.