Bungled deals destroy myth on acquisitions

PUBLISHED : Monday, 08 June, 2009, 12:00am
UPDATED : Monday, 08 June, 2009, 12:00am

Three news items involving mainland companies' overseas acquisition deals emerged last week and caught the eyes of many international investors.

On Tuesday, China Investment Corp (CIC), the mainland's US$200 billion sovereign fund, announced it would spend US$1.22 billion to increase its stake in Morgan Stanley, the US investment bank in which it had already suffered a huge paper loss with its initial investment. This was followed within a few hours by a more bizarre announcement by an obscure private company in Sichuan that it would buy the Hummer brand from General Motors. On Friday, the state-owned Aluminum Corp of China (Chinalco) announced that its US$19.5 billion tie-up with the Australian-British mining giant Rio Tinto had collapsed.

The three events may be separate, but together they signal a confusing and bumpy road ahead for the cash-rich mainland's overseas-acquisition drive. Simply put, the Chinese are buying stuff they should avoid while the things they should buy are slipping out of their grasp.

But one thing for sure is that these developments will help remove one prevailing myth among foreign investors and government officials that the central government, flush with nearly US$2 trillion in foreign-exchange reserves, is orchestrating a systematic and concerted effort to gobble up assets worldwide. That myth has raised the concerns of many governments and among investors about the mainland's rising global corporate ambitions. Well, there's no reason for them to worry.

Even if there were such an effort, the mainland leaders have really bungled the job. A likelier scenario is that the central government lacks a vision and a coherent strategy in its overseas-acquisition drive and may suffer more setbacks in the future or buy more stuff it should not buy.

CIC's continuous investment in Morgan Stanley is puzzling for its purpose and timing. CIC made its first investment with a US$5.6 billion stake in the investment bank in December 2007, at the very peak of the global asset bubble.

After the bubble burst, CIC suffered huge paper losses from its investments in Morgan Stanley and Blackstone, a private-equity group. After CIC was heavily criticised in the domestic media for the two disastrous investments, and with the value of the investments more than halved at the peak of the crisis last December, CIC chairman Lou Jiwei told investors in Hong Kong he did not 'have the courage' to invest in foreign financial institutions.

Merely six months later, his courage appears to be back. CIC said it made the investment to reduce its overall cost basis and because of its optimism in Morgan Stanley's future growth and progress.

It is true that the US banking crisis is showing signs of abating, but it is far from over. Temasek, Singapore's sovereign fund, which serves as CIC's model, has been offloading its investments in western financial institutions, including its recent exit from the British bank Barclays despite losses. So have Middle Eastern sovereign funds.

CIC last week bought the shares at US$27.44 each, which raised the question: if CIC was so confident of Morgan Stanley's growth prospects and wanted to lower the cost basis, why did it not buy the shares that traded below US$15 in February?

Sichuan Tengzhong Heavy Industrial Machinery Company's intention to purchase Hummer is even more puzzling. The privately owned firm, which makes road and construction engineering equipment and has a business in speciality commercial vehicles, was largely unknown before its headline-grabbing announcement last week.

It has understandably caused an uproar on the mainland, not least because it has no management expertise and experience in running a proper automobile business, and Hummer - a symbol of gas-guzzling American excess - goes against the mainland's efforts to push for green and fuel-efficient cars. Tengzhong's excuse of wanting to make Hummer more fuel-efficient is even more ridiculous. Hummer became popular exactly because of its gas-guzzling nature and large body.

Meanwhile, a true body blow to China's global ambitions came on Friday when Rio Tinto walked away from a US$19.5 billion investment by Chinalco. Most analysts noted that with commodity prices and Rio's share prices rebounding, commercial consideration instead of political reasons was behind the collapse of the deal.

Australian politicians have hastened to say that mainland investment is welcome. But it is difficult to ignore the fact that in the past two years, mainland companies have been flooding Australia, trying to gobble up mines of iron ore, copper, coal, and nickel and other metals. If this strategy was sanctioned by the central government, it was badly thought out. The shopping spree has clearly worried Australia and whipped up nationalistic opposition.

This is totally understandable. It's not very hard to imagine what would happen if Australian or US firms tried to do the same on the mainland.