The Hindu Business Line : CNOOC's offer for Unocal

The US is already indebted to China for billions of dollars and the Unocal purchase only implies an interchange of corporate assets for Treasury debt paper. This should not make such a vital difference to the US' security concerns. Instead of spending part of its surpluses exclusively on buying US Treasury paper, China is looking to acquire real assets, such as corporations. And it would make eminent sense for India to make China a partner and an ally, rather than a rival, in the world energy scenario, says S. Venkitaramanan.

CHINA'S aggressive forays into international corporate acquisitions could place it on top of the global capitalist M&A league. First, there was the historic deal, completed last year, of China's computer-maker Lenova buying IBM's Personal Computer Division. What a change for the Big Blue, once the proud symbol of US technological strength!

One of China's durable-goods majors, appliance-maker Haier, is also making a bid for the American appliance-maker Maytag. But the most controversial acquisition to date is China's attempted takeover of the American oil company, Unocal, which has raised the hackles of US legislators and raised concerns about America's energy security.

In an aside, it is natural to reflect that US companies have been going into China in a big way over the years. Particularly noteworthy is the fact that Bank of America recently acquired a stake in one of China's large public sector banks. It is rather strange that having pleaded for opening up of China's corporate space for foreign direct investment into China, the US is playing a reluctant debutante for China's investments into the US.

The story of Unocal is itself typical of American business deals except that one of the actors is Chinese. Unocal, a US company in the oil sector with a revenue of $8.2 billion, accepted an offer on April 4, 2005 from Chevron, a much larger American oil company with revenues of $51 billion. The offer was estimated at a total value of $16.2 billion (partly in cash and partly in Chevron stock).

On June 22, 2005, the Chinese oil major CNOOC (China National Offshore Oil Corporation) made a better offer, valued at $18.5 billion, all in cash. Unocal shareholders are scheduled to vote on the Chevron proposal on August 10. CNOOC made a market-smart premium bid, well after Unocal had received the Chevron offer. It outpriced Chevron sharply, perhaps keeping in view the US' sensitivities about foreign acquisitions of US oil companies.

Objections to the deal have come, as expected, from American law-makers on the ostensible ground that the US' national security may be compromised, as a result of China's state-owned oil company acquiring a US oil firm. Observers, however, point out in response that this is a fragile argument.

Unocal's contribution to the US' energy requirements is tiny — 57,000 barrels a day — as against America's total output of 7.3 million barrels a day. What is more, Unocal, as an oil and gas company, primarily holds a moiety (a part, portion, or share) of gas reserves in Asia, which it extracts and sells locally. In essence, the objection raised is one based on national pride, not on energy security.

As is customary in such cases, China's offer to buy Unocal has to be cleared by a Committee that looks into such proposals. This is the "Committee on Foreign Investment in the US", which consists of inter-departmental representatives. The reaction to China's offer will be a litmus test of the US' adherence to principles of fair trade when it comes to allowing foreign direct investment in the US. After all, if the tables were turned and it was the US which had made an offer for a Chinese oil firm, US politicians would have cried to high heavens if the Chinese Government had tried to block the deal on the ground that the offer came from a US firm. After all, Unocal shareholders are getting a better offer from China than that offered by Chevron and it would be blatant governmental interference if the US were to block the deal on extraneous considerations. CNOOC has offered not to take any of Unocal's products to China — a concession that should meet considerations of US energy security.

It is worth remarking that at the current pace of China's exports, China's current account surplus is growing at such a rapid pace that China can afford to buy one Unocal at least every month. The argument by US patriots that America would be surrendering a bit of its assets if Unocal becomes Chinese-oriented has to be assessed against the fact that the alternative is that China would use the funds so released to buy more US debt securities.

There is an axiom in international finance that foreign direct investment is definitely more stable than portfolio investment. Debt paper can be easily sold whereas it is difficult to dispose of investments in Unocal and run away.

The US is already indebted to China for billions of dollars and what the Unocal purchase implies is only an interchange of corporate assets for Treasury debt paper. This should not make such a vital difference to the US' security concerns. Nor is it as if Unocal is in possession of any high security technology, which will imperil the US' defence. Incidentally, the Chinese foray into corporate acquisitions in the US reminds us of what the veteran investor guru, Warren Buffet, advised some time back in his allegorical talk about the US' spendthrift ways. He had visualised that the thrifty nations of the world would acquire more and more real estate from the US. Perhaps, China is making a strategic shift in the way it deploys its over $600-billion reserves.

Instead of spending it exclusively on buying US Treasury paper — which can always be devalued — China is investing part of its surpluses in acquiring real assets, such as corporations. Therein lies a lesson for other Asian thrift societies, like India, to learn. India may do well to take a leaf from the Chinese book. It could be a more profitable and strategically more worthwhile transaction for India Inc to own more corporate assets in the US in place of the RBI's buying more debt papers, which have a chance of erosion in value. True, the acquisitions must be carefully evaluated and priced properly. There are enough takeover artists in India to help India Inc to fine-tune such acquisitions.

While the CNOOC's aggressive foray into the US has naturally irked the US policy-makers more from considerations of national pride than of security, one is reminded of similar xenophobic reactions of earlier decades, when Japanese corporates ventured forth to acquire stake in US corporates and real estate. There were outcries then that Japan was about to buy out Rockefeller Centre. Similarly, Sony Corporation's purchase of a Hollywood movie producer drew hysterical responses, although Sony did not fare too well from the deal. The emotional outcries against China's attempted acquisition of Unocal are similar to those voiced earlier against Japan's investment forays in the 1960s and 1970s.

Incidentally, the picture would get more complicated if China yields to US pressures to revalue the remninbi. As a result of such revaluation, Chinese corporates will have that much higher leverage because their remninbi holdings would be worth that much more in terms of US dollars. A strong Chinese acquisition drive will be strengthened further if the remninbi revalues as all the remnimbi the Chinese central bank prints will be worth 10-15 per cent more than now. It is, however, necessary to take a more balanced view of the US' international investment position. Taking a bird's eye view of the overall US investments, the Chinese investments are relatively miniscule. China's overall investments in the US account for only $490 million up to last year, against total foreign direct investment in the US of $1.5 billion. China's investment in the US is as yet buta modest contribution.

We may, however, see a sharp transition now that China is flexing its muscles. The Asian tiger will naturally call on the US to deal with international investments in a more transparent and fair manner. What laws and rules apply to the US' FDI in other countries, like China, should apply to China's FDI in the US corporate world. That is a fair request to make. One hopes that for the greater good of a liberalising world economy, China does not slip on Unocal oil.

To sum up, the Chinese offshore oil company, CNOOC's attempt to buy Unocal has implications far beyond the immediate transaction. It shows that the US has a long way to go to learn to abide by the rules of fair trade and investment, which it has itself done so much to bring into force under the new WTO regime.

There cannot be one law for FDI in the US and another for the lesser nations. It is to be hoped that the China-Unocal episode will clear up the muddied rules of the game, making them more transparent and fair than they appear to be at present.

There is yet another dimension to the CNOOC's foray. The latest episode shows that China and the US are getting to be close competitors and rivals in the world energy sector. It is not as if the US' exclusive writ will run forever in the global energy scenario. China is obviously prepared to challenge it, be it Unocal, Kazakhstan or Iran.

India has to learn from China's example. It would make eminent sense for India to make China a partner and an ally, rather than a rival, in the world energy scenario. China can be a hefty partner in the global energy sweepstakes.

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