The Cnooc bid

I have not said much about the CNOOC bid for Unocal, but I have been mulling it. I am finally stirred to action by an op ed in today’s W$J by Cnooc’s CEO, Fu Chengyu, a Jesse Eisinger piece in the same paper, and an email exchange with one of my more financially sophisticated students.

The Cnooc CEO says don’t worry: American investors will be protected – Cnooc is NYSE listed and has good and professional governance practices; Unocal operates in Asia anyway; all US oil and gas will be sold back to US markets – and why not, since it’s one of the strongest in the world; Cnooc ownership will enable Unocal to increase its investment, so the US will be getting more oil because of this deal; Cnooc is committed to protecting US jobs; investments in critical infrastructure, such as pipelines, will be divested or protected; Cnooc has long experience in joint venturing with US and other international firms; and anyway, shouldn’t the highest bid win?

Eisenger sensibly points out that it’s silly to worry about Cnooc’s Unocal acquisition when the real problem is that China holds more than $500 billion of US debt. How are we worse off if they diversify into real assets?  This commitment to the US actually protects us more than if they held more liquid debt, an investment that could be yanked out anytime.

All this is added to my general sympathy for giving companies to the highest bid, as I argued in the MCI/Qwest/Verizon situation (see the Takeover archive).

My student is concerned that Cnooc's government ownership will entitle Cnooc/Unocal to special hands-off treatment by securities regulators, which could hurt investors.  My response is, if it’s just investors we’re worried about, that will get reflected in Cnooc/Unocal’s price.

So the question boils down to whether Cnooc’s ownership of important US assets is a problem.  In fact, it would seem that, if we’re worried about parochial US concerns, we’re better off with Cnooc owning Unocal than with the assets being held by the impersonal market, either directly or as a sub of a non-government-owned company.  If Cnooc doesn’t own the company, the market will push the resources and jobs to the highest value users and workers, who may not be Americans.  But Cnooc and the Chinese government have an incentive to give the US special consideration if they want to do more US deals.

Given all this, it would seem that Cnooc is able to make the highest bid for the company not because it's government-owned, but despite its government ownership, which constrains its use of the assets.

Finally, the best way to protect US companies from foreign ownership is to ensure that they’re managed well. This may require, among other things, an active takeover market, and an absence of overregulation such as Sarbox. Cnooc should be a reminder that the age of American business dominance will not inevitably last forever.

Update: Tom Kirkendall offers thoughts and more links on the debt to China and the Unocal bid.

Update 2: More here.

Update 3:  Chevron responds, and I comment.

Comments

[Robert Schwartz]

Remember the hysteria when Japanese companies bought Pebble Beach and Rockefeller Center? Back then I said, don't worry about it. What are they going to do with it? Pick it up and move it to Hokiado?

Welcome to the same old stuff. This too shall pass.

[Thomas Blumer]

The difference between Japan and CNOOC is that CNOOC is 70% owned by the Chinese government.

The free-marketeers who either support this or who aren't opposing this ought to tell us why Chinese nationalization of an $8 billion (sales) company is OK, when we know that if the American government wanted to nationalize Unocal these same people would be going bonkers.

[ATM]

So are there any Chinese energy companies that US companies can buy outright?

[Ann]

No, there are no Chinese energy companies that can be bought by foreigners. They're majority owned by the Chinese Communist Party (i.e. by some arm of the government).

At least with telecoms, it's explicitly illegal for foreigners to own any telecom network. I don't know if such a restriction has been spelled out for energy, but the government wouldn't allow it.

Of the more than 1,200 stocks trading on the Shanghai and Shenzhen exchanges, there is only a handful that are not majority-owned by the government (and the handful probably have close ties to the military). There's a proposal now for the government to sell off the rest, which will allow the government to unload a lot of overpriced assets, but it's hard to imagine that the government won't continue to control them. The Chinese Communists only flirt with markets up to a point, but they don't let it get out of hand.