Over the past few years the overseas acquisition efforts of China’s ‘Go Global’ companies have often resembled those of a either a bulldozer or an excavator.
The difference between a bulldozer and an excavator is one of approach and purpose: the bulldozer pushes things brutally aside, whereas the excavator patiently digs trenches.
The first allows nothing to stand in its way as it levels the ground; the second burrows deep, making hollow spaces ready to receive building foundations.
Sany Heavy Industry, China’s construction equipment manufacturer which is about to acquire Germany’s Putzmeister, is understandably familiar with what both types of equipment are designed to do. Sany’s product range is used on thousands of building sites across the world. In its run-up to buying Putzmeister – one of Germany’s many proud Mittlestand firms – for €360 million in February, Sany had been patiently digging the foundations that eventually led to a smooth and successful takeover.
For years Sany’s management had studied the operations and products of Putzmeister as a competitor in China; they established sales and service offices around Europe, gaining experience and market insights; in 2011 Sany set-up an R&D facility and a regional office near Cologne; and when loss-making Putzmeister put itself up for sale at the end of 2011, Sany moved quickly and decisively to make an offer. “We felt we already knew Putzmeister,” said one senior Sany executive. “They had been our teacher for many years.” You can find excavators, but not bulldozers, in Sany’s product catalogue (and by acquiring Putzmeister it is now the world’s leading manufacturer of concrete pumps).
Some of China’s companies have learnt the functional difference between the excavating and bulldozing acquisition approaches. Haier – a serial buyer of foreign firms with an established brand presence in many overseas markets – is one of those ‘Go Global’ Chinese companies that exemplifies the excavator mentality. Over the past few years some other Chinese companies have adjusted their acquisition modus operandi from bulldozer to excavator, relying less on brawn and more on brain.
For example, the recent Cnooc (China National Offshore Oil Corporation) US$ 15.1 bid for Canada-based Nexen is in dramatic contrast to its 2005 bulldozer approach when it attempted to take over Unocal, a U.S. oil exploration company (since merged with Chevron).
As we know, that acquisition attempt all went horribly wrong. The U.S. political establishment viewed it as an assault by an outsider trespassing on its home turf, breaking into a friendly deal between Unocal and Chevron. The U.S. saw it as “a thinly disguised takeover of an American company by the Chinese government, part of a wider plot to control the world’s oil supplies.” Cnooc was considered to be a tool of Beijing’s state capitalism, directly challenging Capitol Hill’s sense of American exceptionalism and national security.
Cnooc acted like a bulldozer in America’s back yard. Significantly, its bid for Unocal was unsolicited and interpreted as hostile. And it naively thought that a bigger cash offer than Chevron’s would be enough to claim the prize of its Californian-based target. The result was a rejection of Cnooc’s bid by the U.S. House of Representatives, a vote that ironically jarred with a central tenet of American values: the belief in free-market, globalised capitalism.
More recently another Chinese company – Tianjin Xinmao – bruised itself rather badly in Europe using the bulldozer approach . At the end of 2010 it appeared unexpectedly with a much higher bid offer for Draka, a Dutch fibre optic cable company, which was seen as an attempt to gazump Prysmian, the Italian takeover suitor. Caught unawares at a late stage in negotiations (and nobody likes unpleasant surprises), Prysmian launched a robust public relations and lobbying pushback playing on traditional fears about Chinese intentions – the threat to European jobs and loss of valuable technology. Xinmao’s sudden and late gatecrash backfired, even raising fundamental questions about how it would finance its offer. Xinmao had not done its excavation work to prepare a credible bid: it was an unknown company with a mysterious identity; it failed to communicate its strategic intentions and financing arrangements, and it had arrived by surprise and uninvited late into an otherwise friendly bid process.
The lesson learnt by China has been that unsolicited gate crashing is no substitute for patiently preparing the foundations on which to launch an acquisition bid. This approach is far more subtle and oblique than directly muscling into a foreign market to buy Western companies. John Kay, the eminent economist, advocates obliquity in dealing with the complex problems of business and society: “Oblique approaches are the most successful, especially in difficult terrain” . In our parlance, it’s the excavator not the bulldozer that wins the day.
In July 2012, Cnooc put into play probably China’s biggest overseas acquisition to date with its bid for Canada’s Nexen, a company with global assets in the oil and gas industry and specialist know-how in exploiting oil sands and shale gas fields. Significantly, unlike Unocal, it is a friendly and not a hostile bid where the two players know each other well. Nexen has cooperated with Cnooc on several projects in the past. The Nexen board has accepted the bid even though Canadian and U.S. regulatory approvals are still needed, the latter potentially more difficult than the former.
But M&A experts are agreed that Cnooc has learnt lessons from its Unocal experience and carefully structured the acquisition to be palatable to the regulators. In other words, Cnooc has dug the foundations on which to build a successful acquisition deal. It has ceased to be a bulldozer.
Other Chinese companies with overseas ambitions should study, take note, and start excavating.