Why China Is Buying?

Bill Powell.  Time New York: Jul 4, 2005.  Vol. 166,  Iss. 1,  p. 33 (1 pp.)

The bid for Unocal is by far the most audacious move any Chinese company has made. CNOOC, whose market value is only about $22 billion (compared with $119 billion for Chevron), offered about $18.5 billion, or $67 a share, for Unocal. Since it's an all-cash offer, the Chinese company would have to take on a huge chunk of debt to finance the deal.

AS A GRADUATE STUDENT AT THE University of Southern California in the mid-1980s, the CEO of China's third largest oil company remembers seeing Union 76 signs plastered all along America's Left Coast-emblems of California's car-crazed lifestyle. For Fu Chengyu, then a poor student from northern China, culture shock doesn't even begin to describe it. Try future shock. "Back then," he says, "China seemed like it was 100 years behind the United States."

It is making up for lost time quickly. Never has China's rapid rise been more evident than last week, when two big Chinese companies entered the auctions for two high-profile U.S. competitors: Haier, well known among college students as the maker of small refrigerators popular in dorm rooms, is teaming with a U.S. private-equity firm to bid for Maytag, the struggling appliance maker based in Iowa. And 19 years after getting his M.A. in petroleum engineering from U.S.C., Fu wants to own Unocal, once the parent of those Union 76 gas stations. The company he heads, China National Offshore Oil Corp. (CNOOC), topped a $16.5 billion bid from Chevron for the ninth largest U.S. oil company.

In China, with its surging trade surplus and huge holdings of dollar reserves, CNOOC's action is called the "go out" strategy: for the past two years, the Beijing government has been urging Chinese firms to expand their presence in overseas markets. Some have begun to respond. Late last year computer giant Lenovo bought the highprofile but money-losing personal-computer business from IBM for $1.75 billion. Prior to that, TCL, a consumer-electronics maker, bought the RCA TV business from French giant Thomson. And all the while, Chinese energy companies have been making deals with governments and private companies, desperately trying to acquire oil-and-gas reserves needed to power an economy still growing 9% annually.

But the bid for Unocal is by far the most audacious move any Chinese company has made. CNOOC, whose market value is only about $22 billion (compared with $119 billion for Chevron), offered about $18.5 billion, or $67 a share, for Unocal. Since it's an all-cash offer, the Chinese company would have to take on a huge chunk of debt to finance the deal. Fu insists that no one in the government pushed the company to buy Unocal, and sources close to CNOOC's board tell TIME that Fu, not some shadowy stringpulling figure in Beijing, has been the driving force behind the bid. Indeed, a banker close to the deal says that Fu is convinced the value of Unocal is actually "much higher" than what his company is offering for it (attention Unocal shareholders!) and that if Chevron counters, CNOOC might not be shy about raising its bid. "If you know our history" Fu told analysts last week, "you'll know we are a value-driven company. Value creation drives our acquisition strategy, nothing else."

The Chinese company's "it's just business" approach won't mute the deal's critics in Washington. To them, a takeover of Maytag is one thing-"We don't go to war over washing machines," said Republican Congressman Richard Pombo of California-but energy is a different story. With the Chinese government subsidizing the dealCNOOC's parent company, wholly owned by the state, will give it an $8.5 billion, 30year loan at just 3.5% interest-cries of predatory financing are inevitable. So too are complaints (accurate enough) that there is little chance a Western oil major could buy outright one of China's biggest energy companies if it wanted to. A level playing field China is not, and with trade tensions between Washington and Beijing strained already, the Bush Administration promises to scrutinize any proposed deal carefully.

To which free traders respond: Don't bother. If a Chinese company wants to pay a hefty premium to (mostly) U.S. shareholders, and guarantee the bulk of Unocal's jobs to boot, why should those shareholders be prevented from selling? After all, Japan 15 years ago wasn't exactly an open economy when its flagship companies began buying everything from Rockefeller Center to Hollywood movie studios. The Japanese, it turned out, got taken like tourists. -Reported by Eric Boston/Washington