NYTimes: By David Barboza and Andrew Ross Sorkin, Aug. 3, 2005
SHANGHAI, Aug. 2 – A Chinese oil company said on Tuesday that it was withdrawing its $18.5 billion offer for Unocal, the American oil company that had been at the center of a takeover struggle that will end with its staying in American hands.
The pullback underscores the resentment and bitterness that has formed in China and the United States over the effort to buy what some consider a strategic asset.
The bid awakened broad tensions in the United States over economic security and economic competition with China that apparently led Cnooc, which is 70 percent owned by the Chinese government, to conclude it had no chance. The tensions, analysts said, are not expected to disappear along with the bid. As Chinese companies increasingly try to buy major international companies, the experience is likely to push them to become more attuned to the political sensitivities of deals. [Page C1.]
The withdrawal of the Cnooc bid, which was made in late June, lets the Bush administration avoid having to make a sensitive decision about whether to formally block the transaction. But the political firestorm in Washington that pushed the Chinese company to drop its bid may have revived a prickly sentiment in Congress that is expected to spill over into other facets of the financial and economic relationship between China and the United States.
The decision ends the hotly contested takeover battle for Unocal, the American oil company, and clears the way for Chevron to seal its acquisition of Unocal for about $17 billion in cash and stock. The failure of Cnooc’s takeover attempt — code-named Operation Treasure Ship — may be most galling to the Chinese because Cnooc’s offer was higher than Chevron’s bid.
Still, the withdrawal leaves China Inc. with some hard-learned lessons. As Chinese companies endeavor to expand their global reach, Cnooc’s bid is likely to become a case study in tactical and political miscalculations. Even though the company had hired an army of high-price brand-name firms — Wall Street advisers like Goldman Sachs and Washington lobbyists like Akin Gump Strauss Hauer & Feld — it still failed to navigate the political minefields and negotiate a superior offer.
In the end, officers of the Chinese company said they were reluctant to increase their bid closer to $20 billion because Washington seemed unlikely to approve the deal anyway, and had even adopted legislation that would have slowed or mired the approval process.
In a statement issued late Tuesday in Hong Kong, Cnooc explained its decision to withdraw by saying: “This political environment has made it very difficult for us to accurately assess our chance of success, creating a level of uncertainty that presents an unacceptable risk to our ability to secure this transaction.”
Some Chinese businessmen said the failed bid could broadly affect trade relations between China and the Unites States far beyond mergers and acquisitions.
“The way the U.S. government has treated Cnooc and politicized the deal will largely frustrate Chinese companies,” said Han Xiaoping, the chief information officer at Falcon Power, an energy consulting firm based in Beijing. “The companies not only in oil but all other industries will not want to play the game by the U.S. rules.”
Even so, Chinese oil companies are expected to continue their acquisition hunt, as China’s appetite for energy grows to feed its expanding economy.
Cnooc’s bid for Unocal — the largest takeover bid ever attempted by a Chinese company — was plagued with problems long before it even started in late June. Indeed, in March, when Unocal was up for auction, Cnooc’s independent directors voted against pursuing a bid during a heated board meeting, just 15 hours before the bidding deadline, according to several executives who recounted the decision-making process within Cnooc.
The most outspoken skeptic was Erwin Schurtenberger, the former Swiss ambassador to China, but pointed questions also came from Kenneth S. Courtis, the vice chairman for Goldman Sachs in Asia, who was particularly upset by the hasty nature of the offer.
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Six days after the contentious board meeting, on April 4, Mr. Schurtenberger resigned from the board; a company statement said he was doing so for health reasons. He has had prostate cancer for years.
Several days later, Chevron struck a $16 billion deal for Unocal. Still, Cnooc’s ambitious chairman, Fu Chengyu, was undeterred. The independent directors had pledged to revisit making a bid after hiring an independent adviser, N.M. Rothschild & Sons, and an energy consulting firm to do a separate assessment of the planned bid.
With Mr. Schurtenberger no longer on the board and a positive assessment from the outside energy consultant, Cnooc’s board voted in late June to make an unsolicited offer worth $67 a share, or $18.5 billion. During that board meeting, the American advisers suggested there was some regulatory risk, but they dismissed the prospect of opposition to the deal from politicians as “no more than the usual noise.” One recent precedent for a high-profile acquisition had been Lenovo’s purchase of I.B.M.’s personal computer business, a deal that went through relatively smoothly.
Of course, the day Cnooc announced its offer, the reaction began. Chevron’s lobbyists worked their political base in California. Two Republican representatives, Richard W. Pombo and Duncan Hunter, had written a letter to President Bush in anticipation of the offer urging that the transaction be scrutinized on the grounds of national security, and they went into overdrive. Other politicians accused Cnooc of acting as a proxy for the Chinese government and seeking to secure strategic energy assets that were arguably valuable to the United States.
Investors were sent into a tizzy, gambling in the stock market on the chance that a bidding war would erupt. Within about a week of Cnooc’s first offer, word spread that it was preparing to raise its bid to $69 a share. To ease worries that it could renege on the deal, the company also took steps to set aside $2.5 billion in escrow in case of lawsuits. Cnooc officials said they were even willing to dispose of most of Unocal’s assets in the United States if that was necessary to obtain approval of the United States government.
The Chinese government and Cnooc officials also insisted that the takeover bid was solely a commercial deal and had nothing to do with politics. Cnooc pleaded with officials in Washington that it was simply attempting a “friendly” takeover of Unocal with a higher bid and would even pay the $500 million breakup fee if Unocal agreed to abandon its earlier agreement with Chevron.
But by mid-July, the opposition in Washington had reached a critical mass. Inside Cnooc, there was a feeling that its offer was “really foundering,” according to a person involved in the discussions. The depth of the political opposition to the Cnooc bid was clear.
Not only had several bills and resolutions been presented in Congress, but it was also the day after high-profile hearings before the House Armed Services Committee in which witnesses including R. James Woolsey, the former director of central intelligence, criticized the proposed purchase as a threat to America’s energy security.
In China, the Internet chatter on pro-government Web sites, which had originally applauded the Cnooc offer, fell silent. The tone of the commentary in Chinese news agencies and in the press changed markedly. Besides chastising the political meddling in the United States, local analysts and commentators said China should only try friendly deals in the future and that the Cnooc move probably did not make economic sense at any higher price.
“Up to then, the view of the company’s foreign advisers was that all you had to do was put more money on the table,” said a person involved in the takeover discussions, who insisted on anonymity because of the confidential nature of the discussions. “They really underestimated how powerful Chevron is — a company 10 times Cnooc’s size — and how much influence it has in Washington. It was a complete misreading of political risk.”
There was some discussion in the last couple of weeks of trying to bring in an American partner to defuse the political controversy in the United States, the person said..
But instead Cnooc blinked. Unocal was ready to accept Cnooc’s new offer of $69 a share, but on July 16, Mr. Fu called Unocal’s chairman, Charles R. Williamson, “and informed him that, although Cnooc’s board had authorized an increase in the Cnooc proposal to $69 per share in cash, Cnooc was not prepared to raise the proposed per share consideration beyond $67 per share,” according to a filing by Unocal.
Had Cnooc made the higher offer and Unocal accepted it, Chevron’s chances of winning the takeover contest would have been much dimmer. But without a higher offer from Cnooc, Chevron made its move: It raised its bid to $64 a share. Unocal’s board accepted it.
Soon afterward, things got much worse for Cnooc.
Congressional negotiators working to reconcile the House and Senate versions of the energy bill added a provision that requires a four-month-long study of China’s energy needs before the government could approve Cnooc’s bid. The bill was virtually a fatal blow for any bid by Cnooc.
With a shareholder meeting to vote on Unocal’s deal with Chevron set for Aug. 10, Cnooc had to decide whether to raise its bid or fold.
For Mr. Fu, the situation was particularly painful, and perhaps ironic. For years he had argued in company meetings that Cnooc ought to avoid countries in Africa and the Middle East because of the political risks associated with some countries there, according to an adviser to the company.
That was one of the reasons Mr. Fu had pushed to make an acquisition in the United States.
“This is a pretty rude awakening,” the adviser said. “The political risk turned out to be higher in America.”