On June 23, 2005, CNOOC announced its attempted acquisition of Unocal, an California-based independent oil and gas company. [1]  The Chinese company's offer was $18.5 billion, which was roughly $2 billion more than Chevron,the next highest bidder, offered, reflecting a premium of about $1.5 billion over the value of Chevron's offer. [2]  CNOOC made an all-cash offer of $67 per share compared to Chevron's lower combined cash and stock offer of $61.26. [3]

Even before the offer was announced, lawmakers in Washington announced that the deal deserved additional scrutiny: "As the world energy landscape shifts, we believe that it is critical to understand the implications for American interests and most especially, the threat posed by China's governmental pursuit of world energy resources. The United States increasingly needs to view meeting its energy requirements within the context of our foreign policy, national security and economic security agenda.'' [4]  Even the Secretary of Energy hinted that the deal would receive heightened scrutiny.  [5] 

Even though the CNOOC offer was much better for Unocal shareholders, the increased scrutiny of the deal served as a major roadblock to shareholder approval.  The bid forced Unocal's shareholders to weigh the higher offer "against the risks the deal face[d] in Washington." [6]  In addition to the standard process, the proposed deal would be subject to approval by the Committee on Foreign Investments in the United States ("CFIUS"), a Federal multiagency group that can "prevent any foreign investment on the grounds of national security." [7]  This standard procedure, for which CNOOC started the paperwork in early July 2005 was put into jeopardy by House legislation that would disallow funding for any government review of the deal. [8]  CNOOC eventually abandoned its takeover bid on Aug. 3, 2005 after the Senate included a provision that would have delayed any government consideration of its bid for several months.  [9]  While the company blamed the abandonment on political pressures, part of the blame should be placed on the company's own missteps, including missing a crucial deadline for an initial offer before Chevron's had been accepted. [10]

In 2006, Dubai Ports World (DPW) faced similar problems in its bid to takeover Peninsular and Oriental Steam Navigation Co., a U.K. company that handled port security at a number of U.S. ports. [11]  Not long after the announcement, U.S. lawmakers requested that the White House review the national security implications of having an Arab company running U.S. ports. [12]  Soon after, it came out that the CFIUC had already approved the deal. [13]  This disclosure outraged U.S. lawmakers who threatened to block the deal because of security concerns. [14] Moreover, neither an additional, more stringent review of security concerns [15] nor an unprecedented package of port security measures was enough to mollify the objectors. [16] In the wake of legislation that would have blocked the deal, DPW agreed to divest itself of any U.S. holdings acquired in the deal. [17]

U.S. lawmakers are not alone in objecting to foreign ownership; they are in the company of the new populist government of Bolivia which is seeking to renationalize major areas of its economy. [18] While the Republican party has been anxious to avoid anything that even smacks of the word "French", it is imitating France's economic protectionism. [19]  Experts are worried about "an undercurrent of anxiety about the global economy that has become a general political phenomenon." [20] This concern has spread to other European countries including Spain and England. [21]  This spread engenders worries that "protectionism remains the greatest threat to global growth." [22]

These two failed takeovers serve to warn foreign companies looking to invest in "sensitive" areas of the U.S. economy that they must consider more than the economics of the transaction.  Even though CNOOC's offer was worth significantly more than the eventual sale price, the delay and the chance that the merger would be rejected were enough to sway institutional shareholders against approval. [23]  Asked what lessons he had learned from the failed attempt, CNOOC Chairman Fu Chengyu responded, "We learned we need to be more prudent in terms of public relations and political lobbying when dealing with such a big deal ... the first things you need to go for are public relations and political lobbying. And then if those work out, you turn to talk about the deal." [24]  While some have raised concerns that the trouble was stirred up by Chevron in an attempt to scotch the deal [25], the numbers don't seem to bear that out.  Only slightly over half had received campaign funds from Chevron in the past two years. [26]  Even the letter writer, Rep. Pombo, had only received $13,500 from Chevron, barely a drip in the bucket.

Even given the concerns raised by these failed acquisitions, be ready for many more takeover attempts by Chinese and other third world firms.  This piece is less worried by the idea that the uproar was related to political donations than to the fears of the unknown.  While the idea of working at a Chinese or Indian firm may cause alarm, economists warn that in the long run we should be ready for an increasing number of these takeover bids. [27] Given the level of China's dollar holdings, we should not be surprised that it is seeking to diversify its portfolio.  That has shown itself in CNOOC's attempted purchase of Unocal and another Chinese firm's attempted purchase of Maytag. [28]  In fact, in economic terms, the U.S. may be better off because direct investment is less likely than treasury investments to be pulled out quickly leaving a mess behind. [29]

The biggest losers in these two cases were not the buyers.  In the CNOOC-Unocal deal, the shareholders received approximately $1 billion less under Chevron's offer. [30]  The biggest losers in the DPW deal might be American citizens: DPW was the first internaitonal maritime shipping company to have its security management systems ISO certified. [31]

III. Conclusion

While it is important to have transparent, public reviews of these deals, as opposed to a review by an "obscure committee of second level officials." [32]  However, review before Congress, as some have proposed, is also inappropriate. [33] A more appropriate approach would require a stringent approach to security done in a public, transparent manner, but prevent politicians from using the deals to score cheap political points.

"While the Unocal and Maytag contests may prove to be setbacks for two of China's star companies that are seeking to become global corporations, they and others are expected to return to the fray." [34] 

[1] David Barboza and Andrew Sorkin, Chinese Oil Giant in Takeover Bid for U.S. Company, N.Y. Times, Jun. 23, 2005, at A1.

[2] Id.

[3] Id.

[4] Id. (quoting letter from Rep. Hunter and Pombo to President Bush).

[5] Id.

[6] Leslie Wayne and David Barboza, Unocal Deal: A Lot More than Money is at Issue, N.Y. Times, Jun. 24, 2005, at C4.

[7] Id.

[8] Jad Mouawad, Chinese Company Asks U.S. To Review Its Bid for Unocal, N.Y. Times, July 2, 2005, at C4.

[9] Matt Pottinger, Russell Gold, Michael M. Phillips, and Kate Linebaugh, Oil Politics: CNOOC Drops Offer for Unocal, Exposing U.S.-China Tensions, Wall St. J., Aug. 3, 2005 at A1 (hereinafter Oil Politics).

[10] Id.

[11] Dubai Ports Wins Bid for P & O, Wall St. J., Feb. 11, 2006, at A4.

[12] A.P., White House is Urged to Review Dubai Deal, Wall St. J., Feb. 16, 2006 (available at Lexis).

[13] Greg Hitt, White House Agrees to Re-examine Ports Deal, Wall St. J., Feb. 27, 2006, at A2.

[14] Id.

[15] Greg Hitt and Neil King, Jr., Dubai Firm Bows to Public Outcry, Wall St. J., Mar. 10, 2006, at A1 (hereinafter Public Outcry).

[16] Neil King, Jr., Politics and Economics: DP World Tried to Sooth U.S. Waters, Wall St. J., Mar. 14, 2006, at A4.

[17] Id.

[18] Greg Ip and Neil King, Jr., Ports Deal Shows Roadblocks for Globalization, Wall St. J., Mar. 11, 2006, at A1.

[19] See generally id.

[20] Neil King, Jr., Politics and Economics: When Security, Foreign Investment Collide, Wall St. J., Apr. 10, 2006, at A4.

[21] Heather Timmons, Nations Rebuild Barriers to Deals, N.Y. Times, Feb. 28, 2006, at C1 (hereinafter Rebuild Barriers).

[22] Id.

[23] Oil Politics, at A1.

[24] Shai Oster, Boss Talk: China's Offshore Oilman, Wall St. J., July 31, 2006, at B1.

[25] US Lawmakers Meddle in CNOOC's Unocal Bid, China Daily, July 6, 2005, available at http://www.chinadaily.com.cn/english/doc/2005-07/06/content_457677.htm.

[26] Id.

[27] Rebuild Barriers, at C1.

[28] Jesse Eisenger, What's Lost in the Fuss About Cnooc's Unocal Bid, Pittsburgh Post-Gazette, July 6, 2005, available at http://www.post-gazette.com/pg/05187/533664.stm.

[29] Id.

[30] Editorial, China Paranoia, Wall St. J., Aug. 3, 2005, at A10.

[31] Press Release, DP World First to Meet Recognised International Standard for Security Management, DP World, Sept. 17, 2006, available at http://www.dpworld.com/fullnews.asp?NewsID=57.

[32] Editorial, The Dubai Ports Deal, N.Y. Times, Mar. 2, 2006, at A26.

[33] Douglas Holtz-Eakin, You Can't Be CFIUS, Wall St. J., July 13, 2006, at A8. (Proposed Senate legislation would require notification of Congressional delegations and state governors of proposed purchaes in their states).

[34] Jad Mouawad and David Barboza, In Takeover Dance, the Chinese Miss a Step, N.Y. Times, July 21, 2005, at C1.