Question

Integrative Case 3.6

China Merchants Group’s Acquisition of the Newcastle Port

Hao Tan (University of Newcastle, Australia)

Why was China Merchants Group, a state-owned enterprise, able to successfully close the deal to acquire the Newcastle port of Australia?

On April 30, 2014, the world’s largest coal export port, the Newcastle port of Australia, changed hands. The owner of the Australian port, the new south wales state government, agreed to lease the port for 98 years to a consortium formed by the China Merchants Group (hereafter “Merchants”) and Australia’s Hastings Funds Management, for A$1.7 billion (US$1.57 billion). Over the lease period, the consortium will exercise control over the port, as well as the land, roads, railways, and other infrastructure within the wharf area, and will be entitled to earnings derived from the ports operations.

In the 2012- 2013 financial year, the Newcastle port exported 140 million tons of coal, worth A$15 billion (US$13.8 billion). The spot price of coal at the Newcastle Port is a benchmark for the international coal market. Given the significance of the port, the lease had attracted bidders from all over the world. These included Cheung Kong Infrastructure, owned by the Hong Kong tycoon Li Ka-Shing; China State construction; Deutschland Bank; and Macquarie Bank. The short term and long term financial benefits of this acquisition for Merchants remain to be seen. However, it’s successful bid will certainly create opportunities to further internationalize its infrastructure business, and synergies well with its existing shipping and port operations. Control of the Newcastle port will further help the company- a large state owned enterprise (SOE) from China- to play a more significant part in the global energy transport market.

Mergers and acquisitions in Western countries by china’s large SOEs have faced considerable political difficulties for a long time, especially for those mergers and acquisitions that concerned “strategic” assets in host countries. In 2009, an acquisition bid by the Aluminium Corporation of China (Chinalco) for Rio Tinto, of the top three global mining companies, failed. This was largely because of strong objections in Australia over concerns related to Chinalco’s state ownership. However, the acquisition of the Newcastle port by merchants appeared to generate much less criticism in Australia. After the announcement of the bidding outcome, the Australian media has been largely positive about the deal. For other Chinese companies that are considering to “go abroad”, there seem to be at least three lessons they can learn from the success of Merchants.

First, the acquisition came at a beneficial time, making it a win-win-win situation for the government, the local community, and the foreign investor. The acquisition came as a result of governmental changes in Australia, both at the state and the federal levels, from labor party control to that of the Liberal party. The new liberal government appealed to the public with plans to invest in new infrastructure. Many of those infrastructure projects had been long overdue in New South Wales and elsewhere in Australia. The Newcastle port acquisition will provide capital for some of those much-needed projects in the local area of Newcastle. Thus it is widely welcome by the government and the community. This is quite different from the bid of Rio Tinto by Chinalco a few years ago, where the Chinese company was perceived by many as a potential monopolist in the Australian resource sector seeking to take advantage of that period’s industry downturn.

Second, it appears that merchants had convinced the owner of the port and the Australian public that the motivation for its acquisition was a commercial rather than a political one. State ownership may be a winning factor for SOEs in China. However, it is often seen as a negative factor in foreign markets. Fully aware of this difference, merchants, and its bid efforts, had highlighted a range of commercial advantages of the company, such as is long experience in the shipping and port industries over the last 140 years; it’s current investments and management portfolio , with a number of large ports across continents; the related businesses of the company enabling operational synergies, including a super tanker fleet and the world’s largest container manufacturing business; and the governance of the company, as a Hong Kong-based and Hong Kong-listed company. As a result, the company’s industry expertise was well received and its state ownership less of a concern.

Finally, the bid of merchants had been greatly helped by its track record in developed countries, especially in Australia. Merchants had been operating in Australia for more than 20 years. It’s track record included acquisitions of Loscam Ltd. in 2010 and the Terminal link in 2013. Majority of the foreign investments made by merchant had proved successful, which had enhanced the positive image of the company as a responsible multinational corporate citizen. In other words, merchants was not a total stranger to Australia, which significantly reduced its liability of foreignness.

Of course, the confidence of the owner and the public in the host country not only relies on the good story the company tells, but also on its fundamentals, including its financial capabilities, as well as the conditions and terms of its bit. However, it is certainly important for the management of a multinational company to be able to frame and communicate effectively to various stakeholders the motivations and the consequences of its international mergers and acquisitions. As the philosopher Terrance McKenna used to say, “ The world is made of words.” The stories we receive affect how we understand and participate in the world. The stories a company can tell also affect whether it can reduce resistance in the host country, gain support from stakeholders, and eventually succeed in its internationalization endeavors.

In 150 words or more answer the follwoing Case Discussion Question:

What are the challenges facing large state-owned enterprises (SOEs) in their efforts to acquire strategic assets in foreign countries in comparison with those by private firms? What can SOEs due to deal with those challenges?

Answer 1

Answer: The major challenge that a state owned enterprise (SOE) faces while acquiring strategic assets in foreign country as compared to the private enterprise is that the public and the other stakeholders in the foreign country are skeptic about the political interests of the SOE’s. The involvement of the government in SOE adds a political angle and makes it difficult for such enterprises to acquire strategic assets in a foreign country.   The stakeholders in the foreign country like the public and government fear that giving SOE’s from other countries a control over strategic resources will harm the political interests of their own country. This is evident in this case itself. The SOE‘s should therefore concentrate on creating their professional image and through communication aim to address the concerns of the stakeholders in the foreign countries. Such companies should look for Win-Win situations and use them for creating a positive image at the marketplace.