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 follwing Case discussion question:

What are your recommendations for China Merchants Group to effectively manage and operate the Newcastle port after its acquisition?

Answer 1

Chinese state owned companies usually face sever legal and political resistance when they attempt to acquire a company from a developed world. Similar expectation was made when Merchants bid for Newcastle Port. However the result was different. The reason why Merchants was able to acquire Newcastle Port is because of several reasons. They are

Appointment of new liberal government both at the state and national level. The timing was right and the new liberal government was more open to a foreign state owned company acquiring the port

Merchants focused on the commercial benefit of the acquisition rather than the political ones during their bid process. They highlighted their achievements in the commercial domain and completely avoided the fact that they are a state owned company from China.

Merchants had experience in Austrian market for 20 years and this had made the Australian people were relatively more comfortable with them than other bidders. They also had decent track record in developed countries and their past acquisition of several Australian countries meant that they were comparatively relatable.

There are several factors that helped China Merchants Group acquire Newcastle Port without any serious resistance. However, this is not the end of the journey but a beginning for them. They had won the bid with a promise of commercial development and by showcasing their portfolio and track record. Now that they have acquired they need to keep in mind a few cultural and commercial nuances in order to build a long and sustainable relationship with the local entities.

They should focus on recruiting Australian employees more than brining Chinese employees from their home country. This should make the community feel more accommodated and will garner them support in the long run.

In addition to that, Merchants should also develop the port and manage the infrastructure in a healthy way. However, given their track record and knowledge of the country this not be a problem.

China Merchants should also work on some CSR and community outreach programs to get the support of the people, other organizations and the government in long run.