China’s Shuanghui International Holding Ltd announced in May 2013 that it agreed to acquire US pork processor Smithfield Food Inc for US$7.1 billion. If approved by the US government, the transaction will represent the largest Chinese takeover of an American target. The outcome of the Smithfield deal is significant in that it will shed light on the US’s stance on majority ownership by a Chinese company of a large US company. Now, the major hurdle for the transaction is clearing the review process by the US government’s Committee on Foreign Investment in the United States (CFIUS) which will assess the national security implications of the deal. Since China’s first acquisition of a US operation in 2004 (Lenovo’s purchase of IBM’s computer division for US$1.75 billion), few acquisitions of controlling interests in US companies by Chinese investors have been approved. The previous largest takeover was Dalian Wanda Group’s acquisition of AMC Theaters for US$2.6 billion in 2012. CFIUS approval of the Smithfield deal will likely stimulate further Chinese investment in the US.

Chinese Outbound Investment Trends

Responding to China’s "Go Global" policy in 2000 and financial incentives by government-owned banks, China’s outbound global direct investment has grown significantly in the last decade. Chinese state-owned enterprises (SOEs), which are ultimately controlled by the central government, continue to dominate China’s overseas investments. Traditionally, the Chinese government’s outbound policy steered investments primarily to secure energy and raw materials. Therefore, natural resource-rich countries have been among China’s prime targets. However, Chinese firms in recent years have turned their sights on emerging and advanced country markets, with the goal of acquiring brands, technologies and markets for Chinese goods. These frequently are accomplished through mergers and acquisitions with US firms.

The Smithfield acquisition would provide China with technology and expertise in food safety regulations which has been deemed essential in China’s latest Five Year Plan (2011–2015). Although Shuanghui is privately owned, its significant presence in the Chinese market is indicative of a broader effort by Beijing to secure the raw materials needed to feed its fast-growing economy. China is the world’s largest consumer of pork and the third largest buyer of US pork. Other significant purchases by Chinese buyers in the food sector have included state-owned Cofco Corp.’s acquisition last year of Australian sugar producer Tully Sugar Ltd for US$140 million and Shanghai-based Bright Food (Group) Co.’s purchase in 2011 of Australian food producer and importer Manassen Foods Australia Pty. Ltd. for an estimated US$522 million.

The Smithfield transaction is also significant in that it represents a departure from the recent trend of minority share purchases by Chinese investors. Prior to 2006, Chinese outbound investments tended to be in the form of acquisitions of control. However, the majority of these acquisitions did not fare well; they were viewed as aggressive in light of China’s outbound policy and resulted in post-acquisition operational challenges relating to cultural differences in styles of management, the transfer of know how essential to the business, and the integration of two very different types of business-operating styles.

Beginning in 2006, the trend in Chinese investments changed from control acquisitions towards investments in minority interests in private companies and engaging in joint ventures with multinationals and other entities. Minority transactions became popular as such deals tended to attract less regulatory attention and allowed Chinese companies to effectively partner with sellers. As the sellers remained involved in the day-to-day operations of the target companies, Chinese companies could exploit the sellers’ knowledge of the businesses, gaining the expertise they required. Furthermore, Chinese investors would often seek equity step up rights in minority acquisitions to obtain 100 percent control in the future. However, the exercise of these subsequent step up rights would trigger competition clearances (which would not be initially triggered by the minority acquisitions) and therefore would be more likely to cause anti-trust issues to arise.

Commentators on the Smithfield deal have generally overlooked the fact that Shuanghui is not a Chinese SOE as compared to the acquirers in most Chinese outbound deals in the past. Shuanghui was privatized and now nearly half of its shares belong to Goldman Sachs, CDH Investments, Singapore’s sovereign wealth fund, and New Horizon Capital, a private equity firm co-founded by the son of the former Chinese prime minister. These private investors are more sophisticated investors than the SOEs, and approval by CFIUS will give an indication as to the US’s position towards majority ownership by Chinese private investors. Moreover, the deal may evidence a new trend of investment by non-SOE Chinese investors in the US market.

CFIUS Approval

CFIUS, headed by the Treasury secretary, includes members from the Departments of Justice, Homeland Security, and Energy, along with other departments, and reviews the national security implications of transactions where a foreign person takes control of a US business. Most deals reviewed each year involve businesses that are not controversial and are approved without much difficulty. However on occasion, CFIUS has refused to approve a transaction or has required changes in deal structures, such as spinning off a sensitive business, in order to secure approval.

A number of Chinese transactions have been abandoned in the face of CFIUS opposition. In 2011, China’s Huawei backed away from its acquisition of US cloud-computing company 3Leaf Systems after the panel suggested the Chinese company should divest assets in order to complete the merger. Opposition from Washington lawmakers may also pressure the Chinese to back away from a deal before CFIUS has completed its review. In 2005, widespread opposition from Washington forced China’s state-owned oil company, CNOOC, to abandon its US$18.5 billion acquisition of California energy firm Unocal. Lawmakers have already expressed concerns about the Smithfield acquisition. Citing Shuanghui’s sale of pork that contained a banned feed additive and a series of other food scares across China, Congress has questioned the impact of the deal on the safety of the nation’s food supply chain. CFIUS has also been urged to investigate the role the Chinese government may play in Shuanghui’s operations.

Chinese SOEs are not perceived as market players but rather as driven by state goals. They come under greater scrutiny by the US government so as to ensure that Chinese companies do not act in collusion to acquire corporate assets important to American national security. An increased SOE presence is also seen as harmful to the US economy as SOEs operate less efficiently and profitably than private firms. As Shuanghui is not an SOE, its ownership structure is unlikely to complicate the review. Accordingly, a successful acquisition by Shuanghui could open the door for increased inbound investment by Chinese private (non-SOE) investors.

While the US has a relatively open policy towards foreign direct investment, there has been heightened sensitivity towards Chinese investment in the US. The outcome of the Smithfield deal will likely be an important signal to Chinese investors as to the US government’s position on future takeovers in strategic industries as the Chinese continue to seek out investment opportunities in the country.


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