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China's state-owned energy enterprise, CNOOC, has offered to acquire Unocal for US$18.50 billion, which represents a $2.50 billion premium over Chevron's offer. What is this premium for?
If I Were a Unocal Shareholder...
-- by Robert M. Liu
China's state-owned energy enterprise, China National Offshore Oil Corporation (CNOOC) has offered to acquire California-based oil company, Unocal Corp., for US$18.50 billion, which represents a US$2.50 billion premium over Chevron's offer of US$16 billion. If I were a Unocal shareholder, I would have to ask myself, "What is this premium for?"
Chances are this premium is for the risks (and unknown factors) the CNOOC takeover bid might entail. If Unocal is acquired by Chevron, it would be a union between two typical capitalist American companies with similar corporate cultures. The risks involved would be much lower, while the synergies from the merger should serve shareholders' long-term interests.
Whereas if CNOOC succeeds, we would see a merger between a state-owned Socialist entity and a free-market business enterprise. If I were a Unocal shareholder, I wouldn't dare to predict a happy marriage, because this is totally uncharted territory.
Some media reports draw an analogy between Japanese companies acquiring U.S. businesses in the 1980s and CNOOC's attempt to take over Unocal, suggesting that concerns over the latter may be as wrong as those over the former. But Japan is Japan, and China is China. While Japanese companies are free-market business enterprises, Chinese companies are nationalized Socialist entities controlled by the Communist Party of China.
In other words, for Unocal to merge with CNOOC is to accept the control and leadership of the Communist Party of China. Anyone who considers a possible CNOOC takeover of Unocal to be a mere business acquisition must be kidding himself, because CNOOC is not just a business organization -- it is apparently a front for the CPC.
Historically, the CPC operated as an underground secret society when China was governed by Generalissimo Chiang Kai-shek's Nationalist Party (the KMT). Today, the CPC continues to operate as a secret society that infiltrates Chinese communities all over the world.
Media reporters may not want to bother and ask Mr. Fu, the CEO of CNOOC, whether he is a member of the CPC. My guess is that he has to be in order to hold his important position at CNOOC. At least, his loyalty to the CPC is beyond doubt. In return, he has the trust of the CPC.
Now, Mr. Fu says that he would retain the Unocal management team. While this signal of trust from him should be appreciated, the business executives of Unocal need to ask themselves whether they want to be loyal to their would-be new boss, the CPC, the real and ultimate owner of CNOOC.
In China, the state owns most of China's resources, but the state is controlled by the CPC. So, in reality, the CPC controls and owns almost everything, including CNOOC. If the CPC wants, it could find enough funds to take over not only Unocal but also Chevron, using CNOOC as a front. So, there is reason to see a possible CNOOC-Unocal deal not as a business transaction with commercial purposes but as an action by a Communist state.
If I were a Unocal shareholder, I could hardly be optimistic about such a future. I would definitely cash in as soon as the deal went through, rather than hold my Unocal shares with unpredictable long-term consequences. Why? Let me explain as follows:
It is said that because of the economic reforms that began in the late 1970s, the Chinese economy now shows signs of strong growth. The private sector is said to be expanding at a great pace, and foreign investments continue to pour in. Still, the state (or the CPC) controls China's major industries and most of its resources.
Thus, the nationalized Socialist nature of China's economy has not undergone a fundamental change despite the expanding private sector. If the CNOOC-Unocal merger became a reality, it would represent an expansion of the state-owned sector of the Chinese economy into the United States of America -- a clear indication that under the CPC's plan China's future is not privatization and capitalism as many of us in the West wish, but rather National Socialism with ever-growing military might.
Since CNOOC is a state-owned enterprise, Unocal shareholders should take a close look at the performance of the state-owned sector of the Chinese economy. Generally speaking, it is poor. For proof of this pessimistic assessment, one need only watch the Shanghai Composite Index (which consists of China's state-owned enterprises). It has recently fallen to its 8-year low of around 1000. It could fall through the floor.
Although there is strong empirical evidence that, plagued by poor corporate governance and corruption, China's state-owned enterprises are struggling with lackluster earnings or even perennial losses -- one of the reasons why China's state-owned banks are loaded with bad loans and insolvent by Western standards, the CPC is bent on maintaining the state-owned sector.
This is because the CPC knows that by maintaining the state-owned Socialist nature of the economy, it helps maintain its one-party rule in China.
True, with well-educated and better-off people joining the party, the class nature of the CPC may have changed. Besides, as better-qualified officials move up the party hierarchy, the Chinese leadership seems to have allowed the country's ancient, scholastic, Confucian traditions to stage a comeback. Yet, all this does not change the National Socialist nature of China's economy.
In recent years, nationalistic sentiments have been on the increase in Socialist China. Understandably, there is plenty of skepticism in the West about China's real intentions and ambitions. Who is calling the shots in Beijing? The moderates or the hardliners? Could it be that the few moderate faces we see on TV are for international consumption, while the hardliners are actually pulling the springs behind the scenes?
If the moderates are in control, why does the number of missiles targeted at Taiwan keep rising? Apparently, Beijing is raising the ante to test U.S. public opinion and see if America has the stomach for a military conflict at the Taiwan Strait.
My guess is that the hardliners' intention toward Taiwan is most likely to force Taiwan's leadership to accept Beijing's terms of re-unification which might eventually enable the CPC to control Taiwan as it now controls Hong Kong, whereas the moderates in the CPC may be willing to offer more generous conditions.
Back to the topic of CNOOC's attempt to acquire Unocal, with so many uncertainties surrounding the China issue, one would ask, "Is it wise to risk the future of a successful company like Unocal and the long-term interests of its shareholders by handing it over to the Communist Party of China in exchange for a US$2.50 billion premium?"
[July 7, 2005]