OPINION

Shuanghui's Dilemma in Overseas Acquisition

Smithfield Foods, Inc., the world's largest pork producer, has accepted a proposed acquisition by Shuanghui International Holdings Ltd. (The acquisition is now subject to a national security review by the Committee on Foreign Investment in the United States.)

For Shuanghui, a leading pork producer in China and a pioneer in the Chinese meat processing industry with over 30 years of history, the deal with the American food company, if wrapped up, would be a Hollywood drama of "a snake swallows an elephant." However, there are still a great many obstacles for Shuanghui to overcome.

Although Shuanghui is a privately owned enterprise free from the regulations governing its state-owned counterparts, it agreed to purchase the American company for $4.7 billion, in addition to assuming $2.4 billion of Smithfield's debt. At this point, it remains uncertain whether good money is being lost paying a premium of approximately 31 percent over Smithfield's closing stock price on May 28.

Nonetheless, compared with the acquisition itself, how to successfully run it is a bigger issue for Shuanghui. Smithfield agreed to accept the deal largely because it expects to seek rapid expansion in the Chinese market. The problem is that balancing pork production and supply is no safe bet despite the huge market potential in China. How will Shuanghui match Smithfield's production standards? How can the company ensure food safety? How can it guarantee that utilizing illegal food additives like clenbuterol would not happen again (Chinese health inspectors discovered the illegal addition in Shuanghui's port supplies back in 2011.)

In addition, even if Shuanghui production in America runs smoothly, transportation cost will be extraordinarily high. More importantly, the Chinese pork producer has to figure out how to integrate with Smithfield in terms of business, staff and industry-chain management. Reviewing the history of overseas acquisitions by Chinese companies, it is not difficult to find that problems surfaced in the integration of culture, ideas and management thinking, which lead to some acquisitions' failing.

Indeed, Shuanghui should be lauded for its courage and ambition. But at the same time, it should recognize that such an acquisition would trigger an array of problems. Considering its current management level, it is almost impossible for Shuanghui to thoroughly solve these problems in the short run.

Besides, it won't be easy getting an approval to wholly acquire America's largest pork producer and supplier. Even if the acquisition is approved, a number of tough terms would be attached. China's related supervisory department would also have to assess the acquisition to ensure there is no monopoly issue.

Many foreign companies cooperate with world-renowned investment banks and strategic investors in their overseas acquisitions. Shuanghui should learn from this practice. For one thing, acquisitions would take place in a more comprehensive, objective and rational way. For another, such a model allows all-round supervision and tracking, and pushes the acquirers to enhance their business management.

Moreover, investment banks and strategic investors are more familiar than the acquirer with local laws, culture and workers' demands. Therefore, their participation would greatly help Shuanghui avoid detours and reduce conflicts and contradictions in management.

This is an edited excerpt of an article by Tan Haojun, an online commentator who serves in a state-owned assets supervision institution, published in Securities Times

THE MARKETS

No Slowdown

Great Wall Motors, China's largest sport utility vehicle (SUV) producer based in Hebei Province, has defied an industry slowdown that began early last year, according to a report from Chinese business magazine Caixin.

The company sold 620,000 vehicles in 2012, up 28 percent from 2011, well beyond the industry average increase of 4.3 percent, according to the report. Its share price jumped 103 percent on the Shanghai bourse in 2012, marking the largest increase among China's publicly held automakers.

Great Wall Motor's recipe for success lies in its unswerving pursuit of profit. Instead of branching out to create many lines of products with uncertain profitability, Great Wall maximized the productivity of each production segment and focused on its best-selling models such as Haval, an SUV brand that held 14 percent of the country's SUV market share in 2012.

Luxury Consumption

China's affluent consumers are increasing their purchases of lower price luxury items and moving away from established brands, Bank Julius Baer said in a report released in Hong Kong on June 4.

The Swiss private banking group released its third Julius Baer Wealth Report on June 4, saying that Chinese consumers have changed tastes and habits, and luxury has morphed into a lifestyle instead of something more ephemeral.

The report states that the next wave of luxury consumption in China would be less about established brands and more about a migration toward heritage and quality.

Stefan Hofer, the lead author of the report, said, "evidence continues to mount that Asia's growth and wealth creation engine has decoupled from the still-weak mature economies, and China in particular is moving up the value chain."

NUMBERS

69

Numbers of mergers and acquisitions (M&As) in the Chinese market in May

$329 mln

Transaction value registered by the six Chinese companies that completed overseas M&As in May

$448 mln

Transaction value of M&As in the Internet sector in May

Email us at: yushujun@bjreview.com