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 |