David Barboza of the New York Times is out with an excellent article that nicely sums up why China rejected Coca Cola’s bid to purchase Huiyuan. The article is entitled China Blocks Coke Bid for Juice Maker, and it does a great job summarizing the rejection because it quotes China Law Blog’s own Steve Dickinson and because it reaffirms what we have been saying all along.
Barboza rightly notes that “very few foreign companies have taken full control of a major Chinese company….[but] “many legal analysts said they had expected the deal to be approved because China itself is moving aggressively this year to acquire foreign assets during the global economic downturn.” It then quotes Steve:

Steve Dickinson, a China-based lawyer at Harris Bricken, said China usually restricts foreign takeovers because of a longstanding belief that state assets should not be controlled by foreign entities.
“China’s very open to green field investments, allowing foreign companies to start up businesses,” Mr. Dickinson said. “But China strongly discourages outright purchases of existing Chinese companies to enter the China market.”

This is exactly what we have been saying all along. In one of our posts from more than a year ago, entitled, “Meet China’s New M&A Policies. Same As The Old Policies,” we set out what we saw as the basic rules for China government approval of a foreign led M&A deal:
China’s basic policies for M&A is as follows:

Foreigners are permitted to purchase small Chinese companies that the central government is not interested in managing.
Foreigners are permitted to purchase large, state-owned enterprises that suffer from financial difficulty, provided the foreign investor agrees to restructure the purchased company.
Foreigners are permitted to purchase non-majority interests in strong, successful Chinese companies, but only if there is some added benefit, such as transfer of technology, advanced management or access to foreign markets.
Foreigners are not permitted to purchase a majority interest in a large and financially successful Chinese company. Even smaller companies are off the table if they are financially sound and work in a core technology field or have created a strong or historically important brand.

China is “remarkably receptive to direct foreign investment that creates new business activity in China,” but opposed to purchases of successful existing businesses and assets. “Such purchases are strongly disfavored, since they are seen as providing no net benefit to China:”

Under this policy regime, venture capital and troubled company buy-out businesses have plenty of room to operate. Strategic alliances in core industries also work well. On the other hand, traditional private equity that focuses on the outright purchase of strong and successful companies simply does not work under this system. Central government regulators will consistently step in and exercise their veto powers to prevent the foreign acquisition of a majority interest in any existing, strong Chinese company. This is not likely to change anytime soon.

For more on what goes into China’s M&A policy for foreign investment, you should also check out “China M&A: Can You Hear Me Now?” “China’s Anti-Monopoly Law. People, We’ve Got The Rules.

  • Herb

    You never predicted that this deal would fall through. But now you want to claim that one of your maxims was the equivalent of putting money down on the table and picking on the wheel.
    Notice, Coke obviously had no legal counsel or consultant as smart as you. Or maybe, like you, they knew what they were up against but thought it worth trying to overcome the obstacles they anticipated?

  • Jay

    I can’t wait to throw this in the face of the next Chinese bureaucrat or party official that raises the CNOOC Chevron case to me. The Europeans and Americans need reciprocate.

  • Whilst Dan might not have predicted the Coke deal falling through, Coke might have saved themselves some cash by reading ‘Meet China’s New M&A Policies. Same As The Old Policies’.

  • I agree with all that you say but I also think, in this case, that it is a loss for China. One that was powered by purely nationalistic rather than practical economic interests. Huiyuan is in the beverage business which is clearly not a “strategic industry.” The economies of scale and entrance that they could have developed might have been of assistance to similar Chinese firms looking to expand internationally. Moreover, it would have forced other domestic beverage firms to improve or fail as they compete for market share and profits. In the long run, that would have been great for China Inc. in general.

  • Herb

    Laosan’s comment is in the same non-analytical propagandeering mode as all statement by Hu or Wen or Xinhua or any other person speaking for the Chinese govt. What I mean is that it is silly to suppose that the people who made this decision against the purchase were solely interested in “pure nationalism” as against “practical economic interest”. As much as the Chinese govt’s enemies may dislike the fact, its leadership knows how serve “nationalism” without sacrificing “economic interest”. Those who would like to see China implode can only wish, in vain, that the powerful people veto-ing such corporate acquisitions (as the contemplated Coke one) are being nationalistic and economically suicidal. And while Laosan’s speaks of “China’s loss”, some of us have no doubt that some in China will not be harmed, or may even benefit. But figuring out who will not be harmed or benefited will certainly require going beyond a mode of propagandeering. It will also take more time and effort than I am now ready to spend.

  • Deejay

    I don’t see how this is a loss or will somehow scare off investors at all. China has been pursuing nationalistic economic policies since the very beginning, it’s just another day and everyone knows this.

  • China isn’t alone in the matter of ‘anti-monopoly’ Laws, ‘nationalism’ and Laws regarding ‘controlling interest’ of national industries. China’s policies follow the rest of the world in this regard and it was the ‘anti-monopoly’ Law that sunk the deal.

  • Coke, Huiyuan and the audiences that matter

    Nothing as timely as the blogs, I tell you. As everyone on the planet now knows, the Coke-Huiyuan deal

  • Coke’s Failed China Deal. Private Equity Will Live To Do Deals Another Day.

    The South China Post did a story today on China’s having used its antitrust law to block Coke’s purchase of Huiyuan. The article is entitled, “China raises chills as Coke bid bottled up,” and it talks about whether the blocking of this deal will signal…

  • HN

    It’s really sad for the new Anti-Monopoly Law and the officials in MOFCOM. Most comments on this case don’t talk about what the laws says or what the analysis says (yes, it’s ALMOST none there) but whether this is “nationalism” or “protectionism”. maybe this is the legal reality.