In a big victory for free trade, the US has approved the sale of Canadian oil exploration giant Nexen (Toronto: NXY) to China’s CNOOC (HKEx: 883; NYSE: CEO), removing the last major obstacle that could have stopped the landmark deal. The US approval was decidedly low-key, with Nexen formally announcing it had received the final major green light it needed to close the sale. (English article) The development marks the second major approval of a potentially sensitive deal by the US in the last month, and is the latest indicator that such deals that pose no real risk to national security and are likely to move forward for now without political resistance.
That means we could see a mini-boom of Chinese firms buying US companies, especially in the technology sector, now that the US presidential elections are safely in the past. But Chinese firms will still need to do their homework to avoid embarrassing vetoes of deals that really are too sensitive.
CNOOC’s plan to purchase Nexen for $15 billion has been controversial since its announcement 7 months ago, not because it posed any real security risks but because it marked the biggest purchase ever of a western company by a Chinese one. For that reason, many people in Nexen’s home Canadian market expressed concerns, prompting the government to extend its review of the deal twice before finally approving it in December. (previous post) That approval was the most important, but the US also needed to approve the deal because Nexen also had a small number of assets in the United States.
Nexen said its sale to CNOOC was recently approved by the Committee on Foreign Investment in the United States, or CFIUS, which must clear all cross-border deals involving US companies to make sure they don’t pose national security risks. With the US approval removing the final potential obstacle, Nexen said it now expects the deal to close on February 25, or more than half a year after it was first announced.
Approval of the deal is the latest sign of the fading role of politics in cross-border M&A between China and the west. In another similarly positive development last month, CFIUS also approved the sale of bankrupt high-tech battery maker A123 Systems to another Chinese buyer, Wanxiang Group. (previous post) A rival bidder for A123 had been trying to block the sale, arguing the battery maker owned defense-related technology, and also that it had received previous government support.
Approval of these 2 deals seems to indicate the administration of US President Barack Obama will be rational and open minded about similar deals in his second term, meaning we could see Chinese firms move aggressively to acquire US companies. Many of those deals could come in the tech sector, and would likely be in the relatively small $5-$20 million range as Chinese firms seek to obtain cutting edge western intellectual property.
But Chinese firms will also have to be smart and do their homework to avoid embarrassing setbacks like the one experienced by an affiliate of construction equipment giant Sany (Shanghai: 600031) last fall. In that case, the affiliate was planning to invest in a wind farm in the state of Oregon, only to see the plan vetoed because the site was near a military manufacturing facility. (previous post)
Of course it’s possible that Sany was aware of the situation, and was planning to use the wind farm as a base for spying on the military facility. But it’s also possible Sany simply didn’t hire the proper consultants when it was planning the project, since such consultants probably would have told it to abandon the deal due to its closeness to the defense facility. At the end of the day, 2013 could well develop as the year when we see some major M&A in the west by Chinese firms, as governments get down to the business of promoting free trade and the risk of political interference starts to fade.
Bottom line: US approval of CNOOC’s purchase of Canadian rival Nexen marks a big win for free trade, and could auger a mini-boom in smaller M&A by Chinese firms in the west this year.
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This article was first published in the online edition of the South China Morning Post at www.scmp.com.