I have to commend the Obama administration for approving the sale of leading US pork processor Smithfield (NYSE: SFD) to China’s Shuanghui, rather than succumbing to pressure from US politicians who opposed the deal. Washington regulators who were reviewing the deal for national security issues quietly approved the sale just before the weekend, providing a nice gift for Shuanghui for the upcoming Mid-Autumn and Chinese National Day holidays. (English article) But more importantly, approval of the deal sends an important message that the US wants to promote fair and free trade with China, and won’t play the kinds of political tit-for-tat games that often happen during trade disputes.
Before I go any further, I need to openly admit that my call on this decision was wrong, as I honestly thought there was a good chance the Committee on Foreign Investment in the United States (CFIUS) would veto the deal. (previous post) My prediction was based on strong concerns that were expressed by US politicians during hearings on the deal over the summer, combined with China’s own weak record for food safety. The deal was first announced in May, and would see Shuanghui acquire Smithfield for $4.7 billion — the largest-ever acquisition of a US firm by a Chinese buyer.
The deal isn’t done just yet, as Smithfield shareholders still need to approve it. Such approval seems likely based on the 31 percent premium that Shuanghui offered over Smithfield’s share price when the deal was first announced. More recently, another group led by hedge fund investor Starboard LP has said it is trying to assemble an even higher bid, which could potentially derail the Shuanghui offer. I’ve seen similar developments before, and based on past experience would say the Starboard group is unlikely to mount a successful bid due to the advanced stage of the Shuanghui deal.
By approving the deal, the Obama administration is showing that it will weigh each case individually in its trade relations with China, aiming to minimize unrelated political considerations in its decisions. The US could have easily vetoed the deal as a retaliatory move, after China announced anti-dumping tariffs earlier this year on US-made polysilicon, the main ingredient used in making solar panels. Many observers believe Beijing’s move was mostly retaliatory, in response to Washington’s earlier levying of similar anti-dumping tariffs on Chinese-made solar panels. So more broadly speaking, the US approval of this deal seems to show that Washington doesn’t want to fight tit-for-tat trade wars with China and is most interested in promoting the free flow of goods and services across international borders.
Assuming the deal closes soon, which seems likely, the next question will become: What’s ahead for Smithfield under Shuanghui’s management? My guess is that Shuanghui will probably move very carefully at first, and will make few if any changes at Smithfield to avoid any controversy. The only changes we’re likely to see initially are increased imports of Smithfield products to China, and perhaps some technology transfers from Smithfield to Shuanghui’s operations in China.
But that said, I do see some integration issues for Shuanghui in the near future, since it has little or no experience dealing with foreign firms. We saw similar issues when PC giant Lenovo (HKEx: 992) bought the PC operations of IBM (NYSE: IBM) back in 2005, which ultimately led to a major reorganization at Lenovo. Like IBM’s PC operations, Smithfield was already struggling a bit due to company and industry-related issues, and I’m not at all convinced Shuanghui has the expertise to turn things around. All that means that approval of the deal may just be the first step in what’s likely to be a difficult marriage for the 2 sides in the next couple of years.
Bottom line: Approval for Shuanghui’s Smithfield purchase reflects a US commitment to fair trade, though the firms will face integration issues in the next few years.