Overcoming Political Risk in Cross-Border Transactions:
China’s CNOOC Invests in Chesapeake Energy
Cross-border transactions often are subject to considerable political risk. In emerging countries, this may
reflect the potential for expropriation of property or disruption of commerce due to a breakdown in civil
In addition to a desire to satisfy future energy needs, the Chinese government has been under pressure to
tap its domestic shale gas deposits due to the clean burning nature of such fuels to reduce its dependence on
coal, the nation’s primary source of power. However, China does not currently have the technology for
recovering gas and oil from shale. In an effort to gain access to the needed technology and to U.S. shale gas
and oil reserves, China National Offshore Oil Corporation Ltd. in October 2010 agreed to invest up to
$2.16 billion in selected reserves of U.S. oil and gas producer Chesapeake Energy Corp. Chesapeake is a
leader in shale extraction technologies and an owner of substantial oil and gas shale reserves, principally in
the southwestern United States.
The deal grants CNOOC the option of buying up to a third of any other fields Chesapeake acquires in
the general proximity of the fields the firm currently owns. The terms of the deal call for CNOOC to pay
Having been forced in 2005 to withdraw what appeared to be a winning bid for U.S. oil company
Unocal, CNOOC stayed out of the U.S. energy market until 2010. The firm’s new strategy includes
becoming a significant partner in joint ventures to develop largely untapped reserves. The investment had
significant appeal to U.S. interests because it represented an opportunity to develop nontraditional sources
of energy while creating thousands of domestic jobs and millions of dollars in tax revenue. This investment
was particularly well timed, as it coincided with a nearly double-digit U.S. jobless rate; yawning federal,
state, and local budget deficits; and an ongoing national desire for energy independence. The deal makes
sense for debt-laden Chesapeake, since it lacked the financial resources to develop its shale reserves.
In contrast to the Chesapeake transaction, CNNOC tried to take control of Unocal, triggering what may
be the most politicized takeover battle in U.S. history. Chevron, a large U.S. oil and gas firm, had made an
CNOOC’s all-cash offer sparked instant opposition from members of Congress, who demanded a
lengthy review and introduced legislation to place even more hurdles in CNOOC’s way. Hoping to allay
fears, CNOOC offered to sell Unocal’s U.S. assets and promised to retain all of Unocal’s workers,
something Chevron was not prone to do. U.S. lawmakers expressed concern that Unocal’s oil drilling
Perhaps somewhat naively, the Chinese government viewed the low-cost loans as a way to “recycle” a
portion of the huge accumulation of dollars it was experiencing. While the Chinese remained largely silent
mid-2010, Indian conglomerate Reliance Industries acquired a 45 percent stake in Pioneer Natural
Resources Company’s Texas natural gas assets and has negotiated deals totaling $2 billion for minority
Discussion Questions
1. Do you believe that countries should permit foreign ownership of vital scarce natural resources?
Explain your answer.
Answer: Such investment should be welcomed to the extent it helps U.S. firms develop assets that
2. What real options (see Chapter 8) might be implicit in CNNOC’s investment in Chesapeake? Be
specific.
Answer: CNOOC has a call option to accelerate or delay investment in the Texas field up to $1.08
3. To what extent does the Chesapeake transaction represent the benefits of free global trade and
capital movements? In what way might it reflect the limitations of free trade?
Answer: The focus on free trade and unrestricted capital movements is on minimizing barriers to
products, services, technologies, and capital flowing to regions in which there is the greatest
demand. For years, the Chinese have been running a trade surplus with the United States and in
4. Compare and contrast the Chesapeake and Unocal transactions. Be specific.
Answer: In the Unocal transaction, a largely state-owned corporation was attempting to take
control of a major U.S. firm. In contrast, CNOOC in the Chesapeake deal is simply a minority
5. Describe some of the ways in which CNOOC could protect its rights as a minority investor in the
joint venture project with Chesapeake? Be specific.
Answer: As a minority partner, CNOOC could be expected to negotiate the usual and customary
protections. These could include specific rights to selected technologies including the ability to
InBev Buys An American Icon for $52 Billion
For many Americans, Budweiser is synonymous with American beer, and American beer is synonymous
with Anheuser-Busch. Ownership of the American icon changed hands on July 14, 2008, when beer giant
Anheuser Busch agreed to be acquired by Belgian brewer InBev for $52 billion in an all-cash deal. The
combined firms would have annual revenue of about $36 billion and control about 25 percent of the global
beer market and 40 percent of the U.S. market. The purchase is the largest in a wave of consolidation in the
global beer industry, reflecting an attempt to offset rising commodity costs by achieving greater scale and
purchasing power. While expecting to generate annual cost savings of about $1.5 billion, InBev stated
publicly that the transaction is more about the two firms being complementary rather than overlapping.
While it publicly professed to want a friendly transaction, InBev wasted no time in turning up the heat.
The firm launched a campaign to remove Anheuser’s board and replace it with its own slate of candidates,
including a Busch family member. However, AB was under substantial pressure from major investors to
agree to the deal, since the firm’s stock had been lackluster during the preceding several years. In an effort
to gain additional shareholder support, InBev raised its initial $65 bid to $70. To eliminate concerns over its
ability to finance the deal, InBev agreed to fully document its credit sources rather than rely on the more
traditional but less certain credit commitment letters.
Discussion Questions:
13 Schultes, 2010
1. Why would rising commodity prices spark industry consolidation?
Answer: Higher prices for basic ingredients tended to erode brewer profit margins. By merging,
2. Why would the annual cost savings not be realized until the end of the third year?
Answer: Cost savings would be more rapidly realized if InBev had plants and warehouses
geographically close to AB’s operations which could be consolidated. However, there are few
3. What is a friendly takeover? Speculate as to why it may have turned hostile?
Answer: A takeover is said to be friendly if the suitor’s bid is supported by the target’s board
and management. Friendly takeovers often are viewed by acquirers as desirable to minimize the
Arcelor Outbids ThyssenKrupp for Canada’s Dofasco Steelmaking Operations
Arcelor Steel of Luxembourg, the world’s second largest steel maker, was eager to make an acquisition.
Having been outbid by Mittal, the world’s leading steel firm, in its efforts to buy Turkey’s state-owned
Erdemir and Ukraine’s Kryvorizhstal, Guy Dolle, Arcelor’s CEO, seemed determined not to let that happen
again. Arcelor and Dofasco had been in talks for more than four months before Arcelor decided to initiate a
tender offer on November 23, 2005, valued at $3.8 billion in cash. Dofasco, Canada’s largest steel
Serving the role of “white knight,” Germany’s ThyssenKrupp, the sixth largest steel firm in the world,
offered to acquire Dofasco one week later for $4.1 billion in cash. Dofasco’s board accepted the bid, which
included a $187 million breakup fee should another firm acquire Dofasco. Investors soundly criticized
Dofasco’s board for not opening up the bidding to an auction. In its defense, the board expressed concern
In a bold attempt to put Dofasco out of reach of the already highly leveraged ThyssenKrupp, Arcelor
raised its bid to $4.8 billion on January 16, 2006. This bid represented an approximate 80 percent premium
over Dofasco’s closing share price on the day Arcelor announced its original tender offer. The Arcelor bid
Discussion Questions and Answers:
1. What were the motives for Arcelor’s and ThyssenKrupp’s interest in Dofasco?
Answer: Arcelor, whose dominance was centered in Europe, was eager to diversify into
North America. It sought to do so via the non-union steelmaking operations of Dofasco’s steel
2. What do you think was the logic underlying Arcelor and ThyssenKrupp’s bidding strategies?
Be specific.
Answer: ThyssenKrupp may have been motivated more by its desire to boost the cost to
Arcelor than actually completing the transaction given its already highly leveraged state.
3. Why do you believe that Dofasco’s share price rose above ThyssenKrupp’s offer price per
share immediately following the announcement of the bid?
4. Why do you believe that Dofasco’s board was concerned about a lengthy auction process?
discussion of the Mittal–Arcelor transaction.
Answer: The potential lengthening of the time to closing could be very harmful to Dofasco.
Key employees may be wooed away to competitors. Customers may see a deterioration in
Ford Sells Volvo to Geely in China’s Biggest Overseas Auto Deal
Despite a domestic car market in which car sales exceeded the U.S. market for the first time in 2009,
Chinese auto manufacturers moved aggressively to expand their international sales. In an effort to do so,
Zhejiang Geely Holding Company, China’s second largest non-government-owned car manufacturer,
acquired Ford’s money-losing Volvo operation in mid-2010 for $1.8 billion. The purchase price consisted
of a $200 million note and $1.6 billion in cash.
Discussion Questions
1. With the world’s largest and fastest-growing domestic car market, why do you believe Chinese
carmakers are interested in expanding internationally?
2. What factors are likely to motivate Geely and other Chinese carmakers to ensure strict
enforcement of intellectual property laws?
Cadbury Buys Adams in a Sweet Deal
Cadbury Schweppes PLC is a confectionary and beverage company headquartered in London, England.
Cadbury Schweppes (Cadbury) acquired Adams Inc., a chewing gum manufacturer, from Pfizer
Corporation in 2003 for $4.2 billion. The acquisition enables Cadbury to gain access to new markets,
especially in Latin America. The purchase also catapulted Cadbury to the top spot in the global
confectionary market. Adams‘s major brands are in the fastest growing segments of the global market and
complement Cadbury’s existing chocolate business.
Cadbury bought 100 percent of the business of the Adams Division of Pfizer. The decision whether to
transfer assets or stock depended on which gave Cadbury and Pfizer optimum tax advantages. Furthermore,
many employees had positions with both the parent and the operating unit. In addition, the parent supplied
numerous support services for its subsidiary. While normal in the purchase of a unit of a larger company,
this purchase was complicated by Adams operating in 40 countries representing 40 legal jurisdictions.
A team of 5 Cadbury in-house lawyers and 40 outside attorneys conducted the legal review. Cadbury
staff members carried out separate environmental due diligence exercises, because Adams had long-
standing assets in the form of plant and machinery in each of 22 factories in 18 countries. Cadbury filed
with antitrust regulators in a number of European and non-European countries, including Germany, the
Czech Republic, Turkey, Greece, Italy, Portugal, Spain, the United Kingdom, South Africa, and Brazil. The
requirements varied in each jurisdiction. It was necessary to obtain regulatory clearance before closing in
countries where prenotification was required. The master agreement was conditional on antitrust regulatory
approval in the United States, Canada, and Mexico, Adams’s largest geographic markets.
Discussion Questions
1 Discuss how cross-border transactions complicate the negotiation of the agreement of purchase
and sale as well as due diligence. Be specific.
Answer: Cross-border transactions are necessarily more complex than home country transactions,
because they involve facilities located in different countries, differing legal systems, and cultures.
2 How does the complexity described in your answer to the first question add to the potential risk of
the transaction? Be specific.
Answer: The increased complexity of performing due diligence means that there is a significant
3 What conditions would you, as a buyer, suggest be included in the agreement of purchase and sale
that might minimize the potential risk mentioned in your answer to the second question? Be
specific.
Vodafone AirTouch Acquires Mannesmann in a Record-Setting Deal
On February 4, 2000, Vodafone AirTouch PLC, the world’s largest wireless communications company,
agreed to buy Mannesmann AG in a $180.0 billion stock swap. At that time, the deal was the largest
transaction in M&A history. The value of this transaction exceeded the value of the AOL Time Warner
merger at closing by an astonishing $74 billion. Including $17.8 billion in assumed debt, the total value of
Vodafone AirTouch Corporate Profile
Vodafone AirTouch, itself the product of a $60 billion acquisition of U.S.-based AirTouch
Communications in early 1999, is focused on becoming the global leader in wireless communication.
Although it believes the growth opportunities are much greater in wireless than in wired communication
systems, Vodafone AirTouch has pursued a strategy in which customers in certain market segments are
Mannesmann’s Corporate Profile
Mannesmann is an international corporation headquartered in Germany and focused on the
telecommunications, engineering, and automotive markets. Mannesmann transformed itself during the
Strategic Rationale for the Merger
With Mannesmann, Vodafone AirTouch intended to consolidate its position in Europe and undertake a
global brand strategy. In Europe, Vodafone and Mannesmann would have controlling stakes in 10
Mannesmann’s “Just-Say-No” Strategy
What supposedly started on friendly terms soon turned into a bitter battle, involving a personal duel
between Chris Gent, Vodafone’s CEO, and Klaus Esser, Mannesmann’s CEO. In November 1999,
Vodafone AirTouch announced for the first time its intention to make a takeover bid for Mannesmann.
Culture Clash
Hostile takeovers of German firms by foreign firms are rare. It is even rarer when it turns out to be one of
the nation’s largest corporations. Vodafone AirTouch’s initial offer immediately was decried as a job killer.
The German tabloids painted a picture of a pending bloodbath for Mannesmann and its 130,000 employees
if the merger took place. Vodafone AirTouch had said that it was interested in only Mannesmann’s
German law at the time also stood as a barrier to an unfriendly takeover. German corporate law required
that 75 percent of outstanding shares be tendered before control is transferred. In addition, the law allows
individual shareholders to block deals with court challenges that can drag on for years. In a country where
hostile takeovers are rare, public opinion was squarely behind management.
The Offer Mannesmann Couldn’t Refuse
When it became clear that Vodafone’s attempt at a hostile takeover might succeed, the Mannesmann
management changed its strategy and agreed to negotiate the terms for a friendly takeover. The final
agreement was based on an improved offer for Mannesmann shareholders to exchange their shares in the
Epilogue
Throughout the hostile takeover battle, Vodafone AirTouch said that it was reluctant to offer Mannesmann
shareholders more than 50 percent of the new company; in sharp contrast, Mannesmann said all along that
it would not accept a takeover that gives its shareholders a minority interest in the new company. Esser
managed to get Mannesmann shareholders almost 50 percent ownership in the new firm, despite
Mannesmann contributing only about 35 percent of the operating earnings of the new company.
Case Study Discussion Questions:
1. Who do you think negotiated the best deal for their shareholders, Chris Gent or Klaus Esser? Explain
your answer in terms of short and long-term impacts.
Answer: The short-term effects are relatively clear. In the short-term, Esser was able to negotiate a
huge 56% premium for the Mannesmann shareholders, through his “just say no” policy to Gent and his
public insistence that Mannesmann was worth $200 billion. Moreover, Esser was able to transfer $17.8
billion in Mannesmann debt to Vodafone and obtain Vodafone stock valued at more than $180 billion.
This represented an enterprise value or total purchase price of $198 billion, the largest transaction on
2. Both firms were pursuing a similar strategy of expanding their geographic reach. Does this strategy
make sense? Why/why not? What are the risks associated with this strategy?
Answer:
a. Does the strategy pursued by Vodafone and Mannesmann make sense? The strategy of
expanding their geographic reach does seem to make sense since the cellular phone
industry worldwide is in its growth stage. By expanding their reach these companies have
b. What are the risks associated with this strategy? The risks of this strategy include the
large capital requirements for entering new markets in which a cellular infrastructure
does not exist, the potential for price wars from existing competitors, and a growing
3. Do you think the use of all stock, rather than cash or a combination of cash and stock, to acquire
Mannesmann helped or hurt Vodafone AirTouch’s shareholders? Explain your answer.
Answer: Vodafone was forced to utilize stock due to the limited likelihood of being able to finance a
significant portion of the purchase price with debt. Whether the huge increase in new shares issued
4. Do you think that Vodafone AirTouch conceded too much to the labor unions and Mannesmann’s
management to get the deal done? Explain your answer.
Answer: Concessions made to the labor unions and to management were necessary to get the deal
done, without substantial labor disputes with the powerful German unions. However, the no cutting
5. What problems do you think Vodafone AirTouch might experience if they attempt to introduce what
they view as “best operating practices” to the Mannesmann culture? How might these challenges be
overcome? Be specific.
Answer: The substantially different cultures of the two firms make the introduction of so-called “best
practices” of throughout both firms very difficult in the near-term. However, such hurdles may be
Political Risk in Cross-Border Transactions—CNOOC’s Aborted
Attempt to Acquire Unocal
In what may be the most politicized takeover battle in U.S. history, Unocal announced on August 11, 2005,
that its shareholders approved overwhelmingly the proposed buyout by Chevron. The combined companies
would produce the equivalent of 2.8 million barrels of oil per day and the acquisition would increase
Chevron’s reserves by about 15 percent. With both companies owning assets in similar regions, it was
easier to cut duplicate costs. The deal also made Chevron the top international oil company in the fast
growing Southeast Asia market. Unocal is much smaller than Chevron. As a pure exploration and
production company, Unocal had operations in nine countries. Chevron operated gas stations, drilling rigs,
and refineries in 180 countries.
CNOOC’s all-cash offer of $67 per share in June sparked instant opposition from members of Congress,
who demanded a lengthy review by President George W. Bush and introduced legislation to place even
more hurdles in CNOOC’s way. Hoping to allay fears, CNOOC offered to sell Unocal’s U.S. assets and
promised to retain all of Unocal’s workers, something Chevron was not prone to do. CNOOC also argued
that its bid was purely commercial and not connected in any way with the Chinese government. U.S.
lawmakers expressed concern that Unocal’s oil drilling might have military applications and CNOOC’s
ownership structure (i.e., 70 percent owned by the Chinese government) would enable the firm to secure
low-cost financing that was unavailable to Chevron. The final blow to CNOOC’s bid was an amendment to
an energy bill passed in July requiring the Departments of Energy, Defense, and Homeland Security to
spend four months studying the proposed takeover before granting federal approval.
Discussion Questions:
1. Should CNNOC have been permitted to buy Unocal? Why? Why not?
Answer: CNNOC’s aborted attempt to buy Unocal highlights the precarious nature of global trade
with nations sometimes viewed as hostile to a country’s self-interests. The case against the
merger seemed more politically expedient than real, designed to satisfy domestic political agendas.
2. How might the Chinese have been able to persuade U.S. regulatory authorities to approve
the transaction?
Answer: It is unclear if the Chinese could have done anything to change the outcome in the
3. The U.S. and European firms are making substantial investments (including M&As) in China.
How should the Chinese government react to this rebuff?
Answer: The Chinese can now more readily justify their efforts to restrict foreign investment to