Smithfield shareholder vote tomorrow

Updated: 2013-09-23 11:34

By Michael Barris in New York (China Daily)

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The United States and China must continue to build mutual trust and respect to keep deals like Shuanghui International's proposed purchase of US pork giant Smithfield Foods Inc flowing, analysts said.

The historic, $4.7 billion acquisition appears certain to win the backing of Smithfield shareholders Tuesday after Starboard Value LP, a dissident 5.7 percent stakeholder, reversed itself and said it would vote for the deal, saying it couldn't find a superior offer.

Erik Gordon, a law professor at the University of Michigan Law School and Ross School of Business, told China Daily in an interview Sunday that "Smithfield shows that deals can be done, but there won't be a flood of deals because there still are many problems and suspicions between the two countries".

The Smithfield deal - the biggest Chinese takeover of a US company - could pave the way for future transactions, "if Smithfield words out well for the Americans over the next five years", Gordon said. "But if Americans are fired, if Smithfield refuses to disclose information that is customarily disclosed in the US, or if anything else that is unusual happens, it will increase the fears and suspicions.If China wants to acquire more US companies, it will have to handle Smithfield carefully," he said.

The Committee on Foreign Investment in the United States, a collection of federal agencies that reviews foreign purchases for their national-security implications, approved the deal two weeks ago, clearing the way for the shareholder vote that could bring the four-month takeover saga to a close.

CFIUS was expected to approve the acquisition, announced in May, because it was not seen as compromising US food safety standards, despite some US politicians' statements to the contrary.

Some analysts see the deal as paving the way for more transactions tied to an ambitious effort by Beijing to obtain raw materials and technology needed to run its economy, which continues to grow robustly despite a recent slowdown tied to China's transition to a consumption-driven economy from investment- and export-driven. China's growth over the past three decades, seen as putting it on course to overtake the US as the world's largest economy by 2020, has been accompanied by problems in food security and safety, environmental pollution and health care.

Gordon said that while acquisitions are a short-term way for China to solve its problems, "China wants to solve its problems its way, with its resources. Acquisitions are temporary", he said.

"The reality," Gordon said, is "very few US companies want to be acquired by a Chinese company in return for more access to Chinese markets.You get more access but you lose control of your company.The Chinese appetite for non-Chinese companies will be larger than the willingness of non-Chinese companies to be eaten."

Orville Schell, the Asia Society's director of the Center on US-China Relations in New York, called the acquisition "precisely the kind of win-win merger and acquisition that both sides should welcome".

Addressing the trust issue Gordon referred to, Schell said, "The US has always benefited by being one of the most open economies in the world, and its future economic health depends on its ability to remain so."

Michael Swanson, agricultural economist for Wells Fargo Bank in Minnesota, said he expects "the success of the Smithfield acquisition will help pave the way for additional deals," through the economic benefits and technical expertise it brings China's way.

"Companies that transform commodities will be attractive," Swanson said in an interview. "Relative to China, the US on a per capita basis has a four times higher supply of grains-oilseeds.It makes economic sense to transform the grain into protein in the US.That saves shipping by a factor of three on average or higher."

The Smithfield deal also will serve as "a model for additional deals" in providing a way for Chinese protein companies to learn how to manage food-related diseases, Swanson said. "Given the longer historical emphasis on food safety, US protein companies will have an advantage in controlling food borne pathogens until Chinese processors adopt the capital and practices required to compete," the analyst said.

Vikram Nehru, chair of the southeast Asian studies department at the Carnegie Endowment for International Peace in Washington, said the cross-border acquisition outlook in China is constrained by some countries' reluctance to permit acquisitions by Chinese state enterprises and by Chinese government limitations on direct foreign investment in other countries. Those problems exist despite the "considerable pressure" building in China for domestic savings to "flow abroad and seek higher returns through outward foreign direct investment", Nehru said.

The Smithfield deal's approval might ease the limitations on foreign direct investment, the analyst said. "Further reforms of China's financial sector, and gradual opening of its external capital account," will help improve other nations' receptivity to Chinese acquisitions, he said.

Smithfield shareholder vote tomorrow

(China Daily USA 09/23/2013 page1)