Comments on the Coke-Huiyuan Deal

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This is definitely the story of the day. The MOC rejected Coke’s bid to take over domestic juice company Hui Yuan. The deal was nixed because of competition concerns, with the MOC subjecting the deal to scrutiny under the still fairly new review process formulated under the Anti-monopoly Law.

Everyone is writing about this today. Best commentary I’ve seen so far is from David Wolf. I liked his post from the beginning, particularly this self-conscious passage that (unlike some others out there) tries to avoid a know-it-all attitude:

We are going to hear a lot of hindsight-laden “I knew it was going to be rejected” statements in the coming days. So let me start by stating for the record that this will at first sound like one of those posts, but the that what I really want to do is explore (with the full benefit of hindsight) why this deal may have been killed, in the fervent hope we can learn something at Coke’s expense.

Thanks David.

As everyone else has run through the reasons why this deal was problematic from the outset, I don’t think I will go over all that again. Read David’s post, see what CLB has on tap on this — in other words, check out the usual suspects.

For me, I think I need to respond to the “doomed to fail” theme that is being bandied about, which David acknowledges in the passage above. I agree with the issues David (and others) have enumerated with respect to the built-in hurdles that faced this deal from the beginning. No doubt that neither the law, the current political climate, nor the specific facts of this deal made things easy for Coke.

However, I think that pronouncing these deals DOA is problematic for one reason: politics trumps law. This is not a China issue. Remember what happened in the U.S. with UNOCAL, 3COM and Dubai Ports — those deals fell through because of politics, not because of legal review, security concerns, etc. I’m no anti-trust lawyer, but from what I’ve read so far on the Coke-Huiyuan proposed takeover, the business concentration of the post-merger entity in China was not necessarily problematic. I won’t say that the MOC decision was not defensible from a legal standpoint, but the consensus suggests that at the very least, it was not an open-and-shut case and that politics was involved.

OK, if politics is involved, then so are politicians. And politicians can usually be swayed, depending on the motivation, the mood of the public, etc. Recall that Coke announced a couple of billion in FDI spending in China last week, one assumes designed to influence the decisionmaking of the government on this deal.

Taking this further, if one wants to work within the political sphere, what’s important? I would humbly suggest that at some level, this is a simple exercise. You identify the decisionmakers, find ways to gain access, and you make your case. If you can outflank these folks and influence them via third parties (including the public at large), even better.

I had a major client about five years ago that was in a highly-regulated industry. The China GM of this MNC spent several years lobbying the government, identifying approval authorities in two different agencies, and biding his time until these people were willing to give his foreign-invested enterprise a green light. This ultimately proved successful, and the JV was approved, the first such JV in that industry.

Despite hurdles, therefore, you talk to the folks in charge and then evaluate your chances. When the Huiyuan deal was announced last year, I sort of assumed that Coke had this all lined up (government, PR, financing, etc.). If it wasn’t lined up, they would not have pushed forward publicly. Wrong assumption, of course, but as a lawyer, I’m conservative at heart and would have advised a careful approach. Recall that the U.S. deals I listed above that blew up ran into political brick walls and were not officially rejected by the government.

The fact that this whole thing was out there in the public and that Coke let it go through the AML approval process is kind of interesting, again looking at this with hindsight. Did Coke believe that they already had their political ducks in a row and saw the MOC review as a done deal? (Hard to believe this.) Alternatively, did Coke have such confidence in the AML process that they approached it as a straightforward legal procedure insulated from political considerations? (That is simply not possible.)

Perhaps the behind-the-scenes stuff will come out at some point. It’s really hard to see why this unfolded the way it did. Maybe I’m giving Coke too much credit? Certainly the folks involved with the 3COM, UNOCAL and Dubai Ports deals had plenty of resources at their disposal and still managed to screw up in the political arena. You never know, I guess.

What will be the fallout of this? It certainly ensures that the “protectionism on the rise” story will be furthered. Whatever the reasons behind the decision, it smacks of protectionism. I will be interested to see if this failed deal is cited in the near term by the U.S. government the next time a Chinese company moves forward with a takeover or merger involving a U.S. company or major U.S. assets.

2 responses on “Comments on the Coke-Huiyuan Deal

  1. Coke Addict

    Well, Coke is one of those companies that is “too big to fail”. I’ll bet sooner or later they will get what they want. Don’t forget that there are most definitely many things that happened behind the scenes that we will never know about.

    Coke and its bottlers have one of the best distribution networks setup in China: you can find their canned tooth rot in small villages in China. They most deinfitely understand what it takes to operate in China, and it is perhaps some things in the background that need assuaging in order for this deal to go through.

    What Coke lacks in maybe government and PR acumen in China, they make up for in other ways.

  2. Dan

    Great analysis.

    We (CLB) are having a ton o’ fun with this because we set forth what we thought the rules would be for these sorts of deals and, at least in this one instance, we turned out to be right. But you are absolutely right that this deal was not a sure thing either way and nobody can really claim they knew which way the wind was blowing all along. Nobody could know which way the wind was blowing all along because the wind was shifting all along. In the end, it shifted to no for what I see as two reasons: One, nationalism by the Chinese public. The government does not want to cross that public RIGHT NOW. Two, I do have to wonder whether Coca-Cola decided to just let this one slide.