Bush Administration Says Review of Chinese Unocal Bid Premature
19 July 2005
Unocal shareholders to vote on offer from Chinese oil producer August 10
By Todd Bullock and Katie Xiao
Washington File Staff Writers
Washington -- The United States has a process to investigate international efforts to purchase U.S. companies and can block those that threaten national security, but it is premature to hold a formal review of a Chinese company's bid for the California-based oil company Unocal, according to Bush administration officials.
"There is a process that our government uses to analyze such purchases or intent to purchase. And it's best that I allow that process to move forward without comment," President Bush said July 7 at a White House press conference.
China's third-largest oil producer, the China National Offshore Oil Company (CNOOC), offered $18.5 billion in June to purchase Unocal. According to media reports, CNOOC's Chief Executive Fu Chengyu has permission from the company's board to raise the bid to $19 billion. Instead, on July 15 he offered to set aside $2.5 billion to cover Unocal against any shareholder lawsuits should a sale to CNOOC fail and depress Unocal's stock price.
CNOOC is one of three state-owned oil companies created by the Chinese government to acquire offshore oil reserves. Established in 1982 as a joint venture partner with non-Chinese companies exploring such resources, CNOOC is 70 percent owned by the Chinese government.
Although CNOOC is only valued at $22 billion, the company was able to make its offer of $18.5 billion for Unocal because of financial support from the Chinese government. China’s Cabinet, the State Council, approved the effort to purchase Unocal, and the governor of China's State Central Bank helped assemble the financial purchase package. CNOOC’s parent company, which is entirely owned by the Chinese government, has provided CNOOC with $7 billion toward the Unocal purchase.
Unocal's shareholders are set to vote August 10 on whether or not to accept CNOOC's bid or a stock-and-cash offer from the California-based oil company Chevron that is worth $1.5 billion less.
BID SUBJECT TO REVIEW AFTER ACCEPTANCE
Approval of any CNOOC deal with China would ultimately be reviewed by the Committee on Foreign Investments in the United States (CFIUS), a multi-agency paneled committee chaired by the secretary of the treasury, to determine whether a U.S. company's acquisition by another country could pose a national security threat.
"CFIUS is there to review foreign investments in the United States. If the conditions triggering that process are met, then certainly we will proceed," Treasury Secretary John Snow said July 9.
CNOOC asked the U.S. government July 1 to begin the necessary review process in order to boost Unocal shareholders' confidence in its bid, but Snow said CFIUS would not begin the review unless CNOOC's bid is accepted by Unocal. A CFIUS review could take up to 90 days once it begins.
CFIUS, established by Executive Order 11858 in 1975, originally limited its activities to monitoring and evaluating the impact of foreign investment in the United States, but its responsibilities have expanded over time.
The Exon-Florio Amendment to the Omnibus Trade and Competitiveness Act of 1988 expanded CFIUS’s mandate to include not only the investigation but also the suspension or prohibition of mergers or acquisitions that "threaten to impair" U.S. national security.
The CFIUS process begins with a 30-day review period. If the committee approves the transaction during that time, it will not perform any further investigation. If CFIUS does not approve the transaction after this initial review period, it will commence a 45-day investigation.
At the conclusion of the investigation, the committee must provide the president with a recommendation, and the president will then have 15 days to approve or prohibit the transaction. Parties to a transaction may withdraw their submission at any time before a final decision.
PAST BID REVIEWS RESULTED IN FEW INVESTIGATIONS
The committee reviewed 320 transactions from 1997 through 2001 and conducted formal investigation of just four, according to a September 2002 report by Congress's Government Accounting Office. Three of the deals that proceeded to the investigative phase eventually were canceled.
In 2003, Global Crossing Ltd. was forced to abandon a planned sale of its telecommunications network to Hutchison-Whampoa Ltd., a Hong Kong-based group. The Defense Department and others on the committee refused to approve the transaction on national security grounds.
However, there is also precedent for CFIUS approval of Chinese acquisition of a U.S. defense company. CFIUS approved a Chinese consortium's takeover of Magnequench Inc., a company that supplies guidance magnets used in precision-guided bombs in 1995.
In 2003, the Chinese owners shut down Magnequench's Indiana production plant and moved equipment to China. Several critics of the proposed CNOOC-Unocal deal have cited these actions as a warning against permitting the transaction.
See also “Congress Cites Security Concerns over Chinese Bid for Unocal” and "China Must Address Economic, Security Concerns, Commission Says."
(The Washington File is a product of the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)
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