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American Beverage Giant's
Merger Fails
Special> American Beverage Giant's
Merger Fails
UPDATED: March 30, 2009 NO. 13 APR. 2, 2009
A Deal Denied
The largest case of a foreign company trying to acquire a Chinese one is the first to be rejected under the country's Anti-Monopoly Law
By LAN XINZHEN
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But two weeks after the acquisition agreement was signed, the international financial crisis broke out, and the value of corporate assets worldwide underwent revaluation. Huiyuan's business started to fall off, with its profit plummeting at least 19 percent and its share price dropping sharply. In light of the financial crisis, some members of Coca-Cola's board of directors started voicing their opposition to the deal, especially because the company offered a price that was much higher than Huiyuan's actual value.

Meanwhile, Zhu Xinli still was eager to sell Huiyuan to Coca-Cola.

"The world is now facing financial crisis, and Coca-Cola, of course, is under pressure," he said at the company's annual conference of managers this February. "It is said that there are voices of objection on its board of directors. I have an opportunity to meet its global CEO in a few days, and I will give him encouragement." Although he did not elaborate on how he intended to sway those who opposed the deal, his desire to facilitate this deal was clear.

Pan said the deal's rejection would save Coca-Cola a lot of money, although it was not a good deal for Huiyuan, especially considering the premium that the American company offered for Huiyuan.

Both Huiyuan and Coca-Cola said they respected the ministry's decision. On the day the decision was made, Huiyuan stopped all projects at its raw material bases, which it had started in the second half of last year. Now it is shifting all employees who worked on these projects into marketing positions. The company also has asked its employees to ensure the normal operation of the listed company so that it can continue to be profitable.

The Pros And Cons

The Pros:

Shi Jianzhong, professor of economic law at the China University of Political Science and Law: As the first disapproval case after the Anti-Monopoly Law came into effect, the MOFCOM's decision was quite representative and had two important meanings. First, the review of the acquisition did not just focus on individual benefits, but stressed the overall benefits of the whole society. Second, Huiyuan is a company registered in the Cayman Islands, so this would have been an acquisition occurring between two foreign companies in China.

Because Huiyuan is engaged in fruit and vegetable juice production in China, the acquisition would inevitably influence competition in related markets in China. Hence, it was a simple legal issue. From the angle of the Anti-Monopoly Law, the government must strictly carry out the anti-monopoly examination standards for each acquisition so as to realize the goal of the anti-monopoly review to the maximum-maintaining a competitive market structure.

Mei Xinyu, associate researcher at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce: The MOFCOM rejected this acquisition case after comprehensive consideration of the clauses in the Anti-Monopoly Law, because the two parties have too high market shares in the carbonated drinks and juice markets. The veto proves that China is stepping out of the "area of error," that is, the supernational treatment of foreign companies, and is trying to set up a market environment that is just and fair. I think the biggest problem in China's policy on foreign investment is not protectionism, but the supernational treatment of foreign companies. Such supernational treatment has warped the behavior of many companies, encouraging them to wrack their brains to obtain the status of "foreign companies" so they can enjoy preferential policies, instead of enhancing their efficiency through technological innovation and management improvements. One of the examples is that domestically held Huiyuan is registered in the Cayman Islands and gained a legal status of "foreign company."

The cons:

Wu Xiaobo, a financial writer: All the reasons given by the MOFCOM don't stand. The first one was that if the acquisition had been successful, Coca-Cola could have transmitted its controlling status in the carbonated drinks market into the juice industry. I think first there must be evidence to prove that the controlling status of Coca-Cola on the carbonated drinks market would influence consumers' interests and the access to the market by other companies. Otherwise, such controlling status would not have constituted a monopoly. Second, how could one prove that the controlling status of Coca-Cola on the carbonated drinks market would be transmitted to the juice industry? In the past 30 years, Coca-Cola had been engaged in pure water and formulated juice, but neither have been successful. So how could its controlling status be transmitted to the juice industry?

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