The rise of economic nationalism 0 comments

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I first read of this term several weeks back in our national papers and it aptly sums up the increasing politicisation of cross-border M&A (merger & acquisition) activity nowadays.

Those who follow the news would be aware of the national passions that have become entangled with what were hitherto business transations between two parties, simply because one of them was foreign. China has been seen as engaging in expanding overseas assets through proxy companies, in particular securing strategic long-term energy and mineral resource supplies, and has therefore often experienced political opposition to their attempted overseas M&A deals. The prime example would be CNOOC's failed bid for Unocal last year, which drew heavy grassroots and political criticism in America (they probably didn't do their lobbying well). Other recent cases involving other parties would be Mittal Steel's bid for France's Arcelor, the No. 2 steel player, which drew similar widespread opposition within France, Dubai Ports' bid for several American ports which sparked security concerns, and of course Temasek Holdings active acquisition strategy which have single-handedly triggered worries about state-financed, state-influenced investment funds.

Of course, such nationalistic worries about foreigners taking over the country's crown jewels are not new. They are usually associated with the rise of new world powers and the strategic concerns associated with their rise. In the mid-late 1980s it was Japan, now in the new millenium it is China. Hence much attention is given to bids for what are viewed as strategic national assets --- energy, telecommunications, banks are seen as three key ones. One may remember Singtel's bids for Cable & Wireless (Hong Kong, top telco provider) and Time Engineering (Malaysia, fibre optics) failed partly because of the importance of the telco assets in question; similarly, problems are currently being faced in DBS's bid for a stake in Korea Exchange Bank and Temasek's bid for a stake in Bank of China. Investment companies with a state-funded kitty can never shake off the tag, whether justified or not, of having a state-driven agenda in their acquisitions, and in politically volatile countries, popular opposition disporportionate to the perceived "foreign threat" can arise: cue Temasek's acquisition of Shincorp which has dragged it into a political mess in Thailand.

The other main driving force of economic nationalism is the fear of the side-effects of globalisation, which is an inevitable phenomenon in this age of outsourcing and IT. This fear is especially palpable in the Western nations whose jobs are at stake post-takeover. Hence the strong opposition to Arcelor being acquired by Mittal --- the former is a big employer of thousands in France, and mergers almost always lead to consolidation and trimming of fat. European and US cultures also incorporate unionism which can be a powerful force in galvanising mass local opinion against the "foreign invaders". Occasionally the sugar-coated reason is "for security reasons", such as Dubai Ports' failed bid for the US ports recently.

And of course, in the most interesting manifestation of economic nationalism, the state nationalises the economic assets and reaps the benefits itself. That is the route that Russia has taken, with the sidelining (or even conviction) of the big oil oligarchs and nationalising of the country's oil and gas reserves.

What implications does this have for the investor? Well firstly, he should perhaps be aware of what are the key strategic industries to a country that are not likely to be ever divested: defence, energy, telecommunications, banking (the top few) etc. A second take-home point would be that such politically-driven opposition to business deals gives potential acquirors a bad impression of the investment climate which would cause them to divert their funds elsewhere in the future --- this is what analysts are predicting the Middle East will do with their oil money after observing how unwelcome they are in the US --- and surely countries like Malaysia and Turkey would benefit. Thirdly, it teaches us that besides the hard-nosed quantitative valuations of an acquisition, there is also the political --- and social --- aspects to consider, which might ultimately scupper the whole deal.

References:
(1) Wikipedia article: Economic nationalism