By Ben White
Washington Post Staff Writer
Wednesday, August 3, 2005
NEW YORK, Aug. 2 -- Chinese oil company Cnooc Ltd. on Tuesday withdrew its $18.5 billion takeover bid for California energy firm Unocal Corp., saying it could not overcome resistance from politicians in Washington who said such a deal could threaten U.S. national security and violate the rules of fair trade.
In dropping its effort, Cnooc, of which the Chinese government owns 70 percent, said the opposition in Washington was "regrettable and unjustified" and that it would have increased its offer had the resistance not been so strong.
Cnooc's decision ended a politically explosive takeover fight but could have larger implications for already tense economic relations between the dominant economy in the West and the rising commercial power in the East.
Experts said Cnooc's withdrawal could lessen Chinese interest in future deals with U.S. companies and stiffen its resistance to other priorities of the Bush administration and Congress, such as allowing further appreciation in the value of the yuan, China's currency. It could also increase China's interest in making energy deals with nations that Washington considers dangerous rogue states, such as Iran and Sudan.
"I think reciprocal reaction will come," said Oded Shenkar, a professor at Ohio State University and an expert on China-U.S. trade relations. "It may be that the next time there is an opportunity for a joint venture in China, you will see U.S. investors shut out and the deal going to the French or to Royal Dutch/Shell instead of Exxon Mobil.
"The reaction may not come tomorrow because the Chinese approach is not to do tit for tat. But it will come, and it could come in the energy sector or it could come in another area."
Others said the impact would be muted because China generally encourages investments by Western companies. "They want that investment. Our companies help them build their industrial, scientific and technological base," said Patrick A. Mulloy, a member of the U.S-China Economic and Security Review Commission, which was established by Congress to study trade relations between the two countries.
Cnooc's decision to abandon the largest attempt by a Chinese company to buy a U.S. firm clears the way for Chevron Corp. to acquire Unocal, which has extensive oil and gas reserves in Asia. Unocal's board has endorsed Chevron's $17 billion cash-and-stock offer and shareholders are to vote on the deal Aug. 10.
Cnooc made its unsolicited bid on June 23, two months after Unocal agreed to be acquired by Chevron. The reaction in Washington was swift.
Members of Congress, many of them heavily lobbied by Chevron, lined up to attack Cnooc's bid. They said that the company benefited from sweetheart financing from the Communist government in Beijing and that the purchase would be a dangerous energy grab by China.
Sources close to Cnooc said company executives expected opposition and a thorough review by the Committee on Foreign Investment in the United States, the multi-agency panel chaired by the Treasury secretary.
But the sources said Cnooc Chairman Fu Chengyu and other executives and directors were shocked by the intensity of the negative reaction from Congress and by signals that the administration did not want to decide whether to accept or reject Cnooc's bid. The president has final authority to accept or reject such deals.
"This political environment has made it very difficult for us to accurately assess our chance of success, creating a level of uncertainty that presents an unacceptable risk to our ability to secure this transaction," Cnooc said in a written statement.
At first, Cnooc hoped that opposition would ease as the company's lawyers and lobbyists in Washington made the case that the offer was strictly a commercial transaction.
The company argued that Unocal accounts for only a tiny fraction of U.S. oil production and that it would sell any U.S. assets deemed critical to national security.
People close to the company said Cnooc was also prepared to eliminate its reliance on financing by state-controlled Chinese banks.
But Cnooc's lobbying failed, and opposition in Washington grew stronger, culminating last week in an amendment to the energy bill to require an extensive review by the secretaries of defense, energy and homeland security before Cnooc could buy Unocal.
Cnooc came closest to winning support from Unocal's board on July 15. On that day, Unocal chief executive Charles R. Williamson told Fu that if Cnooc raised its $67-a-share bid, it could probably knock out Chevron. But Fu said he would raise the bid only if Unocal agreed to pay a $500 million breakup fee to Chevron. Cnooc had previously offered to pay the fee.
Sources close to the bid said Fu feared that Cnooc would pay the breakup fee, only to see a takeover blocked in Washington. Such an embarrassing outcome could have damaged Fu's standing as a prominent member of the Communist Party.
On July 20, Chevron raised its initial $16.5 billion bid and added a larger cash component. Unocal's board quickly endorsed the new offer and recommended that shareholders approve it. Cnooc spent the next 12 days considering whether to raise its offer and finally decided it would be futile.
Sen. Byron L. Dorgan (D-N.D.), one of several lawmakers who proposed legislation to block a takeover of Unocal by Cnooc, said Congress's actions may have played a part in Cnooc's decision.
"I expect it had some impact because it became a fairly controversial proposed purchase," Dorgan said. The issue will not go away simply because Cnooc's bid has ended, he said.
A full-scale federal review of China's energy needs -- mandated in the energy bill -- will go on, Dorgan said. It will specifically examine the issue of Chinese-controlled companies purchasing U.S. oil firms.
"Something is going to have to happen with respect to the Chinese trade situation," Dorgan said. "I don't know what it is, but we can't continue down this path. It's just unsustainable. Congress ultimately will have to address it because I don't think the administration will address it."
Wall Street observers said Cnooc made critical errors in its bid for Unocal, including not making an offer sooner and not seeking out a U.S. company to join its bid to defuse some of the opposition.
"It serves as a stark reminder that it isn't always just about price," said Stefan M. Selig, vice chairman of Banc of America Securities. "Timing and tactics matter."
Staff writer Jonathan Weisman in Washington contributed to this report.