Don’t Fear a Big Chinese Buyout of American Blue Chips

by Jeff Reeves | June 4, 2013 9:16 am

Stock of the Week[1]Last week, Chinese firm Shuanghui International agreed to acquire domestic pork processor Smithfield Foods (SFD[2]) for $4.7 billion in one of the largest direct buys ever of an American corporation[3] by an Asian entity.

Smithfield investors were pleased, since the $34 a share offer was more than 25% above the previous closing price and shares of SFD stock soared as a result.

But regulators and consumers are now asking themselves the big question of whether this is ultimately a good thing — for Smithfield, for the packaged foods industry and for the American economy in general.

So should we fret over big China buyouts that involve U.S. blue chips?

Probably not.

chinadeals[4]First, some background: Thanks to growth in China that has resulted in some cash-rich companies but a lack of attractive investment alternatives, the Asian economic power has been looking abroad for business deals. Last year, China forged more than $10 billion worth of deals to acquire all or a portion of 46 U.S. companies, according to Dealogic.

So this is hardly a new trend.

Also consider it goes both ways with foreign buyouts. Mega U.S. retailer Walmart (WMT[5]) gobbled up South Africa’s Massmart[6] for $4.2 billion. And before that it took a 35% stake for $1 billion in Trust Mart[7], a retailer in — you guessed it — China. Machinery giant Caterpillar (CAT[8]) paid $700 billion in an ill-advised deal[9] for a China mining-equipment firm in recent years, too, in its hasty pursuit of growth.

We can quibble over the virtues of Walmart and Caterpillar, or Smithfield if it remains a publicly traded U.S. stock going forward, based on their specific operations and sales trends. But as investors, that’s what we should do — regardless of where a company is domiciled.

Consolidation is natural in the business world, with bigger companies buying smaller ones for growth and efficiencies. Presuming nothing runs afoul of regulators or anti-trust watchdogs — standards that apply to domestic buyouts, too — I don’t see why China buyouts are a bad thing.

Of course, the suspicion over big China buyouts is heightened when vital products like food or energy are concerned. Horror stories about dead pigs in Chinese rivers[10] don’t sit well with environmentalists or bacon lovers, and from an energy security perspective it’s uncomfortable to imagine a China enterprise with close government ties controlling our oil reserves.

That second example isn’t just academic either — Canadian oil-sands operator Nexen was purchased by CNOOC (CEO[11]) for $15.1 billion earlier this year[12].

But remember, under the Sarbanes-Oxley rules passed in 2002, stricter disclosure laws apply to foreign companies that trade on U.S. exchanges. So as long as a company is listed on the NYSE or Nasdaq, it is subject to U.S. securities law under the SEC — and considering the opacity of Chinese markets, investors should welcome any Chinese company that is willing to open itself up to stricter U.S. accounting standards.

Whether Shuanghui is a better company after the Smithfield acquisition remains to be seen, and certainly will be a subject of debate on Wall Street. But whether this move is “right” will be determined by future profits, not protectionist policies.

After all, China equities haven’t been all that grand for the last few years . The S&P 500 is up more than 30% since January 2011 while the iShares FTSE/Xinhua China 25 Index ETF (FXI[13]) is down more than 15% thanks to major laggards like China Mobile (CHL[14]) and China Life Insurance (LFC[15]), among others.

Frankly, this kind of underperformance is much more of a concern to me than protectionist policies or fear of an Asian invasion.

Chinese companies, like U.S. stocks, are simply trying to figure out how to squeeze more profits out of a global economy that is still pretty darn dry despite considerable distance from the financial crisis. I am skeptical of these buyouts simply because I wonder if, like some of their American brethren, big-time Chinese companies are simply throwing money around to mask serious underlying troubles.

That might be bad business and bad for investors. But it’s not illegal — and seems like a very American thing to do.

Related Reading

Jeff Reeves[21] is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[22] Write him at[23] or follow him on Twitter via @JeffReevesIP[24]. As of this writing, he did not own a position in any of the stocks named here.

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  2. SFD:
  3. largest direct buys ever of an American corporation:
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  5. WMT:
  6. South Africa’s Massmart:
  7. Trust Mart:
  8. CAT:
  9. ill-advised deal:
  10. dead pigs in Chinese rivers:
  11. CEO:
  12. for $15.1 billion earlier this year:
  13. FXI:
  14. CHL:
  15. LFC:
  16. Skyscraper hubris:
  17. here’s the skinny on the communist takeover of America from the Chinese:
  18. “Chinese Reverse-Merger Firms Outperform U.S. Peers.”:
  19. $257 million:
  20. China deal gone wrong:
  21. Jeff Reeves:
  22. “The Frugal Investor’s Guide to Finding Great Stocks.”:
  24. @JeffReevesIP:

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