Study On Overseas Acquisition Risks Faced By Chinese Energy Companies

Since 2001, after the entrance in WTO, China’s economy growth gained another momentum and developed in faster pace. And more energy is eagerly needed by manufacturing due to massive export and consumption of vehicles due to rise of middle class in all-tier cities. Therefore, the import of energy and relevant resources continue to accelerate to meet these demands. Although China is a big and resource-rich county as written in all our text books, the reserve of coal, oil and gas is not adequate to satisfy the development of economy and need of 1.3 billion people who are consuming more to better change their lives. For example, according the statistics, in 2020, China will need 400 million tons of crude oil and the production of it domestically is only 160 million tons. The gap is wide and important if China intends to keep the momentum of growth and attain the goal of all-round wealth for its citizens.The task of pumping the engine of economy with enough energy and resource lays on the shoulders of energy companies especially some state-owned giant companies. On account that China’s energy and resources are gradually dependent on import more and more, and the fluctuation of price would heavily affect the cost of growth and people’s living, the priority of these companies is to mitigate the risk of price rise and find ways to avoid the influence of price fluctuation. So all the relevant acquisitions by China energy companies aim to control the raw material and resources in order to minimize the risk of price rise and fall. On the other hand, some middle-size energy companies without abundant financial capability seek to acquire other assets like storage assets and logistics assets to minimize the risk of international commodity market price.A Company is an energy company in China whose main business lies in importing commodity and crude oil into China to meet the consumption. A company was established in 2000, with headquarter in Guangzhou, and focus its business in commodity, resource trading and investment. Its development can be described as “fast and strong” and the revenue from 30 billion RMB in 2011 to 6o billion RMB in2012, then to 100 billion RMB in 2013. However, its profit is relatively small and the increases rate grows in a slower pace, with 230 million RMB in 2011, 290 million RMB in 2012 and 390 million RMB in 2013 and hugely affected by international commodity market price fluctuation. Therefore in 2013, it made its decision to acquire B Company who is a public listed company in Hong Kong and possesses four storage facilities assets and a shipyard in Mainland China that would help A Company to mitigate the negative influence of commodity market price fluctuation.After the acquisition, the top priority job A Company is to resume B Company’s public listing status and integrate all its assets to A Company’s original business model. And I looked into the case and analyzed in terms of risk of decision making,operation risk and no-synergy risk. While analyzing the risks, I also used the tools of internal and external environment in terms of PEST, Porter Five-Force and SWOT to justify the acquisition.However, the integration and resumption of public listing status is a new and huge challenge that A Company did not expect. The lack of experience in setting up proper corporate governance structure caused war between shareholder and management and dragged the resumption of public listing status into an endless hole. In that case, the debt restructuring plan could not be completed and the requirement of Hong Kong Stock Exchange cannot be met, which threw A Company into a long and painful acquisition journey. Accordingly, the delay of resumption of public listing status increased lots of financial pressures on A Company that as a trading company is highly dependent on short-loan provided by domestic banks for trading business and planes to raise money after the B Company’s resumption on public listing status.Moreover, the difficulty in dealing with legal problems over foreign assets was not expected by A Company. And to some extents, that has prevented A Company’s integration plan.Through the analysis of this acquisition, I rethink about all the acquisition occurred between Chinese energy companies and foreign entities and came up with suggestions that concentrate on risk of corporate governance, the timing of acquisition, financing structure and legal problems. I hope these suggestions would help Chinese energy companies to be better prepared to acquire foreign assets and entities especially when the central government now is encouraging all Chinese companies to “go-out” and diversify resource imported.