A few years ago, I taught a course on M&A for the USC School of Business. It was a fairly large class, and about half my students were Chinese. I asked a few of them why they were interested in the class. The consensus was: "I want to learn about buying companies, which should help the company I will be working for when I go back to China."
They certainly weren't kidding. Over the past few years, there has been growth in China-U.S. acquisition activity. This year, China's Lenovo bought IBM's (NYSE:IBM) PC business, and the Haier Group is one of the buyers of Maytag (NYSE:MYG).
And, of course, the deal that is getting much of the attention is CNOOC's (NYSE:CEO) pursuit of Unocal (NYSE:UCL), which is the ninth-largest U.S. oil company. CNOOC is the third-largest oil company in China and is 70% owned by the Chinese government.
Chevron put Unocal into play when it made a bid for $62 per share in April. It looked like another ordinary oil deal; that is, until CNOOC jumped into the fray. Now, CNOOC has a $67 cash bid on the table. This compares to Unocal's cash/stock deal of roughly $60 per share. In fact, CNOOC agreed to a $2.5 billion breakup fee if it cannot pull off the deal.
A typical breakup fee is 2% to 5%. In this case -- based on Unocal's market cap -- CNOOC is offering a breakup fee of 14%, which represents $9 per share for Unocal shareholders.
For Unocal, the board should really be looking at one thing: How will shareholders benefit the most? So far, the $67 cash deal looks like a winner, especially since it is backed up with a lucrative breakup fee. No doubt, CNOOC has a strong grasp of capitalism. The irony is that politics appears to be the big problem.
This week, the House Armed Services Committee had a hearing on the CNOOC deal. The sentiment was clear: Congress is very concerned. It appears something has soured here. At the hearing on the pending merger, the former director of the CIA, James Woolsey, was clear in his stance. He said that "oil can be used as a weapon of war."
What's more, there is much skepticism among the rest of America. A Wall Street Journal/NBC News poll shows that 73% of Americans are against the deal. In fact, Sen. Byron Dorgan has submitted a bill to block the CNOOC deal.
Yet there is speculation that a bidding war will break out. Again, this is speculation, and there are many sophisticated investors playing Unocal's stock. It seems to me that Chevron is content to sideline continued bidding -- and it's not beyond the realm of possibility that U.S. regulatory authorities will solve its problems by thwarting CNOOC's bid. This much is certain -- given the political firestorm, the approval process for a CNOOC could take a long time -- if it ever comes about.
Fool contributor Tom Taulli does not own shares mentioned in this article.
