Carlyle Failed To Secure Stake In Chinese Group

The rapid globalization which has brought for many developing countries a surge in capital inflows and the quest for international diversification of investment portfolios ; has also prompted consolidation among multinational corporations where foreign takeovers are increasingly becoming routine. However, as countries continue to privatize assets previously controlled by the government ; conflicts between foreign direct investment and growing protectionist sentiment, continues to gain more prevalence, especially in China.

The latest case of the growing resistance to foreign takeovers in China, comes from one of the world’s largest private equity firms ; Carlyle Group. The firm, according to WSJ – failed to secure a stake in one of China’s largest construction machinery manufacturer and distributor – Xugong Group Ltd.

In March of 2006, China’s Ministry of Commerce rejected Carlyle’s planned purchase of an 85% stake in Xugong Group for US$375 million, signed in October 2005. Carlyle, in an effort of gaining approval for the deal from China’s National Development and Reform Commission, scaled back its plans by seeking instead a minority stake. This offer was also turned down. In a statement to the Shenzhen Stock Exchange Tuesday, a listed unit of Xugong Group said its parent is no longer considering accepting an investment from the U.S. private-equity firm.

An executive at another Chinese machinery maker had campaigned openly against the Carlyle bid with blog postings that took a strong nationalist slant. The executive wrote that “selling anything is fine, but selling out the country is wrong”.

Despite its setbacks with Xugong, Carlyle, notes WSJ – has continued to make deals in China, mostly for minority stakes of less than $100 million, investing a total of $1.3 billion in equity over the past two years in such industries as construction and real estate through various funds.

When it comes to foreign takeovers, particularly in countries working toward a capitalistic system where the implementation of macroeconomic programs and structural reforms are specifically designed to attract capital inflows – the fact is, the system is often confronted with economic patriotism where the government must find a balance between national interests and commercial interests.

Foreign takeovers raise a host of issues on both the unilateral and multilateral levels which are very complex by nature and are legitimately worthy of debate. However, all too often, resistance against foreign takeovers — can ultimately be traced back to fear, whether cultural or security-oriented (including industrial powers) as a result of the transformations forced through economic integration by a globalizing world.

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