Thursday, July 07, 2005

Mr. Fu's Letter
First and foremost, my sympathy and solidarity goes out to any readers in London, and to those with family and friends there. I rode those trains and buses for two years and can only imagine the shock and literal terror of today's events.

The potential acquisition of Unocal by CNOOC constitutes a sort of Rorschach inkblot for US feelings about China and its growing economic and political muscle. Yesterday's Wall Street Journal carried a lengthy op-ed by CNOOC's chairman, Mr. Fu. This well-written document doubtless reflects the input of CNOOC's team of American advisors, in an obvious attempt to shift public sentiment. The letter touches many of the hot buttons identified by Congress and others skeptical of the merits of this deal: US oil imports and energy security, jobs, CNOOC's track record in international partnerships, and its market orientation. It makes a compelling case. The only thing that I find notably absent is the "industrial logic" of the merger, the concrete value-added for CNOOC's shareholders (Unocal's would simply get cash.)

In laying out his arguments, Mr. Fu allays some of the obvious concerns about the disposition of Unocal's oil and gas: US production to remain here (and grow) and Asian production largely committed to other markets, such as Thailand, or managed by the host country, as in Indonesia. But if all of Unocal's production stays where it is, what does CNOOC--and China--get out of the deal? If all the employees are expected to stay, how will any cost savings be generated, no matter how short-term they might prove to be? Where are the synergies, in all senses of that word, of a deal that entails a substantial premium over Unocal's current market value? In other words, where is the new economic value for CNOOC's shareholders that would compensate them for paying an above-market price for these assets?

Now, on one level, the answer to this question is really between CNOOC, its shareholders and its banker(s). But it does raise questions about the degree to which a transaction like this can truly be all things to all people, and whether all of the promises implicit in this can be met over time. By comparison, the logic of Chevron's offer is self-evident, and I can speak to it from personal experience, as a former Texaco employee. Chevron stands to benefit by the absorption of Unocal's assets and activities into its own businesses, particularly Chevron's own longstanding but growing presence in Asia. Layoffs and operational efficiencies will generate cost savings, and it's a good bet that within two years of the transaction, half of Unocal's original workforce will be gone. Such a package contains pros and cons for Unocal's stakeholders, but it's a pretty clear picture. The CNOOC bid remains a good deal fuzzier, nor has Mr. Fu's letter clarified things.

I don't feel I need to add to the list of geopolitical concerns being raised by others. There is clearly more at stake in this transaction than a simple business merger. But I'm not sure those other issues are as central to the business proposition as this question of exactly how CNOOC expects to benefit without doing anything that someone would object to, whether rightly or wrongly. I'll be listening carefully for the answer in the weeks ahead.

FYI, in the in the interest of full disclosure I should mention that I own Chevron stock and options.

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