]Everyone has heard the greater-fool theory of investing— you buy any
asset at any price, no matter whether the price has any rational
relationship to the underlying value, in the hope you can turn around
and sell at an even higher price to someone who’s a greater fool than
you are. The method is more than a little dangerous, and plenty of
people have lost a lot of money when they discovered they were at the
end of that chain instead of in the middle of it. Beijing should
consider those cautionary tales, lest China turn itself into the world’s
greatest fool.
Consider last week’s announcement that a Chinese company will pay $450 million for an 80% stake in a battery manufacturer that was near failure. A123 Systems, which produces high-tech batteries for electric cars, has received roughly half a billion dollars in various government grants and aids from U.S. taxpayers in recent years. It was still on the skids despite the help. Now Wanxiang Group Corp., one of China’s largest auto parts manufacturers, will essentially bail out those taxpayers by offering the company a financial lifeline.
This follows last month’s an-
nouncement that state-owned Cnooc Ltd. will pay $15.1 billion in cash for Canada’s Nexen, an oil and gas firm. That marks a greater than 60% premium over Nexen’s pre-deal stock price, for an acquisition target that was reeling from leadership turmoil and a series of technological prob-
lems at one of its marquee oil sands projects.
Buying ailing companies isn’t inherently foolish. Mitt Romney and his colleagues at Bain made an awful lot of money doing exactly that. A smart acquirer can himself change the underlying value proposition. Mr. Romney’s success lay in his ability to transform a struggling firm into a thriving one through an injection of better “management technology.”
But this requires a certain skill in distinguishing failed business models from failed businesses— telling the difference between those companies that fail because they’re poorly run, and those that fail because they’re selling a product no one wants. Not even Mr. Romney and the many other experienced private-equity investors in
A question or two about the wisdom of buying struggling Western companies.
the West are infallible at this. The contrast between that
model and the China model are striking. The most common justification presented for so many Chinese acquisitions, including A123 and Nexen is technology transfer. The idea is that Chinese companies, at their government’s urging, are buying Western companies mainly for the benefit of the know-how the targets possess in their respective fields.
Think about this for a minute. The successful market-economy acquirers focus on transferring skill into their purchases—management acumen that better unlocks the value of a viable but struggling company, or that integrates a reasonably successful firm into a larger whole that can better exploit its resources. China is interested mainly in transferring mechanical and managerial know-how out of struggling companies, without any apparent thought for why the companies are struggling in the first place.
The question that often seems to go unasked is, is China sure the technology is worth having? A123 is by all accounts a reasonably successful battery producer insofar as it has lined up orders from automakers such as General Motors. The problem is that there turns out to be not much of a market for electric cars. American lawmakers have caught on to that reality, which is why Congress has become less willing to subsidize such green projects over time. Chinese policy makers have not caught on, which is why Beijing persists in plans to concoct an electric-car market in China through subsidies and diktats. Having A123’s battery technology available to a Chinese firm helps that effort, but only helps China overall if the effort itself is worth pursuing. The principle also applies, somewhat surprisingly, to Nexen. The Canadian company was a takeover target in large part because it has been significantly less efficient than its competitors at extracting petroleum from oil sands, at a time when oil prices themselves may be entering a period of decline thanks in part to greater availability of conventionally extracted oil from places such as Libya. While a management overhaul earlier in the year led to improvements at the long-struggling Long Lake sands project in Alberta, it remains a work in progress. Shareholders took the cue from all this and sent the stock into a prolonged decline, even if Beijing didn’t notice or care. China’s admirers will suggest the country is playing a long game. Car batteries are commercially useless today, but will be critical one day. Nexen engineers will get that company’s projects to work and then China will be there to learn from their solutions, and to exploit that know-how when one day conventional supplies become less reliable. Maybe that’s true. But a very fine line separates such notions and the rationalization of the greater fool who, even if he knows something is worth less than he’s paying for it today, believes events beyond his control will eventually lead someone else to pay more for it tomorrow. China’s buying spree could be the making of an economic juggernaut. It could also just be stocking up the world’s greatest technological junkyard.
Consider last week’s announcement that a Chinese company will pay $450 million for an 80% stake in a battery manufacturer that was near failure. A123 Systems, which produces high-tech batteries for electric cars, has received roughly half a billion dollars in various government grants and aids from U.S. taxpayers in recent years. It was still on the skids despite the help. Now Wanxiang Group Corp., one of China’s largest auto parts manufacturers, will essentially bail out those taxpayers by offering the company a financial lifeline.
This follows last month’s an-
nouncement that state-owned Cnooc Ltd. will pay $15.1 billion in cash for Canada’s Nexen, an oil and gas firm. That marks a greater than 60% premium over Nexen’s pre-deal stock price, for an acquisition target that was reeling from leadership turmoil and a series of technological prob-
lems at one of its marquee oil sands projects.
Buying ailing companies isn’t inherently foolish. Mitt Romney and his colleagues at Bain made an awful lot of money doing exactly that. A smart acquirer can himself change the underlying value proposition. Mr. Romney’s success lay in his ability to transform a struggling firm into a thriving one through an injection of better “management technology.”
But this requires a certain skill in distinguishing failed business models from failed businesses— telling the difference between those companies that fail because they’re poorly run, and those that fail because they’re selling a product no one wants. Not even Mr. Romney and the many other experienced private-equity investors in
A question or two about the wisdom of buying struggling Western companies.
the West are infallible at this. The contrast between that
model and the China model are striking. The most common justification presented for so many Chinese acquisitions, including A123 and Nexen is technology transfer. The idea is that Chinese companies, at their government’s urging, are buying Western companies mainly for the benefit of the know-how the targets possess in their respective fields.
Think about this for a minute. The successful market-economy acquirers focus on transferring skill into their purchases—management acumen that better unlocks the value of a viable but struggling company, or that integrates a reasonably successful firm into a larger whole that can better exploit its resources. China is interested mainly in transferring mechanical and managerial know-how out of struggling companies, without any apparent thought for why the companies are struggling in the first place.
The question that often seems to go unasked is, is China sure the technology is worth having? A123 is by all accounts a reasonably successful battery producer insofar as it has lined up orders from automakers such as General Motors. The problem is that there turns out to be not much of a market for electric cars. American lawmakers have caught on to that reality, which is why Congress has become less willing to subsidize such green projects over time. Chinese policy makers have not caught on, which is why Beijing persists in plans to concoct an electric-car market in China through subsidies and diktats. Having A123’s battery technology available to a Chinese firm helps that effort, but only helps China overall if the effort itself is worth pursuing. The principle also applies, somewhat surprisingly, to Nexen. The Canadian company was a takeover target in large part because it has been significantly less efficient than its competitors at extracting petroleum from oil sands, at a time when oil prices themselves may be entering a period of decline thanks in part to greater availability of conventionally extracted oil from places such as Libya. While a management overhaul earlier in the year led to improvements at the long-struggling Long Lake sands project in Alberta, it remains a work in progress. Shareholders took the cue from all this and sent the stock into a prolonged decline, even if Beijing didn’t notice or care. China’s admirers will suggest the country is playing a long game. Car batteries are commercially useless today, but will be critical one day. Nexen engineers will get that company’s projects to work and then China will be there to learn from their solutions, and to exploit that know-how when one day conventional supplies become less reliable. Maybe that’s true. But a very fine line separates such notions and the rationalization of the greater fool who, even if he knows something is worth less than he’s paying for it today, believes events beyond his control will eventually lead someone else to pay more for it tomorrow. China’s buying spree could be the making of an economic juggernaut. It could also just be stocking up the world’s greatest technological junkyard.
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