Thursday, November 4, 2010

Canada Blocks BHP's Bid for Potash Corp., Protectionism is Alive and Well, and Korea Should Learn the Rules

Canada Blocks BHP's Bid for Potash Corp., Protectionism is Alive and Well, and Korea Should Learn the Rules

A few hours ago, Canada prohibited Australia-based BHP Billiton Ltd's bid for Canada-based Potash Corporation.  To some, this is a sign of protectionism against a foreign buyer of a "national treasure."  To some, this will come as a suprise.  The Lost Seoul doesn't think this is suprising, and that the international community's response to this decision will be muted. 

This type of ruling has a long list of precedents, from a variety of different countries. In France, then Finance Minister Sarkozy publicly stated that investors could forget about trying to take over Alstom, the maker of high-speed and subway trains. In China, Coca-Cola had to cancel its plans to buy Huiyuan Juice after the Chinese commerce ministry blocked the deal on anti-trust grounds. In Canada, there was a point in time when it was speculated that jet-maker Bombardier was for sale but that Canada would not approve. In other words, blocking an M&A transaction due to the "national interest" is hardly a new concept.

In Korea, the most famous case involves Korea Exchange Bank (KEB). It was sold to a U.S.-based private equity firm Lone Star. However, once the economic recovery in the early 2000s took hold, Koreans complained about the sale to a foreign investor, and the court system attempted to block the transaction after it had been agreed upon by both the buyer and seller. In addition, it had cleared all regulatory scrutiny. It was only after the uproar occured that the legal challenges to this particular began.

There are two points here. First, the concept of protectionism in the "national interest" has superceded the rights of shareholders in the past. It has been done before, and it will certainly occur again in the future, particularly if the company is involved in the procurement of natural resources. Every nation is wary of China's increased economic power and its natural resource needs. Second, protectionism, even though it has a very unfavorable implication, does not result in an international halt of trade. It is most likely the case you have never heard of the Alstom or Bombardier cases.

Nevertheless, the Korean case stands out because the attempted blockage of this particular cross-border M&A transaction occurred after the approval had already been granted by governmental authorities. That is what has given Korea the "black eye" in that case, and if Korea would like to exercise its "national interest" rights in the future, Korea needs to do so in advance of final approval by the authorities, as has occured in Canada. Interestingly, there was another US private equity firm that extracted far better terms for the Long-Term Credit Bank of Japan.  However, Japan did not try to formally block the deal.  When Korea matches the global standard in financial transactions, then its arrival among leading economic powers will begin to take shape.  Until international players believe that they understand the rules that Korea follows, there will remain the lack of respect that still exists as a result of the KEB situation.  At least Canada announced its protectionist policy in advance.  Like it or not, the world will have to tolerate Canada's decision, and soon it will be forgotten because it has blocked BHP's bid.


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