The impact of US politics on M&A

Top global M&A lawyers explains why high oil prices scuppered CNOOC''s bid for Unocal.

Hogan and Hartson chairman J Warren Gorrell recently passed through Hong Kong for the opening of the law firm's Hong Kong office. Here he explains how in-bound and out-bound M&A in the US is affected by geopolitics.

You've just opened a new office in Hong Kong. Why?

Gorrell: We first opened in Beijing in 2002, and in Shanghai in 2004, and now Hong Kong. So we've been pretty aggressive trying to further develop our Chinese practice. It's a great market for a firm like Hogan & Hartson. I first came to China in 1982.

We decided to open in Beijing initially because one of our unique strengths - and what makes us different from every other law firm - is that we focus on business and litigation matters where business intersects with government. Many big US and UK law firms have strong corporate and litigation practices, but none of them have the regulatory practice we have had from being 100 years old and based in Washington. And so from that regulatory focus, we have gained a complete understanding of every industry in which government plays an important role.

Our competitive advantage is understanding how these industries work. But unlike other Washington law firms, over 40% of our people and revenues are in our business and finance practice. We regularly rank in the top 10 in the US in capital markets and are highly rated in M&A.

So when we looked at China, we saw that Shanghai and Hong Kong were financial centres, but we thought it made more sense for us to go to Beijing first. Obviously government plays an important role in business in China. So we opened and were fortunate to get Jun Wei and her team of lawyers to join us. She is one of the most highly respected corporate business lawyers in China. We also asked one of our leading M&A and finance partners, Steve Robinson to spend virtually all of his time in China. This has led to the practice developing very nicely.

We took a wait and see attitude, but it has worked better than we predicted and we have expanded more aggressively. In the capital markets area we realized that while we had good relations with firms in Hong Kong, it would be more helpful for us to do it in-house. That's what led us to hire Tong Mao and open in Hong Kong. So we now have a three-legged stool to cover Greater China.

The obvious question to ask a government-focused Washington-based lawyer, is how has the climate changed for Chinese companies in the US? Especially those who want to buy companies in America. Is the backlash as bad as the media makes out?

Too much is being made out of it. With the balance of trade issue between the US and China, there is always going to be a focus on such things as the value of the renminbi. They are serious issues, and there is a political element. The current concern, and heightened scrutiny, is part of a plan to put heightened pressure on China - in order to get China to have a more open trade policy and a currency that floats. But what really happened with the CNOOC transaction is as much to do with oil. If oil prices hadn't been $62 a barrel, at the time that bid was made, I think there could have been a very different outcome.

But we consume a lot of oil and if everyday people are paying twice as much for that gasoline - versus what they paid three months ago - that is a real issue for the US and it becomes very political. It's also one that's easy for politicians to make something out of. So at a time when oil prices are high, the war in Iraq is under question, and energy supplies are an issue - it leads to a high level of scrutiny in the oil industry. Had times been different, that deal would have attracted a lot less scrutiny.

But it is political and you are going to see increased scrutiny of China-US transactions. But I honestly don't believe that in the long run it's going to have a significant impact on the transactions that are done. There will be legislation in the US that expands the number of industries that are covered by the security review.

However, the US and China depend on each other to a great extent, and while there are differences, there is a real need for the two to have a constructive relationship - and in the end I believe that is what is going to happen.

Can you explain a little bit about the US-China Economic Security Review Committee and what it does?

There are a range of industries covered, with the obvious ones being technology, and defence-related industries. When those types of transactions arise, you can enter into an agreement to buy in one of those industries, but you can't consummate a transaction till it has been approved by the US government.

The process basically involves providing information on the transaction, the type of technology, the type of information shared, the impact on US security interests. Then the review panel asks for more information and there is a dialogue. Then they end up issuing a decision.

From a deal execution standpoint you obviously want to have scoped out - well in advance - what your strategy is going to be both to deal with this Security Review and the politics. Hogan & Hartson is incredibly well positioned to do that. We have one of the leading regulatory and legislative practices. We also have the M&A capability. None of the other firms have these combined capabilities, and we have the presence in China and the US to structure the transaction and strategise with how to deal with US political interests.

With the CNOOC transaction I believe they started that strategizing a little bit too late. However, there were also things beyond their control - such as the price of oil.

Are Chinese clients talking to you more for this very reason - because they know you have good connections in Washington?

Yes, we are increasingly getting the word out that Hogan & Hartson is uniquely positioned to advise on these types of matters. For example, one of our partners is Jeanne Archibald, a former general counsel at the US Department of Treasury and one of the highest ranking women in government. She has been a partner with us for 10 years and is part of the firm's senior management. She has an enormous knowledge, great relationships, and is highly respected by the government. She deals with these Security Review issues and is an expert in this area.

Is there a particular lobbyist firm you would tend to work with?

Actually, I don't like to use that word, but when I said 'legislative practice' I meant 'lobbyist'. We have a substantial legislative practice, and part of what they do is lobby the US government on behalf of our clients. In the US it is very accepted practice that companies that are affected by potential laws or existing laws, can propose changes to those and be involved in the legislative process. So we have people who have been involved in working with Congress for years and years.

What differentiates us is that, unlike a lobbyist firm which just has relationships, we have substantive expertise in the various areas where legislation is being enacted. For example, energy is a huge practice for us, as are telecoms, media, aviation, environment. So what we can do, that a lobbyist firm cannot, is combine that knowledge with those people that have the legislative skills.

After the whole CNOOC-Unocal situation, do you think some of the Chinese clients might take the view that it's not worth the effort and potential embarrassment of trying to do an M&A transaction in the US?

I think their initial reaction would be to take that view. But if they have advisers who know how it works, they will still go ahead and try and do the transactions. Take the Haier-Maytag deal. It's hard to imagine what sort of security concerns could arise from manufacturing washers and dryers. There are, however, jobs issues, and that is a big deal. But a transaction like that only has a remote chance of being held up by a security review. But, on the other hand, you are dealing in the most competitive M&A market in the world. And you are bidding against everyone else.

My own view is that Chinese clients have concerns and they are right to have temporary concerns. But if they are made to understand how the process works and they are not investing in something that really is a security concern, then I don't think - in the end - there will be a major problem.

The other key aspect of this is structuring the deal. For example, if you do what Lenovo and IBM did where you structured the deal so that operations and jobs stayed in the US then you will face less opposition. It's a question of understanding what you need to do, and who you need to convince to make a transaction work.

Looking at it from the other side, do you think your big US corporate clients feel there could be a backlash against them and M&A deals they might want to do in China?

They ask the question, just as you have. It's too early to tell. But I return to my point that the US and China are dependent on each other and the economies of both will be better served by cooperation and not more barriers. That doesn't mean everyone shares that view, and there are people in the US - who get a lot of publicity - who don't share that view.

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