China Still Learning M&A

Paul Maidment, 07.03.06, 4:00 PM ET

Source from http://www.forbes.com/home/business/2006/07/03/china-mobile-millicom-cx_pm_0703notn.html

News that China Mobile's attempt to buy Nasdaq-listed Millicom International Cellular has collapsed is another setback for the "two steps forward, one step back" venture by Beijing into the world of global mergers and acquisitions.

Luxembourg-based Millicom, which provides mobile telephony in emerging economies, said today that it has terminated all discussions over a potential sale of the company following a strategic review. The talks are understood to have broken down following the failure of the two side to agree a on price.

China Mobile Communications (nyse: CHL - news - people ), the largest of the four state-run telecom companies in China, was reported to have offered $5.3 billion for Millicom, which would have been China's most expensive foreign takeover.

It would have topped China National Petroleum's $4 billion acquisition last year of PetroKazakhstan (nyse: PKZ - news - people ), which, like Nations Energy, a Canadian company in discussions to be bought for $2.2 billion by Citic Group, China's Hong Kong-based overseas investment arm, owns oil fields in the central Asian country.

Beijing has been pressing its favored national champions (see: " Beijing's Balancing Act") to make overseas acquisitions..But it has been seeking small, agreed deals following a series of bloody noses received in high-profile bids.

The most painful of these was the rebuff of China National Offshore Oil's (nyse: CEO - news - people ) $18.5 billion bid last year for California-based Unocal (nyse: UCL - news - people ). That was scuppered by sinophobia in Washington. Unocal eventually was bought by Chevron (nyse: CVX - news - people ).

Since then, China's state-owned companies have shied away from big bids in politically sensitive industries in Western countries, and sought instead smaller victories in more hospitable emerging nations. One example: CNOOC bought a $2.7 billion stake in an oil field off the coast of Nigeria in April.

It is not just a question of politics, but also of management skills. Many of the top managers of China's large state-run companies are handpicked by Beijing. They have been competing with firms from the U.S., Europe and the Middle East, for which this is not the first time in the M&A rodeo. Inexperience has told.

China Mobile decided not to go ahead with buying Millicom following a board meeting on Sunday at which concerns about the price being paid were raised. It would have been paying a hefty multiple of five times Millicom's 2005 revenue of $1.1 billion. Millicom's shares fell by up to 30% in early Monday trading following news that the takeover had collapsed.

Millicom, which is controlled by Kinnevik, a Swedish investment company, says it "has now concluded that this purchaser will not be in a position within an acceptable time frame to make a binding offer that is suitably attractive, or sufficiently certain of closing." That suggests that prices and politics were behind China Mobile's last-minute retreat.

But if China Mobile's decision turned on price, that also suggests Beijing's companies are learning one of the key M&A rules, about not overpaying, and that their next step forward won't be long in coming.