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Failed Coke-Huiyuan deal a lesson to learn

(chinadaily.com.cn)
Updated: 2009-04-03 16:26

Lessons to Learn

There may also be lessons to learn for Coke and foreign corporations. For one thing, trying to gain absolute control of a big Chinese company, even in non-strategic industries, may not be very wise. Alex Xu, an M&A expert and vice president at ChinaVest, says that foreign parties often enter deals with the goal of holding majority stakes, but then realize the difficulties and alter their expectations. He cautions against 100 percent takeovers of the type planned by Coke. "One hundred percent gets too much attention."

Coke has suffered before when trying to buy companies outright in other jurisdictions, Xu points out. In October 2003, the Australian Competition and Consumer Commission made a decision comparable to MOFCOM's, denying Coca-Cola Amatil the right to buy Berri Limited, whose core business was fruit juice and fruit drinks. Xu contrasts this with the approach of YUM! Brands, owner of KFC, Pizza Hut and other restaurant chains, which recently made what looks like a smart move in buying 20 percent of Little Sheep (a Chinese chain restaurant).

Now that the Huiyuan deal is dead, Coke has sworn to focus its energies on extending the reach of its existing brands in China, but also coming up with new ones, including in the juice sector. "The Chinese juice market has vast potential and more and more people will drink natural juices whenever their income allows," says Wharton's Zhang. "It is hard to imagine that Coke will give up on that market because of the setback." This could spell trouble for Huiyuan. Moreover, Huiyuan would like to move into diluted fruit juices, but this is precisely where Coke seems best equipped to compete. Coke has many options left, Zhang says: "It can go it alone, or acquire a smaller Chinese manufacturer, or become a minority owner of some existing juice companies." And Huiyuan now needs to look for alternative solutions to correct its marketing inadequacies.

Looking on the bright side, at least the deal has revealed to Huiyuan Coke's strategic intentions in China, says Zhang. Still, Zhu Xinli has every reason to feel disappointed by the failure to close the deal, Zhang adds. "The company has lost a huge amount of shareholder value; he has to re-think his strategic orientation; he needs to get ready for market entry from not just Coke but also other beverage competitors – foreign or domestic, now that everyone knows that Coke is high on this market – and he has to become even more mindful of government interventions."

Reproduced with permission from Knowledge@Wharton, http://knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved.

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