China vetoes Carlyle's acquisition of machinery maker Xugong Group

25 July 2008

Image Credit: Photo by Remy Steinegger / Copyright: World Economic Forum

Evidently, it is not only Indian politicians who protest the sale of domestic entities to foreign companies citing tenuous arguments of loss of national sovereignty. Our northern Communist neighbour is also not above such considerations, if the latest Carlyle-Xugong fiasco is any indication.

The world's second- largest private-equity firm, Carlyle Group, yesterday said it has dropped its plan to invest in China's Xugong Group Construction Machinery Co, citing ''significant changes in the market environment.''

''Both parties have decided not to proceed with the investment and Xugong will embark independently on its restructuring,'' Carlyle said in joint statement with the Chinese building machinery maker, without elaborating. Agreements under which Carlyle and Xugong discussed first a takeover and then a minority investment have expired, the companies said.

Carlyle's bid for Xugong Group was closely watched amid US government warnings about possible Chinese protectionist sentiment. Beijing stepped up scrutiny of foreign acquisitions following the Carlyle bid and enacted a rule last year requiring a national security review of such deals.

Carlyle had tried to buy Xugong in 2005, offering $375 million for 85 per cent of the company, when the Chinese stock market was in a slump. Xugong said it wanted the investment in order to grow in a market dominated by US-based Caterpillar Inc. and Japan's Komatsu Ltd. The government of the eastern Chinese city of Xuzhou, which owns Xugong, approved the deal.

But the bid sparked complaints about asset sales to foreigners. China is the world's leading destination for foreign investment but the takeover of existing companies is still unusual.