Asia's top mergers and acquisitions bankers gathered two years ago at the swanky Island Shangri La in Hong Kong to celebrate the top deals of 2012. As the transactions were being toasted, one was unravelling.
Advisers on Caterpillar Inc's $677 million purchase of ERA Mining Machinery Ltd picked up an award for cross-border deal of the year. The purchase was billed as a coup for Caterpillar, the world's top maker of tractors and excavators. ERA was the holding company for Zhengzhou Siwei Mechanical & Electrical Equipment Manufacturing Co Ltd, one of China's biggest makers of hydraulic coal-mine roof supports. Siwei would help Caterpillar gain traction in the world's largest coal industry.
"Siwei was going to be our Chinese business card," said a person with direct knowledge of Caterpillar's strategy.
The night of the awards on November 16 three Caterpillar lawyers were wrapping up an eight-hour grilling of Wang Fu, Siwei's chairman. Major accounting problems had been unearthed at Siwei headquarters in the gritty Chinese city of Zhengzhou. Two months later, on January 18, 2013, Caterpillar said it had discovered "deliberate, multi-year, coordinated accounting misconduct" at Siwei.
Wang was sacked. Caterpillar took a non-cash goodwill impairment charge of $580 million - 86 percent of the value of the deal. The company says it was caught unaware by the problems at Siwei and only discovered them in November 2012, five months after the deal closed.
A Reuters review of hundreds of pages of public documents, as well as interviews with former employees, board members, bankers and advisers, reveals a more complex story. Accounting problems were rampant at Siwei before Caterpillar bought it. Yet at multiple junctures, Caterpillar chose to ignore existing or potential problems and push ahead with the deal.
A year and a half after directors of the Peoria, Illinois-based company signed off on the deal, it has become a case study in how a foreign company with decades of experience in China can still flounder in that market. It also shows how willing some multinationals are to accept risks they might otherwise avoid to establish themselves in the world's second-largest economy.
The deal has triggered legal action against Caterpillar. In May, Caterpillar announced it had settled a dispute with Siwei's controlling shareholder, owned by an heir to the Crown Worldwide logistics company fortune and the former head of the American Chamber of Commerce in Beijing. Four shareholder suits filed in the United States in Caterpillar's home state of Illinois are continuing.
Meanwhile, Siwei has foundered. Former employees told Reuters that as of September, the company had no new orders in 2013, and it had fired or furloughed about half of its workforce.
When it bought Siwei, Caterpillar had been doing business in China for more than 30 years. It had amassed 20,000 China employees, dozens of manufacturing, research, logistics and parts centers and a broad dealer network. It had nine new facilities under consruction, and had just completed the $8.8 billion purchase of Bucyrus, a mining and earth-moving company with significant China operations.
When former Chinese president Hu Jintao dined with a group of American businessmen in 2011, Caterpillar Chief Executive Doug Oberhelman was included.
Source: Reuters
