Just when it appeared as though the Marriott-Starwood deal was well on its way to finally being completed, another roadblock has emerged.
On August 8, both companies announced that the Ministry of Commerce of the People’s Republic of China (MOFCOM), the entity responsible for reviewing and granting antitrust clearance in China, had asked them for more time — up to 60 more days — to review the deal.
China’s request for an extended review period is something both companies couldn’t really refuse. Refusal would result in the prevention of closing their already lengthy merger transaction, so they agreed to grant an extension of up to 60 days as part of a phase three review.
Is this sort of delay a common occurrence when it comes to antitrust approvals? Yes, and no.
With the recent merger of AB InBev and SAB Miller, two of the world’s largest beer companies, for example, China was the last country to grant antitrust clearance. “China takes a long time to grant antitrust clearance, and often, it wants to extract concessions from those deals,” one antitrust law expert told Skift.
While it’s true that various jurisdictions have different review processes and standards by which they clear antitrust issues, this case has its own characteristics. One reason is that it involves China, a country whose anti-monopoly law was only enacted in 2008, and another factor revolves around a Chinese insurance conglomerate called Anbang.
Does China Still Want a Part of Marriott or Starwood?
There’s some evidence to suggest, when you put all the pieces of the puzzle together and consider China’s past history of clearing antitrust issues in global mergers, that this delay on the part of Chinese regulators may be more politically or economically motivated than Marriott officials have let on in public statements.
Skift spoke with three different antitrust experts about this case, two of whom asked to speak on background, and essentially, here’s what all three said: When it comes to China and antitrust clearances, anything goes.
There are many lingering questions. What if this hold-up is part of China’s plan to ultimately acquire some of Starwood or Marriott’s assets? What if China decided not to have Anbang, which bid nearly $14 billion to acquire Starwood and then withdrew it in order to ultimately pick and choose what assets it wants in the form of a divestiture as part of antitrust clearance? Or what if Anbang’s pursuit of Starwood woke the Chinese government up about the possibilities of owning at least a piece of Starwood?
“My strong suspicion, without having any inside information, is that the Chinese are looking at this deal as a way for them to get some kind of major assets in a divestiture to some Chinese company,” said Thomas J. Horton, a professor of law and a Heidepriem Trial Advocacy fellow at the University of South Dakota School of Law.
Horton has nearly 40 years’ experience working in antitrust law and specializes in antitrust laws relating to China. He recently testified before the U.S. House of Representatives Subcommittee on Regulatory Reform, Commercial and Antitrust Law on international antitrust enforcement in China on June 7.
“There have been a lot of instances of the Chinese using their anti-monopoly law in merger cases to extract assets, intellectual property, and intellectual information technology,” Horton said. “I think [the Chinese government] is thinking about what kind of package of assets they can demand from the parties [Marriott and Starwood] in order to not hold the entire deal hostage. I am almost sure they are sitting there, talking about how much of a package they want to see to allow this to go forward, and they could also control who would be buying it and cherry pick the assets, for example.”
Horton also believes that while MOFCOM asked Marriott and Starwood for an extension, politicians who are involved at an even higher level within the Chinese Communist Party are most likely involved.
“It’s clear to me that MOFCOM would not be acting independent of [government] leadership on a deal like this,” he said. “There is a very complex array of issues facing China on this, from economic, political, governmental, even military — who knows? I would think any decisions made about this are made at a very high level. MOFCOM is a very bit player in the process at this point.”
Another antitrust expert said, “If China wanted to get assets they wanted to acquire, I would not put that past the Chinese at all. They’ve been known to do that in other industries. It wouldn’t be crazy; these things are known to happen in China. They will hold up American and other foreign companies to get concessions to allow a globally based merger in China to proceed.”
Why Anbang Matters
If Horton is right, one of the biggest clues as to why China might be pursuing this path would relate to Anbang.
When China’s Anbang Insurance Group and its consortium emerged in March with an unsolicited, all-cash $13 billion bid for Starwood, it set off a dramatic bidding war between the Chinese insurance company and Marriott International, a global hospitality player.
Initially, people were wondering: Who is Anbang? Who’s behind it? To be honest, there are a lot of unknowns about Anbang except that (1) it’s big, with as many as 39 corporate shareholders; (2) it has a lot of money ($100 billion, it told The Wall Street Journal), and (3) it’s interested in hotels. Anbang purchased the Waldorf-Astoria hotel in New York for $1.95 billion in 2014 and announced its desire to buy 16 luxury U.S. properties from Blackstone for a total of $6.5 billion in March.
Oh, and one other thing: Anbang’s chairman and CEO, Wu Xiaohui, is married to the granddaughter of Deng Xiaoping. Deng Xiaoping led China as its paramount leader following Mao Zedong’s death in 1976, and is credited with crafting the country’s current economic model. Needless to say, Anbang’s ties to the Chinese Communist Party run deep.
In the bidding war with Marriott over Starwood, it seemed like Anbang would likely beat Marriott. SEC filings from Starwood showed how close Anbang was to sealing a $13.8 billion all-cash deal.
However, suddenly on March 31, Anbang informed Starwood’s legal team it was walking away from the deal, citing “various market considerations.”
Weeks later, Marriott executive chairman Bill Marriott revealed that had Anbang gone ahead with its $13.8 billion all-cash offer, “We were done.”
Fred Hu, chairman of Chinese private equity firm Primavera Capital Group, which was one of Anbang’s consortium members in the bid for Starwood, told The Wall Street Journal that Anbang decided to walk away because the deal had just become too expensive. “There wasn’t any issue with funding,” Hu said.
Some also speculated that another reason why Anbang walked away from the Starwood deal was due to pressure from regulators both in China and in the U.S. who may have objected to Anbang’s ownership of a U.S. hotel company for various reasons related to foreign investments, national security and antitrust matters.
If Chinese regulators did, in fact, have something to do with Anbang’s decision to walk away from Starwood, it could be argued, Horton said, that a “very complex set of circumstances” was most likely involved.
He also said that Anbang’s failed attempt could have acted as a signal to the Chinese government to take action in acquiring at least some of the assets, both physical or intellectual, owned by Starwood and/or Marriott.
“The Chinese would say, ‘Gosh, we have to get at least a piece of this, and do it at a much more favorable price point than what the bidding was going with Marriott,'” he said. “To force them to divest assets to a Chinese company, you’re setting the market, essentially. If they were trying to buy the whole company [Starwood], there could have been opposition from all over the world not wanting a Chinese company to own this major hotel chain from the U.S.”
China Is Different
Even omitting the evidence put forth by Anbang’s failed attempt to buy Starwood earlier this year, there’s a case to be made for the fact that the decision to extend this deal’s review period might be driven by ulterior motives. There’s also the fact that China’s antitrust review process isn’t like anyone else’s.
Chinese antitrust regulation does not operate in the same way as antitrust regulation does in countries like the United States or the European Union.
“The Chinese, historically, have been very protectionist,” one antitrust expert said. “If they are concerned about what a merger means for one of their domestic chains or companies, they might hold it up on those grounds to protect their own domestic industry.”
This expert noted that in 2009, when Coca-Cola tried to buy China Huiyan Juice, Chinese government officials rejected it because they didn’t want the country’s largest juice company to be owned by Coca-Cola.
Furthermore, China isn’t as transparent as the U.S. “It’s not an open democratic system; it’s very nationalist,” said the expert. “The number one concern of any Chinese bureaucratic government official is satisfying the party and making sure the country’s economy is protected. They look at things differently than we do. There’s not much rule of law in China that we understand or know of.”
That’s exactly what Horton testified about before the U.S. House of Representatives in June. He concluded his testimony by saying, “Like it or not, the United States and other Western countries and businesses are going to have to accept that China views itself as different, and that its view of its ‘socialist market economy’ is vastly different from our view of free markets.”
Why China Might Want Marriott or Starwood’s Assets
There are a number of reasons why China or a Chinese company might want assets from a U.S. hotel company such as Starwood or Marriott, whether it pertains to actual hotels, locations, or simply brands.
Since 2010, Chinese investors have spent more than $5 billion on U.S. hotels, according to data from New York-based research firm Rhodium Group, which was cited in a U.S.-China Economic and Security Review Commission report.
“These hotel assets tend to be very, very valuable locations and beautiful buildings with a lot of cache and name-brand appeal,” said Horton. “They are very desirable places for foreign commerce with all kinds of foreign dollars coming through them. I could see this being a very attractive industry for them. Taking a package in a hotel chain could easily be expanded to Chinese holdings around the world to leverage into all other regions. The Chinese are very aggressive investors throughout the world today. If some of these companies’ assets were owned by the Chinese it could be huge for them to have that same name brand cachet.”
Brand cachet is certainly something both companies have plenty to offer to Chinese investors, especially Starwood. Starwood’s Sheraton brand, for example, is one of the top hotel brands in China, having been the first Western company to operate a hotel in the People’s Republic of China in 1985.
Both companies also have a presence in China and the Greater China region, Marriott with approximately 98 properties and Starwood with 159, and both with plenty more properties on the way. Starwood, unlike Marriott, also owns a larger portion of its properties than Marriott, which has pursued an asset-light strategy that Starwood is also pursuing currently. However, Starwood does not currently own any of its properties that are located in China.
It’s also not necessarily clear, however, if China would want specific assets from either Starwood or Marriott, whether in the form of brand names or actual properties.
“It could be another minor concession they’re looking for,” another antitrust expert told Skift. “China is a black box. Everything is fair game.”
Some Potential Challenges
That same expert also brought up a valid point. How would China argue for divestitures on antitrust grounds?
“Is it common for antitrust regulators to request divestitures to clear a deal? Yes, it’s very common when the purpose is to address valid antitrust concerns,” she said. She noted that, in the case of AB InBev and SABMiller, both companies made concessions to sell off some of their assets to another third party to gain regulatory approval.
“But, on the other hand, this deal is kind of unusual given the sense of lack of competitive overlap,” she noted. “I think it would be a really difficult argument to make.”
The combination of Marriott and Starwood would mean that the merged companies would operate only about 257 hotels in the Greater China region. That’s not very much when you consider that China’s Jin Jiang Hotels, for example, operates 1,451 hotels in China.
This expert wondered if, perhaps, China might make an argument that this deal may compromise issues of national security, for example. “Perhaps, for whatever reason, maybe these hotels are located near something related to national security in China and for that reason they trigger some sort of analysis or review on national security grounds?”
At one point in his testimony before the U.S. House of Representatives, Horton noted, “A potential complicating factor in attempting to predict how boldly China will apply security concerns in its interpretation and enforcement of its anti-monopoly law is that the term ‘national security’ conceivably could be defined broadly and ‘used to promote domestic [Chinese] economic protectionism.'”
Even though, by U.S. or EU standards, it doesn’t seem like China has a case to make for any actual antitrust complications, it’s possible that, given the country’s unique set of standards or analysis of antitrust cases, some sort of argument or reason could very well be made.
Should Starwood and Marriott Be Concerned?
Probably not yet, but as other failed global mergers of similar scope have shown, antitrust clearance could very well undo a merger that’s taken months or even years to try to close. That was the case with Coca-Cola and China Huiyan Juice in 2009 and it was the case with Applied Materials and Tokyo Electron in 2015, too, which was unable to get antitrust approval in both China and the U.S.
At this point, both companies have up to two more months to wait and see what China’s regulators say.
But, as one antitrust expert noted, both companies may have to reconfigure their merger strategies to get that regulatory approval.
“You have to be diligent. You may have to make some concessions to satisfy the Chinese government that you may not have thought you’d have to make at the outset. It’s never an easy merger process in China,” he said.
At this point, China is the only country that stands between Marriott and Starwood and the completion of their merger. The U.S. Department of Justice and the European Union have granted their blessings for the merger. Since the companies initially announced their proposed merger in November 2015, Marriott and Starwood have also received pre-merger clearance from other regulatory authorities in Canada, Chile, Colombia, India, Japan, Mexico, Pakistan, Saudi Arabia, South Africa, South Korea, Taiwan, and Turkey, as well.
During Marriott’s second quarter earnings call with investors on July 28, CEO Arne Sorenson said, “Well, the Chinese government does have the ability to take deals into a phase three, and obviously we can’t speak for the Chinese government and have no regard for the fact that they’ve got to run their process in a way that meets with their needs.”
When asked if the delay in getting approval from China was politically motivated, Sorenson said, “I don’t think it’s political. I don’t think it is extraordinary. I think it is the wheels of government working and as you can tell from our comments we expect we at least hope that we will be done here real shortly and be able to close the transaction. And close it on the terms that we have explained to all of you.”
Marriott declined to elaborate further yesterday about the regulatory extension in China.