On Tuesday, the Financial Times published my letter regarding the recently-announced joint venture between Dow Chemical and the Kuwait Petroleum Company (KPC). The letter is entitled “Gulf Investors Exert New Control” and the text is as follows:
Sir, Francesco Guerrera’s report “Dow to invest plastics business into $11bn Kuwaiti joint venture” (December 14), on the deal between Dow Chemical and the Kuwait Petroleum Company (KPC), rightly identifies a trend of Gulf-based entities increasingly investing in global companies. As important as the increased volume of such investment, however, is the increasingly strategic nature of Gulf companies’ acquisitions.
The Dow-KPC deal differs from other recent transactions (such as Abu Dhabi Investment Authority’s $7.5bn injection into Citigroup) in two key ways. First, the sector itself (plastics and petroleum-related chemicals) is one in which the Gulf has an inherent advantage and is therefore credibly positioned to become a global leader. Second, the deal is a joint venture by which the Gulf investor exercises significant control and steers the enterprise: rather than take a passive role in a running concern, KPC is shaping the destiny of a new company. These two factors make the deal far more substantive than other high-profile stakes, enabling Dow and KPC to build a stronger business than either could do on its own.
Citi’s deal with ADIA has done little for its share price and strategic footing. Dow’s deal with KPC, on the other hand, sent its stock up 7 per cent in one day. As strategic capital creates more value than passive investments do, Gulf investors’ increasingly strategic view bodes well for shareholder value.
Aamir A. Rehman,
New York, NY 10021, US
Copyright The Financial Times Limited 2007
The taking of strategic positions rather than making portfolio investments does involve the risk of a backlash.
The concern in Western countries will be that many of the big players in the GCC are state or quasi-state institutions, rather than privately owned entities operating on a purely commercial basis.
This has led to concerns in the past when major stakes in Western companies have been purchased by state owned GCC organisations.
Mohammed Amin’s observations on “backlash” are well-founded. The most prominent example of such backlash is the blockage of Dubai Ports World’s US acquisitions through Congressional intervention. The episode, dubbed the “Dubai Ports Debacle” in a Harvard Business School case, is discussed in Chapter 10 — “Getting Things Done — Operations Strategy and the GCC” — of Dubai & Co.
The choice made by KPC and Dow to choose a *joint venture* model was crucial both from strategic and regulatory / public relations perspectives. KPC has not taken a stake in a Western company — it has partnered with Dow to create a new firm, separate from the GCC and US parents. Rather than try to control Dow, KPC has identified a set of assets with strategic relevance and has worked with Dow to “carve out” a line of business.
In addition to creating greater business value (as discussed in my original post), the JV approach has the benefit of avoiding a situation that could be viewed as a foreign takeover of a US firm.
Many thanks to Mohammed Amin for his insightful comment.