The Real Concern with the Smithfield-Shuanghui Merger

My first thoughts on Wednesday's announcement of a merger between Shuanghui International Holdings Ltd. and Smithfield Foods Inc. (NSYE: SFD) selfishly went straight to my refrigerator: about the last thing that I want to eat is a Chinese meat product.

Just over the last few months, Chinese police made several arrests for "meat-related offences," including the large-scale marketing and selling of rodents as mutton.

In March, over 16,000 pig carcasses floated down the Huangpu River, in an incident authorities have yet to expose. And China is consistently plagued with avian flu and E.Coli outbreaks, and episodes of dangerous additives found in their food products.

Then I read Smithfield CEO Larry Pope's comments on the deal, which stress that the idea is to send American pork to China, not the opposite.

China consumes the most pork in the world, and the numbers continue to rise, while American pork consumption is decreasing.

Money Morning Global Investing Strategist Martin Hutchinson, a 30-year global merchant banker, explains the gist of the merger:

"China has much more respect for American food standards than it does for its own. And pork continues to grow in popularity throughout Asia. If this deal gets done, Shuanghui will be able to sell pork into China with the Smithfield brand. And that means they will be able to charge premium prices."

Also, Shuanghui promised there will be no closures or relocations of Smithfield's operations or management.

Turns out there is a concern related to the Smithfield-Shuanghui merger, but it's not about meat quality.

Instead, it's a matter of national security.

The New World Created by Smithfield-Shuanghui Merger

When all is said and done, Shuanghui will pay about $7 billion for Smithfield, which makes this the largest takeover of an American company by a Chinese company in history.

The merger is expected to close later this year, but first is subject to approval by both shareholders and the U.S. Committee on Foreign Investment (CFIUS).

However, CFIUS, which scrutinizes these deals based on threats to our national security, will be no small hurdle to overcome. There is a significant history of epic would-be Chinese takeovers axed by CFIUS due to national security concerns.

In 2005, CNOOC Ltd., a Chinese oil company, bid a whopping $18.5 billion for Unocal Corp, a US oil producer, but apprehensions that the Chinese would interfere with the U.S. energy market put a stop to it.

In 2008, Chinese telephone equipment maker Huawei Technologies and Bain capital bid $2.2 billion to buy American computer-equipment maker 3Com. This deal was nixed for fear that the Chinese would have an increased ability to engage in cyber-attacks against us.

In fact, next week U.S. President Barack Obama intends to confront Chinese president Xi Jinping about China's latest hacks into more than two dozen advanced American weapons systems.

Looks like the timing of the Smithfield-Shuanghui merger is about as awkward as a blind date...

But when I look at the numbers of CFIUS-approved deals, I'm thinking the Shuanghui deal could get the green light. The vast majority of these deals are approved.

Between 2009 and 2011, 269 deals in which a Chinese company would take over an American company fell under the CFIUS review umbrella. Out of those 269, only 100 were investigated, and 25 withdrew somewhere during the investigation process.

In 2011, the CFIUS received 111 notices of deals to review. Of those 111, 40 were investigated and 6 withdrew during the process.

In fact, there have been over 650 examples of foreign direct investment by Chinese companies all-in-all, despite high-profile failed deals.

Plus, annual exports of U.S. agricultural products to China are quickly rising, up 111% between 2009 and 2012.

It seems to me that CFIUS will grant the Smithfield-Shuanghui merger passage through its golden gates. The pork industry doesn't proffer many threats to national security per se, and the deal falls in line with present agricultural export trends.

Still, I would argue the deal is dangerous to our national security on a much grander scale.

It's laughable that we would open our doors to the biggest Chinese takeover in history mere days after they pull off a serious hack into our military databases.

If we continue to allow China to entangle itself in our economy, we undoubtedly become more beholden to it.

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