The Smithfield Acquisition: ShuangHui Buys the Whole Hog

The Big Idea

Founded in Virginia in 1936, Smithfield Foods grew to become the world’s largest pork producer. However, the tightening credit market that came with the 2008 financial crisis proved a challenge, and revenues plateaued through 2013, when the firm faced increasing pressure from investors to cut costs or sell off portions of the company. Three foreign firms made bids to acquire Smithfield. Should the board approve a sale? If so, to whom? What political risks and cultural obstacles could undermine the deal?

The Scenario

In 2013, Smithfield’s growth had stalled for five years. Though aggressive acquisition had been a strategic key to its growth in the past, the company failed to acquire other domestic meat processors and packaging companies. It had also been subject to challenges with government regulators abroad; after the swine flu pandemic of 2009, Europe and China restructured their food-import regulatory policies, and U.S. exporters were subject to more compliance assessments.

There was a strong case for a sale to either ShuangHui International, JBS S.A. or Charoen Pokphand Foods. All three bidders — from China, Brazil and Thailand, respectively — offered a premium price that would have met investors’ demands.

ShuangHui was deemed the best fit because it was willing to pay the most and offered Smithfield an inroad to China, where pork consumption was growing while the U.S. market was less than booming. 

Yet the $4.7 billion sale was risky. Smithfield ham was a national icon, and acquisition by an Asian company could damage the company’s “all-American” image. In addition, the environmental scandals of ShuangHui and pollution in the Chinese food industry could drag Smithfield’s brand through the mud.

ShuangHui could sell its products in the U.S. market through Smithfield or ask it to produce more packaged meats better suited to Chinese tastes — which could lead to lower U.S. sales, which would profit Smithfield’s competitors, given that pork products are often substitutable.

In addition, unions expressed alarm about employee welfare, given the lax safety practices in China. Would ShuangHui stick to Smithfield’s pledges of minimum hours per week and retirement benefits for its workers?

Meanwhile, U.S. politicians showed concern over the deal’s possible economic implications. China’s pork industry needed Smithfield’s technology to improve its patchy record on food safety, and ShuangHui could take the technology to China and increase domestic production, reducing the need to import U.S. pork. If the company then flooded the U.S. retail market with cheaply produced pork products, that could lead to a price war, from which the U.S. pork business could suffer.

The Resolution

The success of the new Chinese-American entity hinged on smooth post-merger integration. Smithfield’s dispersed domestic operations, unionized workforce and regional heritage meant it was not amenable to aggressive change. Likewise, ShuangHui could destroy the value of the deal if it rebranded Smithfield or changed its processes: Smithfield’s reputation as a modern, efficient and clean pork processor was highly valued by Chinese consumers.

Retaining U.S. executives was essential to the deal’s success to maintain a sense of continuity and trust with union leaders, workers and Smithfield’s local community. However, a ShuangHui representative — someone with sophisticated understanding of both companies and cultures — needed to be stationed at the company to represent ShuangHui’s interests.

The Lesson

Selling national champions to foreign buyers can be fraught with complexity. This is even more true now, given the U.S.-China trade war, which has increased regulatory scrutiny of cross-border transactions, especially those involving sensitive technology.  Tariffs on U.S. and Chinese products could push the global economy into a recession, economists warn — hardly fertile ground for deal-making. However, by considering all of a deal’s stakeholders — not just shareholders, but employees and local residents — acquisitive companies can limit the risk of backlash. Conducting stakeholder analyses can also help ensure that a company’s efforts are well-received by the media, the public and politicians.

Finally, and most importantly, deal-makers need to stress the broader benefits of foreign ownership of U.S. companies. ShuangHui promised that it would honor Smithfield’s agreements with union representatives, and it followed through on that pledge. As planned, ShuangHui also increased capital spending at Smithfield by 24 percent, while also paying down its debt and gaining a superior credit rating from Moody’s. Smithfield began selling its pork to Chinese consumers directly online. This led to an employment boom in Virginia, with more than 1,000 more jobs added in the years since the acquisition.

The preceding is based on the case Smithfield Foods: Activists and Acquisitions (Darden Business Publishing), by Ming-Jer Chen, Ruo Jia and Senior Researcher Gerry Yemen.