Caterpillar writes off most of China deal after fraud
Caterpillar writes off most of China deal after fraud
Shares of Caterpillar fell 1.5 percent in afterhours trading following news of the fraud, which was discovered after problems were found with the Chinese company's inventory.
Caterpillar, the world's largest maker of tractors and excavators, said on Friday it would take a non-cash goodwill impairment charge of $ 580 million, or 87 cents per share, in the quarter.
Analysts had expected the company to report $ 1.70 per share when it reports its results on Jan. 28, according to Thomson Reuters I/B/E/S.
Caterpillar closed the purchase of ERA Mining Machinery Ltd. and its subsidiary Siwei, China's fourth-largest maker of hydraulic roof supports, last June, paying HK$ 5.06 billion, or $ 653.4 million. ERA had been publicly traded in Hong Kong, doing business through Siwei, which is known for making equipment to support roofs in mines.
A member of the Caterpillar board during the course of the Siwei deal told Reuters the board was distracted at the time by a larger transaction and paid relatively little attention to the Siwei acquisition.
"It came as a complete surprise to us," the former board member said of the fraud, speaking on condition of anonymity because of the sensitivity of the situation. "It was presented to us as a pretty straightforward transaction. It's a shame. It should have been investigated further."
The source said the driving force behind the deal was Ed Rapp, the former Caterpillar chief financial officer who now serves as a group president with responsibility for China, among other operations. The source said it was Rapp who presented the deal to the board and pushed for its completion.
A Caterpillar spokesman declined to comment on Rapp's role in the deal. Rapp could not be immediately located for comment.
At the time of the Caterpillar purchase, ERA Mining was listed in the Growth Enterprise Market (GEM) of the Hong Kong stock exchange, which is "designed to accommodate companies to which a higher investment risk may be attached," according to the offering circular filed by Caterpillar last year in Hong Kong.
The company was previously known as ERA Holdings Global Ltd. and provided "corporate secretarial services" before being acquired by Siwei in September 2010 through a reverse takeover.
Caterpillar's write-off could revive concerns over accounting scandals and corporate governance issues of Chinese companies voiced by investors including Muddy Waters founder Carson Block.
Reverse takeovers have been of particular concern, since most of the recent accounting scandals in the United States have come from small Chinese companies who went public via a reverse takeover, including China MediaExpress Holdings Inc. A Hong Kong arbitration panel on Wednesday ruled China MediaExpress was a "fraudulent enterprise."
In a statement, Caterpillar said an ongoing investigation launched after the deal closed "determined several Siwei senior managers engaged in deliberate misconduct beginning several years prior to Caterpillar's acquisition of Siwei."
According to a question-and-answer dialog Caterpillar included in its statement, the company found discrepancies in November between the inventory in Siwei's books and its actual physical inventory, triggering the probe.
The company also said it had replaced several senior managers at Siwei, adding that their conduct was "offensive and completely unacceptable."
Representatives for Siwei didn't respond to calls and requests for comment on the Caterpillar announcement. The company employs about 4,000 people in Zhengzhou and produces hydraulic roof supports used to prevent rocks from falling into a coal mine's working area.
Siwei competes with market leader Zhengzhou Coal Mining Machinery, according to Zhengzhou Coal's IPO prospectus filed in November.
Citigroup and law firm Freshfields Bruckhaus Deringer LLP served as financial and legal advisers to Caterpillar on the transaction. Blackstone and DLA Piper acted as ERA's financial and legal advisers.
Freshfields said in an emailed statement that it wasn't able to comment on client matters. Representatives for Blackstone, Citigroup and DLA Piper didn't respond to requests for comment yesterday.
The Siwei deal came as part of Caterpillar's larger ambitions in China. In early 2012, it added Jon Huntsman, the former U.S. ambassador to China, to its board of directors.
The company, which already has 23 manufacturing facilities in China and four more under construction, said the Siwei episode would not change its strategy in the country.
Caterpillar's experience with Siwei may also renew focus on the standoff between the US Securities and Exchange Commission and audit firms over access to accounting documents of US-listed Chinese companies suspected of fraud.
While Siwei was not US-listed, the broader accounting question has been a thorny one for US companies looking to grow their business in China.
Young Iraqis use innovation to make a living in oil-rich south
- The job market for Iraqi youths has become starkly different in the post-Saddam Hussein era
- In the decade which followed the US invasion and the dictator’s ouster in 2003, authorities continued to increase state hirings — with a heavy dose of nepotism
BASRA: From a roving cafe to scrap metal sculptures, young Iraqis unable to tap into the country’s oil wealth are having to find creative ways to make a living.
While their parents generally went straight into public sector jobs after graduation, the job market for Iraqi youths has become starkly different in the post-Saddam Hussein era.
In the decade which followed the US invasion and the dictator’s ouster in 2003, authorities continued to increase state hirings — with a heavy dose of nepotism.
But now, as 26-year-old Karrar Alaa discovered, there are no more guarantees.
Three years ago, he was counting on his business degree leading to a public sector job in the southern port city of Basra.
But tired of waiting, he has turned entrepreneur.
After gathering up all of his savings and borrowing money from relatives, Alaa invested in a car and transformed it into a coffee shop on wheels.
“It’s the first of its kind in Basra. I got the idea from a video shot in Europe and posted on Facebook,” he told AFP.
The “Coffee 2 Go” car has a giant plastic cup mounted on the roof, while an image of a cup of cappuccino and coffee beans is emblazoned on the body.
An initial investment of $20,000 has led to daily earnings of around 150,000 dinars, or $120, from cups of coffee made in a machine installed in the car boot.
Mashreq Jabbar earns similar sums from his little bookshop squeezed into a corridor of a Basra fashion mall.
“Renting a shop costs $6,000 a month; I only pay $2,500 for my hallway,” said the slim 26-year-old, as he tidied shelves of school books, romantic novels and poetry collections.
The geology graduate had also hoped to get a job as a public official, confident that his degree would make him employable in the local oil industry.
But even though the sector accounts for 89 percent of the state budget and 99 percent of Iraq’s export revenues, it provides only one percent of jobs as the majority of posts are filled by foreigners.
The lack of opportunities is nationwide; from the capital Baghdad to second city Mosul in the north, and from the agricultural east to the western desert.
It is not uncommon to find engineers working as taxi drivers, or sandwich stalls manned by literature graduates in a country of avid readers.
Officially, 10.8 percent of Iraqis are jobless, while youth unemployment is twice as high in a country where 60 percent of the population are aged under 24.
A mushrooming number of private universities — with Baghdad boasting around 30 — has made the situation even worse among graduates.
The private sector which emerged after Saddam’s rule has failed to fill the employment gap, with many young Iraqis holding out for the coveted public sector posts.
“The common view is that there’s no choice but to work in the public sector,” said Ahmed Abdel Hassan, an economics professor at the University of Basra.
“Young people who go to work in the private sector say it’s a temporary move before getting a post in the public sector,” he said.
Even Basra’s entrepreneurs see the benefits, with Alaa noting the social security and pension perks, while Jabbar pointed to civil servants’ guaranteed salaries.
Many of those holding out for a state job, however, are left unable to move out of their parents’ house.
Omar Abdallah, 28, had pinned his hopes on getting a teaching job at the end of his studies in fine art.
Iraq once had a high-quality and free education system, but that was left in tatters following the international embargo of the 1990s after Saddam’s invasion of Kuwait.
Having failed to land a job and with no capital to start a business of his own, Abdallah began collecting scrap metal.
“I could only count on myself and my talent,” he said at his family home, where one room serves as both his workshop and exhibition space.
Abdallah has transformed old bicycle chains into scorpions, cutlery into dragonflies and used nuts and bolts to make motorbike models.
In a good month he can sell half a dozen sculptures, charging between $200 and $250 apiece.
“People love my sculptures,” he said proudly. “They tell me: ‘How did you manage to make something so beautiful out of rubbish?’“