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Baoshan Iron & Steel Co Ltd: Crafting a three-way cross-border, cross-shareholding alliance

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  1. Introduction
  2. Strategic position of Baosteel and motives for negotiating a three-way cross-border, cross-shareholding agreement
  3. Possible alternatives to this cross-shareholding alliance that Baosteel should have considered
  4. The risks to each company in the alliance
  5. Possibiliy of a three-way merger
  6. Conclusion
  7. Bibliography

Baosteel is the most modern and profitable steel maker in China. The Chinese giant is, however, in a critical situation: From one side, Baosteel is facing a need for capital to achieve its projects. From the other, the Chinese market became more attractive since China's entry to WTO because China lowered its tariffs and eased import regulations (especially in high-quality products) making the competition harder. This threat is growing considering the transnational announced alliances which would create the two biggest steel making groups. So Baosteel, approached POSCO and NSC for a three-way cross border, cross-shareholding alliance to satisfy its need for capital and thwart the threat of competition by securing its market share, sharing the risks and achieving cost-savings.

[...] alliance will also be the best way to fulfill local demand in terms of high-grade raw materials What are the possible alternatives to this cross-shareholding alliance that Baosteel should have considered? Evaluate each alternative in terms of its pros and cons. Baosteel should have considered two other alternatives to this cross- shareholding alliance: a Joint Venture and an R&D alliance. Let's try to compare these two possibilities. Joint Venture R&D alliance Pros Sharing the risk New products with high Find more capital quality Reducing time to market Sharing risks, Sharing technology resources and expertise Deal with uncertainty Dealing with technology More bargaining power obsolescence Increasing the global market share Cons Essentially the failure Problems of need of of the JV. [...]

[...] These groups will probably gain in terms of bargaining power which is one of the most important factors for success in the steel market. This will make the situation more complex for each of them, i.e., Baosteel, POSCO and NSC. However, a three-way merger will face the same problem the three-way alliance faced; the obstacle encountered here is the fact that Baosteel is not listed in any foreign Stock Exchange except the Shanghai Stock Exchange. Although Baosteel had intended to list itself on the New York Stock Exchange and the Stock Exchange of Hong Kong, it failed to follow up on [...]

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