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Baoshan

In: Business and Management

Submitted By Lgast
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Baoshan Iron & Steel Co. Ltd.: Crafting a Three-Way Cross-Border, Cross-Shareholding Alliance in Asia

1. What is the strategic position of Baosteel and what are its motives for negotiating a three-way cross border, cross-shareholding alliance?

- Market leader for steel. - Largest Subsidiary of Shanghai Baosteel Group Corporation

Motives for negotiating a three-way cross border alliance is to become one of the strongest steel conglomerates in the world. It would also help Baosteel meet the challenges arising from economic globalization and China’s WTO entry. Cross-shareholding is more significant but also more risky than a simple alliance.

2. How does a cross-shareholding alliance differ from a merger or a simple strategic alliance based upon co-operation?

Cross-shareholding: A situation in which a publicly traded corporation owns stock in another publicly traded company. So, technically, listed corporations own securities issued by other listed corporations.
Cross holding can lead to double counting, whereby the equity of each company is counted twice when determining value. When double counting occurs, the security's value is counted twice, which can result in estimating the wrong value of the two companies.

Merger: The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.

Strategic Alliance: SA is a kind of partnership between two entities in which they take advantage of each other’s core strengths like proprietary processes, intellectual capital, research, market penetration, manufacturing and/or distribution capabilities etc.
They share their core strengths with each other. They will have an open door relationship with another entity and will mostly retain control. The length of agreement could have a sunset date or could be open-ended with regular performance reviews.
However, they simply would want to work with the other organizations on a contractual basis, and not as a legal partnership.

3. What are the risks to each company in the alliance? Are there risks to the shareholders of the companies? Do you think a three-way merger is possible?

Companies that have cross holdings are susceptible to confusion and management holdout in cases of company mergers and acquisitions, because one company might refuse consent to the other, and vice versa.

As a result of the significant proportion of the market capitalization being ‘mirage-like’, if both stocks considered as a package look cheap, then they’re actually cheaper than they look. If they look expensive, they’re more expensive than they look. That’s because the discount or premium is shared amongst a smaller equity base than seems apparent.

I believe a three-way merger is possible, but it is prone to confusion if every detail of the partnership is not detailed properly and together.…...

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