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Like most Chinese legislation, the country's Anti-Monopoly Law (AML), which took effect in August 2008 as the country's first antitrust statute, is long on principle and short on details. Naturally, this engendered a great deal of uncertainty among multinationals who never before had to concern themselves with antitrust considerations in their China dealings. Many feared the law was aimed at outsiders.

The hope was that the Ministry of Commerce (MOFCOM), which administers the AML, would shed some light on its interpretation of the law as cases came up for decision. So all eyes were on Coca-Cola Co.'s application for approval of its $2.4 billion bid to buy China's Huiyuan Juice Group Ltd., the country's largest juice company. In September 2008, Coca-Cola filed the application for a transaction that would have represented the largest foreign takeover of a Chinese company. It was one of the first major applications a company filed under the AML.

But MOFCOM rejected the deal in March, triggering an initial reaction that bordered on outrage from the foreign investment community. Pundits speculated that the ruling could have a chilling effect on foreign investment and provoke a backlash against overseas acquisitions by Chinese companies.

“At first, everyone was raising the death knell, taking the rejection as a signal from China that it didn't need foreign capital anymore and was moving into protectionist mode,” says Robert Kwauk, who manages Blake, Cassels & Graydon's office in Beijing.

That made good copy around the world, but close analysis sheds a significantly different–or at least plausibly alternative–light on the decision.

Market Threat

Huiyuan is one of China's most famous brands. At the end of 2008, the company had a 33 percent share of the pure juice market.

Coca-Cola is hardly unknown to the Chinese. The company has had a presence in China for years and has invested heavily there. Had Coke purchased Huiyuan, it would have been its largest foreign takeover and second largest overall.

Coke currently has about 50 percent of the carbonated beverage market in China. The merger would have given the combined entity 42 percent of the pure juice market, 20 percent of a fragmented overall juice market and 12 percent of the nonalcoholic beverage market.

MOFCOM's one-page statement rejecting the deal concluded that the concentration resulting from the merger would have an adverse impact on competition.

“Coca-Cola could use its market dominance in carbonated soft drinks to limit competition in the market for juice through tying, bundling and other exclusive transactions, resulting in consumers being forced to accept higher prices and reduced variety,” MOFCOM stated.

It concluded that the merger would threaten the survival of small and medium-sized juice companies.

According to the release, MOFCOM had asked Coke to submit a list of acceptable “restrictive conditions” that would produce “a workable solution” to the merger's adverse competitive effects. What the company submitted, however, failed to satisfy the authorities. MOFCOM didn't go into detail, but a Ministry source told the media that nothing short of giving up the Huiyuan brand would be satisfactory.

Observers abroad, including heavyweight publications such as the Wall Street Journal and The Economist, lambasted the Chinese for practising protectionism even as Premier Wen Jiabo has been criticizing the U.S. and others for doing the same in response to the economic crisis. Critics also note that the rejection comes at a time when the Chinese government is itself busily encouraging domestic consolidation in various markets.

Still, once the initial furor in the foreign press died down, the reaction of business turned out to be considerably more muted than expected.

Drink Dominance

Even Coca-Cola showed considerable restraint–perhaps not surprising given its huge stake in China.

“We are disappointed, but we also respect [MOFCOM's] decision,” Coca-Cola CEO Muhtar Kent told media.

But it wasn't just words. Kent also renewed Coke's commitment to the Chinese market, affirming that the company was sticking to its plan of investing $2 billion in the next three years–not including the funds that had been set aside for Huiyuan. The money will go to promoting Coke's existing brands.

The American Chamber of Commerce in China would not comment on the ruling. And the European Union Chamber of Commerce would go no further than expressing its hope that “the reasons behind the decision to reject the bid will be made publicly available in the near future,” according to a statement.

The eventual restraint may reflect emerging legal opinion that the visceral reaction abroad was inappropriate.

“When I examine the details of the transaction and analyze the result from the legal perspective, I do not come to the conclusion that MOFCOM's ruling is driven by protectionist concerns,” says Jun Wei, a partner in Hogan & Hartson's offices in China.

Rocky Lee, head of DLA Piper's venture capital and private equity practice in China, adds that the Chinese request for restrictions on the purchase was understandable.

“The deal would have given Coca-Cola a very significant and influential presence in the market,” he says. “So the request for modifications was entirely appropriate and mirrored what U.S. antitrust regulators might ask for in similar circumstances.”

Privately, moreover, some lawyers say Coca-Cola's offer, which was based on evaluations in 2006 and 2007, was a very rich price that amounted to three times Huiyuan's valuation. It had become even richer with the global economic collapse, and it was in Coca-Cola's interest, the lawyers suggest, to have the transaction aborted.

“We do these deals on a regular basis,” said one senior lawyer who works in the Beijing office of a large American firm. “By Chinese standards, the restrictions sought were really quite light, and Coca-Cola could easily have complied with them. If the company was really ready to do the deal in this economy, it should have been a no-brainer for them.”

However that may be, it's clear that the ruling was not devoid of political overtones.

Politics Prevail

According to Kwauk, the political pressure came from a source well known to the West.

“Government contacts and media reports indicate that it was the reaction of the ordinary Chinese Joes that prompted the rejection,” he says. “People were concerned about a monopoly, and they were also concerned about giving up a household name brand in China to foreigners.”

Arguably, that's no different from the people of St. Louis reacting adversely to the sale of beer giant Anheuser-Busch to Belgian-based InBev, a deal that led to considerable lobbying to nix the deal.

“I suspect that the Chinese regulators had their finger on the domestic pulse,” Kwauk says. “And like every other government in this environment, they're listening to the people a lot more than when everything's going well.”

Finally, it's not as if the U.S. has welcomed Chinese investment with open arms. The Chinese are still reeling after public reaction forced them to withdraw the state oil company's $18.5 billion bid in 2005 for Unocal Corp., even though 70 percent of Unocal's reserves were in Asia. Nonetheless, U.S. politicians repeatedly cited national security concerns.

At least the Chinese couched their rejection of the Coke-Huiyuan merger in business terms. Surely that's progress.