Caterpillar writes off most of China deal after fraud

(Reuters) - Caterpillar Inc uncovered "deliberate, multi-year, coordinated accounting misconduct" at a subsidiary of a Chinese company it acquired last summer, leading it to write off most of the value of the deal and wiping out more than half its expected earnings for the fourth quarter of 2012.

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 noncash 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 January 28, according to Thomson Reuters I/B/E/S.

Caterpillar closed the purchase of ERA Mining Machinery Ltd and its subsidiary Siwei 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.

'COMPLETELY UNACCEPTABLE'

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 were not immediately available for comment early on Saturday morning in China. The company employs about 4,000 people in Zhengzhou.

Representatives for Citigroup and law firm Freshfields Bruckhaus Deringer LLP, which served as financial and legal advisers to Caterpillar on the transaction, could not be immediately reached for comment.

Blackstone and DLA Piper, which acted as ERA's financial and legal advisers, were not immediately available for comment.

CHINA AMBITIONS

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 U.S. Securities and Exchange Commission and audit firms over access to accounting documents of U.S.-listed Chinese companies suspected of fraud.

While Siwei was not U.S.-listed, the broader accounting question has been a thorny one for U.S. companies looking to grow their business in China.

(Reporting by Ernest Scheyder; Additional reporting by Soyoung Kim in New York; Writing by Ben Berkowitz; Editing by Gary Hill and Tim Dobbyn)

Source: http://news.yahoo.com/caterpillar-writes-off-most-china-deal-fraud-002503302--sector.html

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