An internal investigation by Caterpillar has uncovered deliberate, multi-year, coordinated accounting misconduct at a company it recently acquired, ERA Mining Machinery Limited (ERA), including its wholly owned subsidiary Zhengzhou Siwei Mechanical & Electrical Manufacturing, commonly known as “Siwei,” in Zhengzhou, China.
Caterpillar’s investigation determined several Siwei senior managers engaged in deliberate misconduct beginning several years prior to Caterpillar’s acquisition of Siwei. The misconduct at Siwei will result in a non-cash goodwill impairment charge of approximately $580 million in the fourth quarter of 2012. The $580 million charge erases three quarters of the original acquisition deal's value, accourding to BreakingViews.com.
The Siwei deal is part of Caterpillar's larger ambitions in China. In early 2012, Cat added Jon Huntsman, the former U.S. ambassador to China, to its board of directors, as reported in Reuters. Cat already has 23 manufacturing facilities in China and has said that the Siwei incident will not change its China strategy.
As a result of the scandal, Caterpillar removed several senior managers at Siwei who were responsible for the misconduct, and a new leadership team has been put in place. In a separate statement, Cat also announced that Luis de Leon, a vice president with responsibility for mining products, was leaving the company to pursue other opportunities.
The responsibilities for Siwei manufacturing operations have been moved to Caterpillar’s China Operations Division, led by vice president Qihua Chen, a long-time Caterpillar employee. The sales and support organization at Siwei will report to Kebao Yang, Caterpillar Global Mining general manager for China and Korea.
Caterpillar's statement on the misconduct included comments from Doug Oberhelman, Caterpillar's chairman and CEO: “The actions carried out by these individuals are offensive and completely unacceptable. This conduct does not represent, in any way, shape or form, the way Caterpillar does business or how we expect our employees to work, which is spelled out in Caterpillar’s Worldwide Code of Conduct. Once our investigation confirmed that misconduct had taken place at Siwei, we moved quickly and decisively to hold the responsible leaders directly accountable for the wrongdoing. Accountability is a critical way that we measure leaders at Caterpillar, and it is my expectation that leaders set an example and are accountable for their actions and results.”
Caterpillar has advised the Hong Kong Securities and Futures Commission of the issues and has filed a Form 8-K with the United States Securities and Exchange Commission disclosing the impairment charge. Caterpillar also said its investigation is ongoing.
“Despite these actions we continue to believe that the Siwei acquisition is well aligned with our strategy to expand our role as a leading equipment and solutions provider for the Chinese coal mining industry,” said Steve Wunning, Caterpillar group president with responsibility for Resource Industries. “We intend to utilize Siwei roof support products and manufacturing capabilities, combined with Caterpillar’s strong commitment to technical innovation and safety, to help our mining customers in China become more efficient and safer within their mines,” Wunning added.
In November of 2011, Caterpillar and ERA jointly announced a pre-conditional voluntary offer by Caterpillar, through a wholly owned subsidiary, for all of the issued shares of ERA, which at that time was a publicly traded company on the Hong Kong Stock Exchange. ERA primarily designed, manufactured, sold and supported underground coal mining equipment in China through its wholly owned subsidiary, Siwei.
In June of 2012, Caterpillar announced the completion of its tender offer for ERA, including its wholly owned subsidiary Siwei. The tender offer was completed after approval from the Chinese government. Siwei has a manufacturing base of 600,000 square meters and employs about 4,000 people in Zhengzhou, Henan province, where Caterpillar intends to continue manufacturing roof support equipment to serve underground mining customers in China.