Siwei is Caterpillar's Autonomy

Caterpillar writes off most of China deal after fraud

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 wipe out half a quarter's profits.

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 fourth quarter of 2012.

Analysts had expected the company to earn $1.70 per share in the fourth quarter, according to Thomson Reuters.

Caterpillar closed the purchase of ERA Mining Machinery Ltd and its subsidiary Siwei last June, paying HK$5.06 billion, or $653.4 million at current exchange rates.

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."

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."
Comment: HP's Autonomy mess.


  1. WSJ: Caterpillar Finds Accounting Misconduct at Chinese Unit

    Caterpillar described the faculty accounting as deliberate and coordinated by several managers for Zhengzhou Siwei Mechanical & Electrical Manufacturing Co., a unit of ERA Mining Machinery Ltd., which Caterpillar paid as much as $734 million last June.

    The discovery will result in a non-cash charge of about $580 million, or 87 cents a share, to fourth quarter results, the company said. Analysts had forecast Caterpillar's quarterly earnings would be $1.70 a share.

    Siwei makes roof-support equipment for underground coal mines. Caterpillar said it first noticed discrepancies between the inventory in Siwei's records and its own physical inventory of equipment in November 2012 following the acquisition.

  2. More on: Caterpillar Unit in Scandal Has Unusual Roots

    ERA Mining, the Chinese company at the heart of the accounting scandal, owes its prominence to influences as varied as coal mining, Hollywood movies and a family connection to the U.S. retailer Sears.

    Under the trade name Siwei, the company makes heavy hydraulic lifts used inside mine shafts to reduce the chance of collapse. China's appetite for coal is the world's largest representing 69% of growth in global consumption in 2011, according to BP Statistical Review, but its mines are among the world's deadliest, with thousands of workers killed annually in accidents.

    In a statement last year, Caterpillar described its acquisition of ERA Mining as an opportunity to "help our mining customers become more efficient and safer."

    The company had been a relic of China's planned economy, but a U.S.-trained mining engineer and coal tycoon, Li Rubo, and Emory Williams, a Beijing-based American entrepreneur, transformed it over the past decade, seeking to tap growing demand for industrial equipment. They got it publicly listed as a non-Chinese company, with prominent international shareholders.

    The company obtained its Hong Kong listing in 2010, using a maneuver called a reverse takeover, according to ERA Mining's regulatory filings. It bought out a nearly defunct distributor of Hollywood DVDs called Era Information & Entertainment Ltd. and used its Hong Kong listing to bypass regulatory hurdles involved in an initial public offering.


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