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1. INTRODUCTION

1.1 An Overview of China's Overseas Acquisitions and Their Outcomes

Since 1978 in according to the “Open & Reform” Policy proposed by Mr. Deng Xiao'ping, China economic has undergone sustaining reforms. These reforms intended to optimize the domestic industrial structure, to build and to strengthen the connection between Chinese and global economy and finally to enhance the competitiveness of Chinese companies and overall economy development. Based on the fact, Chinese firms have been playing an increasingly critical role in foreign direct investment (referred as FDI hereinafter) worldwide. The emergence of China as important source of FDI is especially remarkable and noteworthy amongst developing countries.

According to the statistics from the China National Development and Reform Commission (NDRC), "Overseas direct investment from China's non-financial sectors may reach 48 billion U.S. dollars in 2010, hitting a new high. Resources, energy, high-tech and advanced manufacturing sectors would still be Chinese companies' major orientations (January 17, 2010). China's FDI to non-financial sectors totaled 216.6 billion U.S. dollars in the 2006-2010 period, exceeding the government's target 3.6 times.”

It's obvious that overseas mergers and acquisitions (OMAs) has become the primary mode for Chinese enterprises that are eager to pursue extra benefits in global market. At the same time, thanks to their huge size and dominant position in economic domain, State-Owned enterprises (referred as SOEs hereinafter) have been performing as the main player since the very beginning of this out-going campaign. However, owing to the deepen improvement of the market-oriented economy, private companies have also become more and more powerful and are investing actively worldwide. Undoubtedly, the investment mode of China's FDI would be further diversified in this ever-changing economic environment.

"Chinas investments abroad are growing despite an overall decline globally in foreign direct investment (FDI) following the 2008 financial crisis," said the U.S.-China Economic and Security Review Commission (USCC) in its report -- Going out: An overview of China's outward foreign direct investment (ODI).

Graph 1

Source: United Nations Conference on Trade and Development (UNCTAD), “Inward and Outward Foreign Direct Investment Flows, Annual,” UNCTAD State Database. http://unctadstat.unctad.org.

1.1.1 Rationale for China's ODI

What's the motivation underlying the flourishing Chinese OMAs? So far, according to accumulated transaction values of the completed as well as the foreseeable FDIs, seemingly, the diving forces mainly focus on guarantying the middle and long-term stable supply of energy and other raw materials. These deals are usually accomplished in accordance to the National industrial policy or the “Five-Year Plan”, in which the government not only encourages Chinese enterprises to invest on resources oversea, but also to obtain many other strategic assets and channels. All in all, Chinese government virtually expects that the main force of China economy, the numbers of SOEs, can comprehend the essence of modern corporate governance and gain increasing profits by acquiring similar foreign brothers. Accepted motivations can be roughly classified into four kinds of categories as follows.

Guarantying Energy & Raw Materials, the need that secures steadily access to overseas energy resources and raw materials for supporting China's high economic growth rate, continues to be a core strategic driving force. Likewise, the same story can also be heard in the international commodities markets, in which the prices of commodities ranging from aluminum, iron ore to cotton and sugar have been updated timely by so called “the Dragon's good appetite”. It seems no matter how much the world can produce, the products can always be digested undoubtedly. Why are they investing in these fields in despite of the relatively higher price? It's undeniable that each wave of resource-seeking FDI implemented by the main Chinese energy multinational companies has inconspicuously been guided by national industrial security policy, which aims to secure overseas supply. Simultaneously, the Chinese government could tighten the bilateral political or economic relations by FDI with its existed or target diplomatic countries, such as the neighboring countries, the resourceful countries and so on. Although these actions and polices such as preferential loads, financial aids, and donated infrastructure and public projects, have brought disputes in terms of the idea of “New Economic Colonization”, it's evident that china has successfully maintain the peaceful relations with most of the nations, especially in the developing world. Another evidence of the government's deep participation in these Energy & Resource driving FDIs is the “current conditions stipulated by the influential policy-setting National Development and Reform Commission (NDRC), requiring China's energy firms to purchase equity in upstream energy suppliers, principally through overseas acquisitions.” 37% of total value of sampling deals completed in period of 2007-2009 was in the energy, mining and metals industries, which were following the Commercial Banks, Bank related industries with a percentage of 68%. Based on these data we can see that, despite of the great achievement in the past several decades, China is still in the process of in industrialization and urbanization so that it has to find solutions for fulfilling the coming shortage of energy and other resources.

Thanks to the arising of “Green GDP”, China government has already started to establish its new energy consumption standards, but in consideration of the demographic pressure from the increasing population in urban area, it has never loosened its control on maintaining enough resource reserves. Before the middle of this century, China may still be the largest metals & coal consumer and is already becoming the second oil consumer compared with the U.S. in the same period. As we know, in 2009, the Chinese gigantic SOEs-Chinalco gave up a $19.5 billion bid to double its stake in the Australian iron core producer - Rio Tinto. Though Chinalco was not inclined to attain the controlling position, the deal still failed because of the worries from Australian government, particular on account of the shadow of the Chinese Gov.

Created-assets-seeking.: While the attempted deals that have garnered the most attention have generally get natural resources field involved, other M&A modes have been designed to help Chinese firms acquire high-technology, world-famous brands, manufacturing processes, and managerial know-how. Mergers and acquisitions in these areas may only comprise a small percentage of Chinese ODIs, but they more frequently serve as the vehicle for Chinese investment in developed markets. Chinese firms typically look for targets with high quality assets, which involve the companies that already have a fostered distinctive brand, an integrated operation team but currently they are at their disadvantage due to operation misstep or other financial problems. Chinese acquirers regard those firms as an ideal way to gain a foothold in developed markets and to learn marketing skills. For example, the financial crisis significantly lowered the cost of acquiring many companies or their assets, and Chinese companies with mass of cash in hands were taking advantage of these opportunities. These companies such as Geely Holding Group Co. and Tengzhong Heavy Industrial Machinery found themselves in a position to possibly acquire famous brands such as Volvo and Hummer from Ford and GM as the two American companies struggled through the economic recession. During the same period, the Chinese government also identified the global financial crisis as an opportunity for SOEs and had worked hard to promote FDIs by simplifying regulatory procedures.

Furthermore, Chinese enterprises are eager to develop advanced technology or enhance their overall R&D capability. Setting up R&D centers in developed countries allows Chinese companies to take advantage of those countries' research and innovation capabilities. For example, the Chinese computer producer Lenovo Group has been setting up a network of foreign R&D centers across the developed world, which helped it to become the No.1 domestic PC manufacturer and the fourth largest in the world. Chinese companies are increasingly transferring from the traditional role of manufacturing OEM to independent providers with own branded products by acquiring other companies' brands and technologies. Being able to say, holding some particular world-famous brands such as “IBM' - the expert of business Laptop and “Volvo”- the vehicle with sustaining commitment to Safety, these companies can definitely upgrade their business in domestic market.

Graph 2Sources: Compiled by author

Broaden horizons in global Markets.This effort has kept growing in importance as domestic Chinese markets have become more and more competitive. Access to international markets can help Chinese companies avoid some problems in the Chinese market, such as over-capacity. As Chinese companies meet drastic competition from powerful foreign multinational companies in the domestic market, likewise, in order to avoid the potential business corner, they have been establishing themselves into other emerging markets such as Brics, Middle Asian, Middle East and Africa, where they can offer the products and expand their sale channels with comparable advantages. For example, in the face of domestic industrial overcapacity, “White Home Appliance” manufacturer Hai'er began its expansion abroad many years ago both in developed world - North America, Europe and in developing world, like Iran.

Avoid the Trade-Barrier: Before China joined the club of the WTO, every year China government has to negotiate with other trade parties for quotas, tariffs, and other barriers that have been set up for Chinese-made goods. For example, most of light industrial products had limited access to the U.S. market. However, since many firms mainly survived depending on this market, they consequently invested in Vietnam, Indonesia or Australia and then exported these Non-China products to the U.S. Several years left behind, the mentioned situation is still in the middle of nowhere. Although to some extent, the developed WTO members have lowered the tariffs and quotas on “Made in China” products, Chinese firms have still continued to layout factories in countries that have relatively easy access to the American and European markets. For instance, the acquisition of German television brand Schneider by Chinese television manufacturer TCL and the purchasing of factories built in Italy by Hai'er, have successfully helped them avoid strictly European quotas on these kinds of products.

1.1.2 Distribution of Target Country/Region (Analyzed Deals)

Graph 3 Sources: Compiled by author

Illustrated by numbers listed in above graph, Chinese enterprises mainly invested in Hong Kong and other “Tax heavens ”. The destination followed is North America, where United States accounts for 2/3 of the regional deals. Besides, considering the geographic factor or raw-resources, other Asia-pacific areas have been increasingly becoming the important OMA destinations. Moving to African continent, although Chinese government has helped many energy companies control quite a number of oil fields or mineral resources, it is still not an attractive choice for most of Chinese firms due to their awful political situation and insupportable infrastructures.

Herein there is another phenomenon that deserves our extra attentions, the “Recycled” Chinese foreign direct investment. “According to the 2009 MOFCOM Statistical Bulletin of China's Outward Foreign Direct Investment, China's ODI flows were $56.5 billion in 2009, but the true breakdown of the destination of China's ODI is unknown because a large share of them was made in the world's tax havens (47 of 101 deals according to Graph_3), from where the money can be directed to projects around the world.” Also, many Chinese enterprises were used to stock up a large proportion of their foreign currency reserves in tax havens and then partial of these funds were recycled back into China as “new FDI.” As a result, these “Fake FDIs” can obtain special advantages such as preferential taxes or other supportive policies compared with the same investments done by their domestic competitors.

Moreover, as graph_3 indicates, although geographically dispersed, a significant portion of China's FDI is concentrated in a few countries/regions. Generally, Hong Kong and other tax havens alone received 47 % of selected Chinese FDI deals, which is perhaps explained in part by their role as “Relay Stations”. The regional preference in favor of Asia is not only explained by Hong Kong, but also by reason of the Southeast Asian region, where there has strong traditional affiliation with China mainland in terms of economic structure, corporate governance (family-business & hierarchical organization), similar cultural (Confucius) and long-standing historical commercial relations. Nowadays, it is the second preferred destination for Chinese enterprises in their “going out” list. Statistically, these two destinations have attracted majority of Chinese Asian FDIs, nearly 95% of total sampling value of Asian deals (64% of all samples).

1.1.3 Industrial Distribution

Most Chinese cross-border investors are active in several core sectors. However, more and more industries have been getting involved on their own initiatives. These deals reflect the diversified nature of the country's domestic industry and the Chinese government's long views on national economy. The consistently high percentage (33%) of investment flow in the service sectors, such as financial, advertising and other consulting services reflects the fact that the FDI is largely used to serve and promote the export of Chinese commodities. Subsequently, the investment flow with aims to pursue natural resource accounted for nearly 21% in overall.

Graph 4 Sources: Compiled by author

Oil, gas, and mining and metals related are by far the most important parts within the Chinese economic blueprint. “Examples of ODI projects in this sector include massive acquisitions by the state-owned CNOOC, which in January 2002 made a $593 million deal to buy the Indonesian assets of Spain's Repsol YPF, followed by the $275 million purchase of a 12.5 percent stake in the Indonesian offshore Tangguh Gas field from British Petroleum Co. China's increased M&A activity has not gone unnoticed.” Although so far there isn't sure-enough evidence that proves these SOEs are under absolutely control by government, the concerns on natural & raw materials type of targets are still very prevalent among international investors, who are quite worried about the targets once acquired by Chinese SOEs or even the State share-controlled public companies, will only provide their products to China instead of selling them in the open market. The concerns of National security do matter in many cases. For example, they helped stop CNOOC to purchase Unocal in 2005, whereas, its opponent, Chevron, ultimately won the bidding only after Congress hinted that the deal might be vetoed by the American Foreign Investment Committee.

1.1.4 Ownership of Acquirer

Profited from the achievements gained in the process of economic reforms, the transformation of SOEs to listed corporations has been carrying on at a large scale. Currently a majority of the companies pursuing cross-border deals are publicly traded SOEs that used to be wholly state-owned. By the end of 2010,the number of SOEs that are in the controlling positions with more than 20% shares was 332, of which 228 companies are domestic listed companies, other 94 (including 27 companies listed in both domestic and Hong Kong exchanges)companies are publicly traded at foreign exchange institutions. “As SASAC said, as far as 2010, the percentage of public transformation of major SOEs and their subsidiaries have been increased from 30.4% in 2002 to 70%.” While at this point the state (including local governments) is still a major shareholder in many of these companies, in which managers must operate them duteously and cautiously and follow the disclosure rules of the exchange on which they are listed. The management teams are usually nominated by the National State-owned Assets Supervision and Administration Commission (SASAC) or other local governments, thus their decisions of cross-border M&A usually cannot be regarded as completely independent actions. Recently there is a new trend that, if the management members perform well at their positions, they will be promoted to another exciting job, such as nomarch or minister. It's predictive that many CEOs would calculate the cost of disobeying indications from government. Meanwhile, because many of them rank among China's largest companies, they have been in the forefront of the country's corporate globalization effort. As a matter of fact, although plenty of Chinese companies failed on the road of “going out”, or in spite of the achieved deals but with negative or tiny positive returns, many of them are still striving for out-going investment opportunities. Acknowledge of above information can help us further understand the current prosperous Chinese M&A tidal current.

1.2 Aim and Organization of the thesis

From both the financial ratios and operating performance angles, this study provides investors an opportunity to evaluate the 1Y pre and post impact of cross-border M&A on those acquirers, which have already taken up the dominant position in the acquired companies. Herein, Chinese overseas M&A deals between 2000 and 2010 were examined to identify the distributions of acquirers, their influence on the operating performance of acquirers, and the driving forces implied by such performance. Selected financial ratios and calculated abnormal returns are implemented in order to identify any changes on their short-term performance.

The paper is organized as followed:

  • Section I describe and discuss the history and current overview of Chinese overseas M&A.
  • Section II provides a literature review on those previous studies on M&A, evaluation of operating performance, “Go abroad” Policy as well as the development of Chinese SOEs.
  • Section III outlines the research methodologies.
  • Section IV describes the statistical result.
  • Section IV concludes.

2. REVIEW OF THE RELATED LITERATURE

2.1 The Basics of Mergers and Acquisitions

What's the exact definition of Merger &Acquisition? According to the explanation at Vernimmen, “A merger consists in combining two or more companies, generally by offering the shareholders of one company securities of the other company in exchange for the surrender of their shares. Often called mergers, these business combinations are, however, almost always acquisitions. It can take forms of a legal merger, asset contribution, and contribution of shares.”“While both economic entities have been displaced by a brand-new organization after the merger, ‘An Acquisition', on the other hand, is “Expenditure for the purchase of a company or a share in a company.”Due to the strategic role of Chinese cross-border M&A in current economic system, it's very clear and it has been testified that most companies adopt “acquisition” as the main solution on their way of globalization. In this paper, we have to focus on the deals with more than 50% controlling shares, but in fact this mode is also rather popular in many other deals that are not intend to take up the dominant positions, especially in the resources-seeking group.

From another point of view, currently Chinese acquirers have no other choice but via “Acquisition”. First of all, it's the best way of learning how to become modern enterprises in short-term if without considering the synergy effect. Secondly, for the sake of minimizing the adverse concerns from relevant stakeholders, it's an efficient way for SOEs like CNOOC to get position in those foreign energy or resource-oriented companies. Compared with these Chinese overseas M&A, western companies are very skilled at using many sophisticated M&A portfolios for realizing their comparative simple motivation. “In the developed economies, M&A transactions can assume myriad forms. In Europe, for example, an acquisition could take the form of a purchase of a target company's assets with either cashes or shares; a purchase of share in the target with the purchaser's shares: or some combination of these forms. Mergers, like acquisitions, can be effected with shares or cash. The transaction can leave the purchase in place, in the case of a forward merger, leave the target in place.”In general, regardless of the adopted forms, they pay more attention on the potential returns on investments.

2.2 The Development Chinese domestic & foreign M&A activities

Previous to the year of 1982, China did not allow any form of the market-oriented merger & acquisition activities. While its reform of “Market Economy” were becoming more acceptable thereafter, it released its regulations step by step in order to broaden the investable fields that can allure FDI, but only by the form of “Chinese-foreign Equity Joint Ventures” or “Chinese and foreign contractual joint venture”. Afterwards, those acquisitions can be managed by purchasing shares on the secondary market, or purchasing other existing shares in the Chinese entities from private investors by negotiation. In the first half of 1990s, foreign investors was able to acquire the listed companies by purchasing B shares, which are specially set up and publicly traded in Chinese secondary market in US dollar. In the years that followed, however, foreign investors played increasingly important role in equity exchange market, where they can purchase shares through agreements or other arrangements with those unlisted companies, and also can make their strategic investment by merging or acquiring with the listed companies.

Since the second half of 1990s, Chinese authorities started to officially encourage using western M&A modes. By issuing shares on the two exchange markets, SOEs commenced to diverse their shareholders, to degrade their state-owned images and tried to raise funds from public markets. “These high grade assets were likely to provide foreign investors with opportunities to buy directly the shares of a going concern.”

The last few years have witnessed the gradually transformation of mentioned “Chinese-foreign Equity Joint Ventures” or “Chinese and foreign contractual joint venture” into listed companies. The shares of these companies are traded frequently and would finally be held by a Hong Kong or other holding company registered in “Tax havens”. However, among all these transactions, the percentages of the shares for which the foreign business can hold are still restricted by the country authorities.

Unlike acquisition, mergers among domestic Chinese companies had already become commonplace since 1990s. Such mergers attempted both to recue failing SOEs by combining them with healthy enterprises, and to create conglomerates. Although mergers directly between foreign companies and Chinese entities are not yet possible to all the SOEs in China, there have been increasing numbers of mergers between foreign investor by integrate their shares in the early established collaborative enterprise.

Currently there is a rapid surge in the growth of M&A transactions in China due to restructuring of Chinese industry and promoting of national economic developments. At the same time, the global economy is still in the process of recovering from the financial crisis and suffering the ongoing debt & inflation crisis. The economic uncertainty also provides the opportunities for Chinese acquirers to purchase foreign targets at good price. Lots of measures have been established to encourage Chinese enterprises to distribute its assets cross the world, such as:

  • “Further de-regulation in areas of energy, telecom, financial services, and auto manufacturing and other service areas;
  • Continuous Privatization of SOEs in extensive industries;
  • Rich supply of capital funds to fuel higher-growth investments;
  • Consolidation of core industries as a outstretched strategy to gain global competitiveness ;
  • Reduction of duplicated economic management functions to increase efficiency.”

The legal and regulatory frameworks safeguarding the international M&A have also been put into further construction. With the economic and regulatory environment getting mature, it is foreseeable that there will be more international M&A conducted by Chinese firms with the years to come.

2.4 China's “Going abroad” policy

The campaign of “Going Abroad” started in 1996. At that time, the Chinese government gradually realized that on the way of rescuing its numbers of SOEs, domestic mergers as well as investments abroad would become the two most effective solutions. Since then, Chinese government has initiatively amended many regulations for ensuring Chinese Overseas M&A can be accomplished efficiently, which would be beneficial to both the big amount of state-owned assets and the development of China's overall economy. These changes have been prompting more Chinese enterprises to invest abroad and thereby to expand their distribution channels, to enter new markets, and to obtain important strategic resources such as well-known brands, advanced technology and natural resources.

It's identifiable that the unveiling of its “Going abroad Policy” was the milestone of the official promotion of outgoing FDI. “As a national policy, it was elevated in importance when it was adopted as part of the 10th Five Year Plan (2001-2005)”. One major driving force of the “Going Abroad” has been the loosening of controls on overseas M&A by Chinese firms. In the very beginning, cross-border investment requires co-sanction by China's Ministry of Commerce and the State Administration of Foreign Exchange (SAFE). “In 2002, SAFE authorization was decentralized from the central agency to selected local authorities for projects of US$1 million or less, with an overall investment cap of US$200 million. Subsequent decentralization continued in 2005 such that foreign exchange authorization was extended to all provinces, municipalities, and autonomous regions; the local limit was increased to US$10 million; and the overall investment quota was expanded to US$5 billion. In June 2006, the overall investment quota was abolished. Meanwhile, authorization from the Ministry of Commerce was decentralized to local commercial administrations in October 2004, except for large state-owned enterprises.”From above evolution of national regulations on FDI, it's rather clear that China government has become more and more confident in the outlook of this policy, moreover, that its attitude towards to FDIs has been obviously developing from prudent censoring to initiatively promoting.

A second force has involved direct support from the Ministry of Commerce. Some of this has consisted of informational support and bureaucratic expertise in navigating foreign investment rules. In July 2004, the Ministry of Commerce along with the Ministry of Foreign Affairs provided a “guidance list” of industries that should be preferred for cross-border investment. Additional support has come in the form of preferential treatments that are in favor of domestic companies in terms of direct allowances, tax derate, preferential or supportive loans, etc. Furthermore, an official supportive loan system under directions of the National Development and Reform Commission and the National Export-Import Bank of China came into existence in 2004, which has effectively accelerated the progress of outgoing investments.

2.5 Evaluation of pre & post acquisition performance

So far, most of studies on Chinese cross-border M&A are dedicated to the evaluation of the pre- and post- stock price performance and to analyze the corresponding determinants.. Few studies, however, are focusing on the overall impact of overseas M&A activities in respect of the operating performance of Chinese acquirers.

Although those studies of stock price performance have somewhat successfully measured the short-term increases or decreases in equity value, they are unable to determine whether M&A create real economic gains or losses (Bayldon, R., A. Woods and A. Zafiris, 1984). What's more, it is very much true that most of investors can only gain positive long-term returns on condition that the acquirer have improved its overall operating performance or capabilities from the achieved deal. However, due to the unsound of domestic information disclosure system, it was very difficult to testify the data obtained from this inefficient Chinese stock market. Thus, it is obvious that these researches, along with their conclusions, could be partially fallacious.

The current studies that aim to contribute to the debate on Merger & Acquisition by examining the operating performance of acquirers rather than measuring the return on shareholders are seldom in China, especially the one about cross-border deal. However, many historical researches, except the one on Greek M&A market (M. Pazarskis et al, 2006), provided some empirical evidences on the improvement of operating performance to the merging companies. These evidences have been observed in many countries, both in developing and developed worlds, including US (M. Healy, G. Palepu & S. Rubak, 1990), UK (R.Chatterjee & G. Meeks, 1996), Australia (T. Brailsfrod & S.Knights, 1998), and Malaysia (R. Rahman & R.J.Limmack, 2004).

Their results indicated that performance of merging firms have significantly improved by an increase in asset productivity relative to the specific industry, and also by higher levels of post-merger operating cash flows, which has been mainly gauged by operating cash flow margin, operating profit margin and so on. According to the research on Malaysia, even though there was the potential for improvement in operating performance, still, the author also suggested that opportunities for long-term gains from M&A activities may vary concerning the particular characteristics of merging company, such as ownership, public status, etc. because of the similarities between Chinese and Malaysian markets, its conclusions may provide some inspiring views on our analysis of cross-border investments.

In M&A field, western scholars have also used different techniques in the form of ratio analysis and comparative analysis to identify the effects of M&A on acquiring companies. Despite there are still considerable disagreement among researchers of whether M&A increase the value of the assets of the merging firms, it's undeniable that usually the shareholders of target firms receive substantial premium and uniformly are found to gain from the deals. But, the gains to the acquirers' shareholders are usually close to zero and often are even negative (Berkovitch and Narayanan, 1993; Bradley, Desai and Kim, 1988; Sirower, & Sahni 2006; Variaya and Ferris, 1987). Considering that the size of acquirers are generally much larger than targets, even small percentage losses to acquiring firm may urge shareholders to cancel the deals in progress. As a result, there are inevitable concerns from diverse stakeholders on whether the bigger acquirer can gain more or less in the long run.

Explicated by early empirical studies, around the announcement dates, shareholders of target typically received large positive returns while the acquiring firms only gained tiny positive abnormal returns[Jensen and Ruback (1983) and Asquith; R. Bruner and W. Mullins (1983)]. Whereas, it is suggested that most acquiring firms under-performed the market in a longer period, reporting negative abnormal returns. Based on a pool of 27 cross-border M&A deals, [Masulis, R. W., Wang, C., and Xie, F. (2007)] analyzed post-deal performance of Chinese acquirers, which are listed on the Shanghai and Shenzhen Stock Exchange during the period of 2000-2004, these studies found that, as a whole, cross-border has created positive value for acquiring firms around acquisition. [Chi, Jing, Sun, Qian and Young, Martin R. (2009)] examined the performance and characteristics of acquiring firms in the Chinese stock market. They found significant positive returns before and upon the M&A announcement, but with insignificant long-run abnormal returns.

2.6 The relationship between government and business in China

Dunning and Lundan (2008) summarized that the motivations of acquiring firms from emerging markets may differ from those in developed markets. In particular, government is likely to play a more prominent role in Overseas M&A decisions. The reason we emphasize this relationship is because Chinese OMAs are frequently seen as strategic instruments to further government's efforts to secure energy and other natural resources, and to appropriate new technologies. For instance, a number of authors have noted that no discussion of Chinese OMAs is complete without special recognition to the role of the Chinese government (Ping, 2007; Huaichuan and George, 2008; and Morck, Yeung, and Zhao, 2008).

The relationship between Chinese government and business enterprises is complicated. Government can be via direct ownership or via government ownership of shares. Further, different levels of government may be involved; with national, provincial, and municipal governments engaged individually, or operating together as joint ventures. This makes the distinction between government- and private-ownership blurry at best (Antkiewicz and Whalley, 2007). Liu (2005) estimates that 61.4 percent of Chinese listed companies are under local government control, 15.3 percent are under central government control, and 3.4 percent are cooperatively controlled by different levels of government. Only 12.8 percent are identified as privately controlled. Similarly, Morck, Yeung, and Zhao (2008) find that 65.9 percent of shares of firms listing on the two mainland exchanges are owned by some level of Chinese government or related government agencies.

The implications of government control are manifold. Government can influence the appointment of senior company executives, can exert direct control over the kinds of business activities undertaken and the manner in which they are implemented, and subsidize specific business activities either directly or indirectly via preferential loans or capital from the government controlled commercial Banks, the several national development banks and other sovereign funds. Many literatures have attempted to explore whether government control has beneficial or detrimental effects on Chinese firm performance, with evidence mixed depending on the particular performance metric employed (Xu and Wang, 1999; Qi, Wu, and Zhang, 2000; Sun, Tong, and Tong, 2002; Hovey, Li, and Naughton, 2003; Wei, Xie, and Zhang, 2005). From our point of views, the key of matters is whether governmental factor brings positive returns to Chinese firms when they are pursuing the strategic globalization. In fact, one of the top priorities of the “going global” strategy is to create of a number of “Conglomerate Company”. These large multinational firms with globally recognized brands are able to compete in the international marketplace. Political and financial support for such state-owned or state-affiliated enterprises often gives them an advantage over more market-oriented western companies, as the former may not be subject to the same fiscal discipline by their owners or investors, thus significantly reducing their cost of capital.

3.  DATA AND METHODOLOGY

3.1 Data Description

The sample of this study is the population of 89 qualified cross-border acquisitions engaged by Chinese public firms that occurred between Oct 2000 and Dec 2009 (selected from 1982 to 2010), selected from the Thomson's SDC Platinum M&A Database (henceforth Thomson).

Other Data and key financial ratios were collected from the following websites: Yahoo Finance (finance.yahoo.com), Google Finance (finance.google.com), and Thomson One Banker (Remote access to EMLYON), Annual financial statements were obtained from the official websites of the companies (if available).

3.2 The selection criteria include:

  1. M&A transaction are listed and completed between January 1982 (‘Open and Reform' policy added in Constitution) and December 2010.
  2. The acquiring firm must be Chinese (excluding the Chinese companies located in HK), and the target firm(s) non-Chinese (including the one located in HK).
  3. Transactions with a deal value greater than 1 million US dollars are included.
  4. The acquiring firms must control greater than 50% shares of the public target.
  5. Currently the historical share price of acquiring company must be available.
  6. Excluding the companies that are no longer listed after the transactions. 
  7. The acquiring firm must have its shares traded on either (i) one of the following stock exchanges: Shanghai, Shenzhen, Hong Kong, New York, Singapore, and London.

The sample includes the name of acquiring and target firms, year of acquisition, dollar size of deal, acquired firm country, and acquired firm industry, etc, which are listed in Appendix 1. Table 1 below summarized the features of all cases according to the industry classification, geographic region of the acquirers, year deals took place, and the value involved in the deals and also the range of controlled shares after the transactions. The tables below provide some statistics describing the characters of Chinese outward cross-border M&A activities.

Distribution of OMA Transactions by Acquirer Industry ($ Millions) - Table 1

Distribution of OMA Transactions by Acquiror Industry

Acquiror Industry Sector

Percentage of Deals

Average Value of Deals $ Millions

Miscellaneous Serivces 1

21%

5437

Energy and Natural Resource2

3%

372

Miscellaneous Products3

1%

138

Telecom, Electonices & Prepackaged Softwares 4

6%

224

Chemicals and Drugs

1%

5

Electric, Gas & Water Distribution

33%

8862

Transportation

15%

771

Wholesale, Retail, 5

20%

933

Total

100%

16742

1 includes the SDC catagories: "Business serices; Social Services; Advertising Services; Investment & Commodity Firms, dealers, Exchanges; Radio and Television Broadcasting Stations; Commercial Banks, Bank Holding Companies; Real Estate; Mortgage Bankers and Brokers"

2 includes the SDC catagories: "Oil and Gas; Petroleum Refining; Mining; Metal and Metal Products; "

3 includes the SDC catagories: "Transportation Equipment; Food and Kindred Products; Wood Products, Furniture, and Fixtures; Textile and Apparel Products; Measuring, Medical, Photo Equipment; Clocks; Rubber and Miscellaneous Plastic Products; Stone, Clay, Glass, and Concrete Products; Tobacco Products; Leather and Leather Products; Paper and Allied Products"

4 includes the SDC catagories: "Computer and Office Equipment; Communications Equipment, Electronic and Electrical Equipment,  Prepackaged Software, Telecommunications"

5 includes the SDC catagories: "Retail Trade-Home Furnishings "

Distribution of OMA Transactions by Country/ Region - Table 2

Country

Number of Deals

Percentage

Total Value of Deals by R & C

Average Value of Deals

Region

Hong Kong 1

40

44.94%

7322.65

183.07

Asian

Singapore

4

4.49%

1219.42

304.85

Asian

Indonesia

2

2.25%

853.89

426.95

Asian

Macau

2

2.25%

742.31

371.15

Asian

Thailand

1

1.12%

539.12

539.12

Asian

South Korea

2

2.25%

381.94

190.97

Asian

Japan

3

3.37%

169.91

56.64

Asian

Azerbaijan

1

1.12%

44.00

44.00

Asian

Sub-total

11273.23

Australia

7

7.87%

3423.87

43532.04

Pacific

Sub-total

3423.87

Canada

6

6.74%

990.39

14690.84

N/ A

United States

12

13.48%

638.33

4734.24

N /A

Sub-total

1628.72

British Islands

7

7.87%

259.25

3296.12

Europe

Netherlands

1

1.12%

148.50

13216.23

Europe

France

1

1.12%

8.66

770.74

Europe

Sub-total

416.40

Total

89

100.00%

16742.22

Table 3 of Year M&A deals take place

Year

Percentage

Number of Deals

Yearly Tatal Value of Deals

No. of Acquirors

2000

1.12%

1

32.45

1

2001

1.12%

1

3.83

1

2002

8.99%

8

1288.07

8

2003

3.37%

3

295.13

3

2004

7.87%

7

203.84

7

2005

3.37%

3

220.14

3

2006

6.74%

6

2379.83

6

2007

23.60%

21

2452.90

19

2008

20.22%

18

5793.99

17

2009

23.60%

21

4072.03

18

Total

100.00%

89

16742.22

83

This Table shows time and deal value distribution of 89 (instead of 101) Chinese outbound M&A transactions initiated by 83 Chinese acquirers from 9/26/2000 to 12/30/2009. Events and deal value clustered in the period 2006 to 2009. Chinese OMAs haven't been disturbed by the Global Financial crisis very much. The number of transactions peaked in 2007 and 2009, while the highest average transaction value happened in year of 2008.  (All Data above was gathered according to the designed sample criterions). Attention! All cases in 2010 were excluded from the analyzed ratios sampling, because of their un-available financial data in 2011

Table 4 of deal value (in US$ million)

Value of Transaction (US $ million)

No. of Cases

Percentage

<100

63

70.79%

101-200

11

12.36%

201-500

6

6.74%

501-1000

5

5.62%

1001-3000

4

4.49%

Total

89

100.00%

Table5 of Range of share controlled after Announcement

Shares owned after M&A

No. of cases

Percentage

100%

59

66.29%

51% to 99%

26

29.21%

50%

4

4.49%

Total

89

100%

3.3 Methodology

3.3.1 Ratio Analysis

In order to study the improvement in operating performance, we employ a Ratio Analysis methodology comprised by 3 groups of six ratios. We identify the development of performance by comparing the changes in financial ratios. At this point, we chosen this window of -1Yand + 1 Y by the reason of these very limited available samples. As we can see from the mentioned evolution of Chinese cross-border direct investments, Chinese enterprises, as a whole, are still very young as publicly traded companies. What's more, a suitable window could present an efficient and timely overview on the globalizing company, so that investors can make better strategic decisions accordingly.

In addition to identifying financial ratios of Chinese firms, we followed the methodology used by Healy et al. (1992 and supported by other scholars like Higson and Elliott (1994) and Ismail, Ahmad, Davidon, Ian and Frank, Regina (2009). We employ six ratios combined with their abnormal adjusted performance measures to evaluate the post-merger operating performance.

The following regression is implemented:

Post-merger adjusted performance = alpha + beta* post-merge performance;

“Six financial ratios” were grouped into 3 and Comparisons were made on the performance a year before / after the acquisition. These 3 groups of financial ratios are:

1) Liquidity Ratios:

Ø Quick Ratio:

Quick Ratio = (Cash & Equivalents + Receivables (Net)) / Current Liabilities

Ø Current Ratio

Current Ratio = Current Assets / Current Liabilities

Generally, liquid ratios measures the short-term capability of a company to payback its liabilities and also indicates whether this Company has enough liquid assets to meet unexpected needs.

2) Profitability Ratios:

Ø Return On Invested Capital:

Return On Invested Capital = (Net Income Before Preferred Dividends + Interest Expense On Debt - Interest Capitalized) / ((Last Year's Total Capital + Last Year's Short Term Debt & Current Portion Of Long Term Debt)+(Current Year's Total Capital + Current Year's Short Term Debt & Current Portion Of Long Term Debt)/2) * 100

Ø Operating Profit Margin:

Operating Profit Margin = Operating Income / Net Sales or Revenues * 100

These two ratios gauge a company's long-term operating capability.

3) Leverage Ratio:

Ø Working Capital toTotal Capital:

Working Cap to Total Capital = (Current Assets-Total - Current Liabilities-Total) / Total Capital * 100

Ø Total Debt toCommon Equity:

Total Debt to Common Equity = (Long Term Debt + Short Term Debt & Current Portion of Long Term Debt) / Common Equity * 100

Leverage ratios indicate the extent to which the company relies on debt and possible risks to meet the payback of interest and principal upon maturity.

3.3.2 Event Study

The short-run impact on the Chinese acquiring companies engaged in cross-border M&A's were assessed in an event-study methodology framework. The event-study approach assumes that the financial markets are efficient and the share prices adjusted it instantaneously once related information is made available to the public. As part of the market models, the commonly used event study methodology as original proposed by Fama (1976) including the cumulative abnormal returns (CAR) as employed by by Fama, Fisher, Jensen and Roll (1969) and also supported by J. BROWN & B. WARNER, 1980, compares actual stock prices as impacted by the announcement of an acquisition with the stock prices without being impacted by the acquisition.

The projected stock prices without being impacted are to be projected from historical prices assuming a normal course that stock prices will follow. The difference between the actual stock price and the projected stock price represents the abnormal returns caused by the announcement of an M&A activity. It is common to denote the day of announcement of an M&A as 0 and the number of days before and after the deal is denoted -T and +T, respectively.

Parameters as follows,

  • Acquirer=Boeing, Target=McDonnell
  • Announcement Date: MM/DD/YYYY
  • Normal Return Model: Market Model
  • Estimation Window: MM/DD/YYYY - MM/DD/YYYY
  • Event Window: +/- 5 days centered on the announcement date
  • Return computation: Rt = (Pt − Pt−1)/Pt

4.  RESULTS      

4.1 Overall Operating Performance

The comparison of ratios between -1Y and 1Y+ was summarized in Table_6 below. For each ratio, the table shows the percentage of companies that had their ratio increased one year after the deals, and the average corresponding ratio for all each categories.

Table6 of Six Financial Ratios of Operating Performance (-1 Y to +1 Y)

Variables (%)

% of deals -1Y to 1Y+

Mean %

Positive

Mean %

Positive

No of Samples

Quick Ratio

33.33%

2.29

100%

1.69

100%

60

Current Ratio

33.87%

2.76

100%

2.22

100%

62

Return on Invested Capital

34.43%

13.73

95%

1.15

89%

61

Operating Profit Margin

30.77%

17.69

95%

12.74

86%

65

WC to Total Capital

25.86%

39.49

89%

24.31

79%

57

Debt To Equity

65.63%

45.42

97%

79.62

100%

65

Variables (%)

Alpha

P-Value

T-test

Beta

P-value

T-test

Quick Ratio

0.579605

0.0099

2.6669

0.485398

0.0000

6.8038

Current Ratio

0.973419

0.0005

3.6829

0.451565

0.0000

5.8400

Return on Invested Capital

-12.21874

0.0879

-1.7356

0.974068

0.0016

3.3160

Operating Profit Margin

-1.935387

0.3238

-0.9944

0.829461

0.0000

17.5357

WC to Total Capital

-2.675796

0.6862

-0.4061

0.683304

0.0000

5.3668

Debt To Equity

43.27054

0.0000

5.1032

0.800283

0.0000

8.2141

In the table_6 we present the summary deal characteristics for examined samples. As illustrated, above only less than 40% of Chinese acquirers had an improved performance in the year after an M&A based on the six measurements. In Fact, the 1.15% of ROIC on average has decreased remarkably compared with the same measure in pre-merger period- 13.73%, while there is a slightly decrease on the average operating profit margin from 17.69% to 12.74%. We could also notice that along with rising of total merged equity, 65.63 % of involved companies have used the debt financing in order to support their cross-border activities. In addition, since the majority of internal cash flow may have been occupied by these M&A deals, the capital devoted to operations have been negative influenced in the short-term, for example, the ratios of working capital to total capital were deteriorated in numbers of deals (74.14%). Accordingly, other two liquid measures revealed that the short-term capability of paying back its liabilities and fulfilling the unexpected operating needs has been partially damaged.

Other than the visible changes of ratios, we have also calculated the abnormal adjusted performance, which could examines whether these change in each ratio is because of the M&A itself or is due to a continuous development of pre-merger performance.

Profitability

As the key measure that gauges a company's long-term operating capability, it plays an important role in the process of investigating the post-merger operating performance. From out analysis, despite of 34.43% of companies have experienced increased ratios, the mean of ROIC still shows significant change during the one-year pre and post-merger period with range from 13.73% to 1.15%. Furthermore, the Alpha of abnormal ROIC - (-12.21874), and Beta (0.974068) indicate that the merger led to a decrease in the ROIC performance. However, by the reason of p-value of Alpha (0.0879) and that of Beta (0.0016) this performance is partially unreliable. Next, in terms of performance of Operating Profit Margin, with Alpha of -1.935387, P-value of 0.3238 and Beta of 0.829461, P-value of 0.0000, we are able to say that the announcement of M&A has obviously negative impact on the continuation of pre-merger profitability.             

Leverage

Table 6 shows that the mean ratio of working capital to total capital decreased from 39.49% to 24.31%, and only one fourth of the acquirers have obtained improved capital structure. This has been testified by the abnormal performance of WC to TC, with a beta of 0.683304, p-value of 0.0000. These evidences on the capability of defending potential operating risks imply that the merged companies may have largely financed the deals by external resources. Consequently, they must have relied either on owned free cash flow or on other heavy leverage instruments. The ratio of Debt to Equity exhibits that roughly 2 of 3 companies have leveraged from around 40% to 80%

Liquid

The two liquidity indicators that we employed, namely “quick ratio” and “current ratio”, have not presented very noticeable change due to the M&A. Moreover, by the estimation of abnormal performance of these two measures, we can provide the evidence of insignificant coefficient between the pre and post-merger performance with beta of 0.485398 and 0.451565 respectively. The result that only one third of deals have ameliorated these ratios, to some extent, indicates these companies inevitably run short of liquidity after the cross-border deals.

Our findings are not very consistent with most of mentioned US, UK, Australia or Malaysia based studies. They found that the post-merge profitability of the combined entity had improved in terms of ROC, ROE, etc. However, in contrast to their findings, we exhibited that only part of acquirers had improved their abilities of converting sales to cash or profits and also that of satisfying their investors' expectations on economic gains underlie the restructured merging companies. The reason that our results differed from the prevalent indicators, we believe, may attribute to the differences in the sampling between their and our studies. Our sample is restricted to the public Chinese companies that have pursued dominant positions in foreign listed targets.

4.1.1 Comparison of the improvement of performance by Targets' distributions

Table 7 of Ratio Performance by Target Locations

Locations

Measures

% of Companies with Increased ratio -1Y To 1Y+

Average ratio in 1Y+ for corresp - increased valid cases

No. of effective  Samples

HK

Quick Ratio

46.43%

1.57

28

Tax_H(HK)

Quick Ratio

43.33%

1.57

30

Asian(HK)

Quick Ratio

41.18%

1.95

34

Australia

Current Ratio

42.86%

1.87

7

HK

Current Ratio

40.63%

2.32

32

Tax_H(HK)

Current Ratio

38.24%

2.32

34

Australia

Return On Invested Capital

42.86%

13.45

7

Asian(HK)

37.14%

7.16

35

Tax_H(HK)

31.03%

9.89

29

Europe

Operating Profit Margin

50.00%

20.42

2

N/A

40.00%

14.02

15

Asian(HK)

30.77%

7.53

39

HK

WC to Total Capital

33.33%

45.46

27

Tax_H(HK)

31.03%

45.46

29

Asian(HK)

30.30%

49.20

33

N/A

Debt to Equity

53.33%

122.14

15

Tax_H(HK)

61.76%

83.34

34

Asian(HK)

63.41%

89.44

41

As we have seen in the statistics of distribution of target locations, although China OMAs are increasingly focusing on, America, and European Union and other developed economic areas. We still find that more than half of these out-going enterprises, 58.42% of them, chose Asia markets, 51.49% of them selected Southeast Asia as their main target location, and Hong Kong, as the most important window-market, occupied 41.58% of them.

It appears that Chinese internationalizing firms' target location strategy are mainly based on Asian, especially on Southeast Asia. As a result, it give consideration that Chinese OMAs prefer the regions that has a strong comparability with China in terms of economic structure, similar cultural traditions, corporate governance practices and long-standing commercial relations with China. The preference of Chinese multinational corporations on target locations implies that, when enterprises face different overseas markets, they prior choose the target located in those countries that have the same market conditions and culture background as the home country. The order usually is from local market to neighboring overseas markets, and then to global market. A valid and traditional explanation is that Chinese firms are more likely to operate successfully in a relatively familiar environment like Southeast Asia other than in such a relatively strange markets as those of the European Union, or America.

Along with this preference, whether it has indeed helped them improve the operating performance, we must look into the outcome of these selections. Surprisingly, the table_7 indicates that among the select locations - Europe, Australia, North America HK, Asian (inc. HK), Tax Havens (inc. HK), cross border deals completed in Asian (including HK) with improved performance can always rank in the top 3. On average, there were 30% to 50% of these companies have benefited from the deals. At the same time, it is noteworthy that, in terms of two the most important operating index, the deals involved targets in developed regions went beyond on the “Return on invested capital” and “Operating profit margin”. With a limited number of samples, we cannot absolutely conclude that targets in western economy are prior to the one in developing regions, but it is reasonable that companies with better corporate governance practice experiences could help acquirers go further on a certain extent.

4.1.2 Comparison of the improvement of performance by industrial distributions

Table 8 of Ratio Performance by Industrial Distributions of Acquirer

Industries

Measures

% of Companies with Increased ratio -1Y To 1Y+

Average ratio in 1Y+ for corresp- increased valid cases

No. of effective  Samples

Miscellaneous Services

Quick

Ratio

45.45%

2.84

11

Miscellaneous Products

36.36%

1.11

11

Tele, Elec & Software

31.25%

1.94

16

Energy and Resource

25.00%

1.65

16

Miscellaneous Services

Current Ratio

46.15%

3.41

13

Miscellaneous Products

27.27%

1.65

11

Tele, Elec & Software

25.00%

2.49

16

Energy and Resource

25.00%

2.35

16

Tele, Elec & Software

Return On Invested Capital

42.86%

18.14

14

Miscellaneous Services

40.00%

3.00

15

Energy and Resource

31.25%

13.06

16

Miscellaneous Products

27.27%

17.45

11

Miscellaneous Services

Operating Profit Margin

36.84%

1.00

19

Miscellaneous Products

36.36%

10.68

11

Energy and Resource

33.33%

22.49

15

Tele, Elec & Software

20.00%

11.65

15

Miscellaneous Services

WC to

Total

Capital

60.00%

44.14

5

Miscellaneous Products

36.36%

54.55

11

Tele, Elec & Software

27.27%

39.34

11

Energy and Resource

20.00%

30.55

15

Miscellaneous Services

Debt to Equity

47.06%

88.57

17

Energy and Resource

53.33%

158.08

15

Miscellaneous Products

72.73%

88.57

11

Tele, Elec & Software

80.00%

59.05

15

Graph 4 and Table 1 shows the frequency distribution of the modes by which enterprises enter overseas markets. It shows that “export” is still the most important mode for Chinese enterprises to go abroad. Among those firms, 70% of them are “export” related. Besides, the energy & resource driving OMAs are the second important mode, which accounts for 20 % of total deals but are valued at the Top 1. Thus, the internationalization of Chinese enterprises appears to be still at an initial stage. To be truly integrated into the international system and to head for the upstream value chain of internationalization, as well as to invest overseas and to build overseas factories, Chinese firms still have a long way to go.

Meanwhile, apart from the absolute increased ratios, firms that were investing in ‘Export' and “Energy-Resource” fields have gained obvious achievements with regard to improvement of operating performance compared with other industries. As we can see from table, around 40% of the ratios of these companies have reached a better level. The group of “Miscellaneous Services” has inaccessibly maintained the leading position. Nevertheless, nowadays we can see that more and more Chinese enterprises have begun to try different ways. The most obvious phenomenon is that they have begun to invest on R&D and to strategic expand by purchasing world-famous brands and sale channels. Among the 101 enterprises in the sample, 12 % have adopted this route and some of them performed well such as the chemical and drug industries. Because of available samples are insufficient to generate a convincing conclusion, we don't present their detail figures, which can be found in appendix 9.

Table 9 of Ratio Performance by Diversified or Horizontal M&A

Ratio

% of Companies with Increased ratio -1Y To 1Y+

Average ratio in 1Y+ for increased valid cases

No. of effective  Samples

Diversified

Quick Ratio

34.29%

1.90

35

Horizontal

Quick Ratio

46.15%

1.33

26

Diversified

Current Ratio

36.11%

2.74

36

Horizontal

Current Ratio

48.15%

1.67

27

Diversified

Return On Invested Capital

23.53%

8.77

34

Horizontal

Return On Invested Capital

27.59%

19.84

29

Diversified

Operating Profit Margin

21.62%

15.33

37

Horizontal

Operating Profit Margin

27.59%

45.86

29

Diversified

Working Cap to Total Capital

31.43%

50.53

35

Horizontal

Working Cap to Total Capital

47.83%

15.80

23

Diversified

Total Debt to Common Equity

70.59%

106.92

34

Horizontal

Total Debt to Common Equity

77.42%

69.26

31

Now we turn to the difference of performance between diversified and horizontal cross-border M&As. In general, our results indicate that the one year after operating performance of horizontal industrial mergers and acquisitions have triumphed over the same factor of diversified ones. It is understandable that these companies can easily adjust their international steps by integrating the targets operated in the similar realm.  

4.1.3 Comparison of the improvement of performance by Yearly distributions

Table 10 of Ratio Performance by Year

Measures

% of Companies with Increased ratio -1Y To 1Y+

Average ratio in 1Y+ for correspon- increased valid cases

No. of effective  Samples

2007

Quick Ratio

41.18%

1.39

17

2008

21.43%

2.71

14

2009

77.78%

1.39

9

Average

53.28%

1.21

2007

Current Ratio

35.29%

2.50

17

2008

28.57%

2.75

14

2009

54.55%

2.50

11

Average

50.76%

2.50

2007

Return On Invested Capital

5.56%

22.78

18

2008

53.33%

12.29

15

2009

9.09%

22.78

11

Average

40.46%

8.30

2007

Operating Profit Margin

20.00%

24.79

20

2008

14.29%

38.16

14

2009

30.77%

24.79

13

Average

46.64%

4.84

2007

WC to Total Capital

41.18%

40.43

17

2008

16.67%

59.83

12

2009

77.78%

40.43

9

Average

40.54%

47.65

2007

Debt to Equity

85.00%

67.99

20

2008

64.29%

71.02

14

2009

130.77%

67.99

13

Among the selected samples, most of overseas investments were clustered during 2007 to 2009. As a result, we attempt to uncover whether the post-merger performance has been affected by this chosen period, for instance during the financial crisis in 2008. The financial crisis has brought many countries into serious economic recessions, without exception, China economy itself has also slowed down by one of its two most important engines - exporting. Moreover, access to financial supports for overseas investment has become much more difficult due to the crisis, and trade protectionism relived in many of the main exporting market for products made in China. However, we could also find that 59.41% of analyzed deals, among which had a peak Year-value in 2008, were concentrated between 2007 and 2009. From above table_10, it's clear that the companies with increased performance have obviously improved their corresponding ratios from 2007 to 2009, whereas all measures underwent significantly decrease in 2008. Besides, although the ratio of companies with increased performance in respect to “Return on invested capital” has gained positively increase, its average ratio in 1Y+ still inevitably suffered at that time (22.78-2007, 12.29-2008, 22.78-2009). These findings confirm earlier discussion of economic downturn due to the global financial crisis. Nevertheless, many acquirers may take into account that the high-quality assets could be purchased at a fairly discounted price thanks to the absence of other overseas competitors, moreover, they may also enjoy the short-term positive reaction from public stock market, but their bargaining deals indeed brought inefficiency rather than expected synergies.

4.1.4 Comparison of the improvement of performance by Deal Value distributions

Ratio Performance by Deal Value

Measures

% of Companies with Increased ratio -1Y To 1Y+

Average ratio in 1Y+ for increased valid cases

No. of effective  Samples

< 100

Quick Ratio

41.30%

1.87

46

100 to 200

Quick Ratio

22.22%

2.45

9

< 100

Current Ratio

41.67%

2.61

48

100 to 200

Current Ratio

22.22%

0.63

9

< 100

Return On Invested Capital

25.58%

10.20

43

100 to 200

Return On Invested Capital

50.00%

13.19

10

< 100

Operating Profit Margin

27.66%

3.21

47

100 to 200

Operating Profit Margin

40.00%

26.80

10

< 100

WC to Total Capital

37.21%

45.32

43

100 to 200

WC to Total Capital

11.11%

33.41

9

< 100

Debt to Equity

63.04%

101.03

46

100 to 200

Debt to Equity

100.00%

128.17

10

Owing to the unavailability of financial ratios of deals with value more than 200 million, and at the same time, because more than 83% of all samples are mustering on deal values that are less than 200 million, herein we mainly report the results of majority of selected deals. Except that these ratios are still in accordance to the overall conclusion that around less than 40 % of acquirers have improved their performances on a 1-Year horizon, the coefficient of post-merger performance and the deal value is not distinct and at least not very obvious. Furthermore, it appears that none of the performance changes is highly correlated with the change of deal value.

4.2 The Average announcement returns with a window of (0, 5+).

Table_11 below presents the average cumulative abnormal return (CAR) across all acquiring firms.

Table 11

At-merger

Post-merger 5+

Variables (%)

Mean %

Positive

Mean %

Positive

No of Samples

Change of CAR ( 0, 5+ )

0.35%

54%

2.60%

49%

80

Alpha

P-Value

T-test

Beta

P-value

T-test

-0.003452

0.7060

-0.3787

0.268782

0.0000

6.7886

It shows a small but positive average CAR at 0.35% for the event window (0, +5). Five days after the announcement, the CAR averaged return of 2.6% at an insignificant level. The result suggested that the announcement of cross-border M&A in Chinese firms created a positive, but small, wealth effect for the acquiring firms in the short-run. The finding that the market reacts positively to acquirer's M&A announcements is consistent with some of the earlier studies such as Morck and Yeung (1992), and Masulis, Wang, Xie. (2007).

Some explanations on the positive abnormal returns were provided by earlier researchers. These include the arguments that cross-border M&A's provide integration benefits of internalization, synergy, risk diversification, and, as a result, create wealth for the shareholders of these Chinese acquiring companies. The theory behind positive returns from cross-border M&A's is premised on the fact that companies engage in cross-border transactions in foreign markets for the purpose of exploiting the market imperfection with the specific resources that a company possesses (Tuan, Zhang, J. Hsu and Zhang (2007).

Although as we have discussed in prior paragraph that M&A decision may deteriorate the overall operating efficiency and performance, the positive returns still indicate the relatively optimistic response from investors to M&A activities. Investors may have viewed such investment as an opportunity for a company's growth or an opportunity to better utilize its resources. Furthermore, Most of the cross-border investment decisions are influenced by the policy of the state government, instead of merely based on the company's discretion. The process could have ensured the investor's confidence towards the company's overseas adventure and thus increase the short-term return on shares.

5. CONCLUSIONS

China, still a developing country, is in its transition. Inevitably, compared with their western counterparties, Chinese enterprises' internationalization activities are likely to have distinct characteristics. Also, as we may already notice that the governmental factors have more or less beneficial or detrimental influences on performance of Chinese OMAs, Chinese global players still need override the obstacles brought by these unique Chinese characteristics in order to continue their internationalization.

Our findings can be used to guide a firm in the formulation and implementation of its internationalization strategy. Chinese companies haven't reached the high-end value chain of internationalization. Strategic OMAs still cover only a small proportion of their international activities. Therefore, Chinese companies should choose suitable way based on the characteristics of every single target, and be ready to adapt to a very dynamic global M&A markets. Firms should also perform due diligent, to estimate potential risks involved with ever-changing parameters in international markets, and be well prepared to cope with the difficulty of understanding the exotic business cultures and traditions.

The contribution of the paper is to examine the short-term operating performance of cross-border mergers and acquisitions by Chinese firms and to identify the some of the determinants of such performances. A total of 101 M&A transactions, of which the key financial ratios and historical stock prices of Chinese acquirers were analyzed, are utilized to test the overall synergy performance of M&A activities. Due to the very small sample size, the result cannot involve all the underlying drivers of acquirers' performance.

On one hand, with comparative ratios, only less than 40 % of the acquirers have improved operating performance with respect to liquidity, profitability, and leverage, so cross-border M&A activities do not necessarily create synergy or add value for the Chinese acquirers. On the other hand, we did not find a relation between the post-merger operating performance and the market reactions to the cross-border M&A deals. As we have found that the average cumulative abnormal return of Chinese M&A can reach 2.6% in 5 days after the announcement, it seems that investors optimistically think that every successfully completed M&A is likely to gain considerable synergies. In sum, our analysis reveals that market as a whole overestimated benefit brought by the post-merger synergy.

Lastly, through the cross-industry, target location, year and value distribution analysis, several determinants are identified to have certain influence on the performance of Chinese acquirers. It is found that: 1) the similarities of location, and corresponding culture and tradition, and also the corporate governance practices between acquirer and target; 2) the relationship between the selection of the industry of target and relevant Chinese industrial policy in the same period related to Chinese outbound OMAs, such as forepassed “Export” and “Energy or Resource” or the current “R&D” or “High-tech value added” oriented policies; 3) the diversified or horizontal aspects of cross-border M&A; 4) last but not at least, companies do need to find an appropriate time to enter the global Merger & Acquisition market

The study concluded an overall pessimistic attitude to the operating performance of Chinese companies who underwent cross-border M&A's in the short run. However, we should not ignore that roughly 40% of cases still improved their overall performances one year after the transaction regardless of the chosen location, industry of target and so on. It may be helpful to Chinese companies who intend to engage in M&A transactions since this study found that the performance and the value of their decisions can at least be partially estimated and forecasted

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