Gains to Chinese Bidder Firms: Domestic vs. Foreign Acquisitions

• DOI: http://doi.org/10.1111/j.1468-036X.2013.12031.x
• Date: 01 November 2015
• Published date: 01 November 2015

Gains to Chinese Bidder Firms:

Domestic vs. Foreign Acquisitions

Emma L. Black

Newcastle University Business School, Newcastle University, 5 Barrack Road, Newcastle‐Upon‐Tyne,

NE1 4SE, UK

E-mail: emma.black2@newcastle.ac.uk

Angelos J. Doukas

Deree College, The American College of Greece, DC 709, AP campus 6, Gravias Street, Aghia

Paraskevi, Attica 153 42, Greece

E-mail: ADoukas@acg.edu

Xiaofei Xing

Durham University Business School, Durham University, Mill Hill Lane, DH1 3LB, UK

E-mail: xiaofei.xing@durham.ac.uk

Jie (Michael) Guo

Durham University Business School, China Development and Research Centre

E-mail: jie.guo@dur.ac.uk

Abstract

This paper examines whether foreign acquisition of Chinese firms improves share

price performance relative to domestic acquisitions. The results show that foreign

acquisitions are not associated with positive abnormal returns in the short‐run, but

that they are so associated for domestic acquisitions. Foreign acquisitions also

realise significant long‐run gains, especially when the acquiring firm is large.

Specifically, we find that there is a significant, positive long‐run outperformance of

29.81% for large foreign acquisitions benchmarked against domestic ones, while

large foreign acquisitions earn 22.39% in aggregate. Our evidence suggests that

large Chinese acquirers gain when they expand their operations abroad, consistent

with the literature on reverse internalisation.

Keywords: mergers and acquisitions, China, financial performance, scarcity, cross‐

border, foreign direct investment, multinational, diversification

JEL classification: G14, G34

Comments received throughout development of this work are gratefully acknowledged.

Special thanks go to John Doukas, an anonymous referee, as well as participants at the 2011

EFMA Asian Financial Management Symposium for valuable comments and suggestions.

Correspondence: Jie (Michael) Guo

European Financial Management, Vol. 21, No. 5, 2015, 905–935

doi: 10.1111/j.1468-036X.2013.12031.x

© 2013 John Wiley & Sons Ltd

1. Introduction

China has catapulted onto the global socio‐economic landscape in recent times.

Globalisation and financial market integration have made China a central and integral part

of the global economic landscape, igniting a plethora of political concerns. There is scarce

specific literature, and the wider work related to mergers and acquisitions (M&As) is

virtually inapplicable with respect to the unique idiosyncrasies regarding the performance

of Chinese firms engaged in foreign acquisitions relative to domestic ones. We aim to fill

this gap by examining short‐term market reaction to merger announcements of Chinese

acquirers as well as their long‐term, post‐merger share price performance, stratifying the

sample according to whether the target is domestic or foreign.

Since the economic reform of 1978, China has maintained a high economic growth rate

and now ranks as the world’s second largest economy, valued at a staggering £5.8 trillion

(Flanders, 2011). However, the internationalisation of Chinese firms has not been easy.

Foreign acquisitions have exacerbated Western apprehension regarding the shift of

corporate control to the East, particularly given the mainstream identity of the targeted

international Western brands, such as IBM (Private Equity Asia, 2012) and Volvo (China

Business News, 2012). Foreign acquisitions involving the People’s Republic of China

(PRC) are politically sensitive

1

, particularly given that many involve purchase targets

within the energy, industrial, or technology sectors growing global demand and

diminishing resources are heightening the implications from these purchases. For

example, the office of President Obama has openly criticised China’s trade practices.

Indeed, The New York Times reported that the Obama administration has recommended

that the Committee on Foreign Investment into the US should ‘block any mergers and

acquisitions involving the Chinese companies and American businesses’due to national

security concerns (Schmidt et al.inThe New York Times, 2012).

While Chinese foreign acquisitions have led to a stream of articles in the broader

financial press (e.g. The Economist and the Financial Times), there have been few

academic studies specifically examining Chinese acquisitions on a national versus

international basis since 2000, with most of this research pertaining to the US (Jensen and

Ruback, 1983; Shleifer and Vishny, 2003) or the EU (Faccio and Masulis, 2005). The

historically insular Chinese economy has in fact only recently become a popular topic of

investigation, despite China having exhibited unique characteristics worthy of academic

investigation for a number of decades. Some of the key characteristics relate to the level of

state involvement and resultant political connectedness in the corporate decision‐making

process (see Gao and Kling, 2008; Xu et al., 2013; Wu et al., 2012; Zhou et al., 2012).

While many papers focus on China’s unique political structure and its ramifications upon

traditional firm performance measures, none to our knowledge investigates the financial

performance of bidders acquiring domestic versus foreign targets.

Most of the literature in this area centres on US and EU data sets examining whether

shareholder value increases when acquiring firms expand their operations abroad. The

premise behind this work lies in whether investors place a premium on international firms

1

For example, Swedish government officials strongly opposed the sale of Volvo to the

Chinese car manufacturer Geely under the fear of the potential outflow of intellectual property

to the East, resulting in the deal being referred to the European Commission on anti‐trust

grounds.

© 2013 John Wiley & Sons Ltd

906 Emma L. Black, Angelos J. Doukas, Xiaofei Xing and Jie (Michael) Guo