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Gains to Chinese Bidder Firms

Gains to Chinese Bidder Firms: Domestic vs. Foreign Acquisitions

By Emma L. Black (Newcastle University Business School), Angelos J. Doukas,Xiaofei Xing and Jie (Michael) Guo (Durham University Business School).

Increasing globalisation is a fact of commercial life – and rapid developments over the past decade or so have brought China onto the stage as a major player in international markets. The country’s political situation, with its commercial sector owned, part-owned or influenced by the state to greater extent than those of many other countries, does not just raise concerns among other nations about the economic development – from an academic perspective it also means that much of the existing literature on the subject is irrelevant to its particular circumstance.

China is currently the world’s second largest economy, and its government actively promotes overseas investment. With most existing work focusing on western markets, academics from the Business Schools at Newcastle and Durham Universities have examined the impact of foreign acquisitions by companies based in China compared with their acquisition of domestic firms.

Domestic and Foreign Investment

The academics identified two hypotheses for their study. Firstly, they sought to discern whether foreign acquisitions are positive in terms of the returns which they generate for the acquiring interest; and secondly, they looked at whether those returns are greater in some sectors (specifically, resource-based industries such as technology and natural resources) than others.

Drawing upon a dataset of Chinese firms which had been involved in either domestic or foreign acquisitions with a minimum value of $1m over a period of ten years, they performed statistical analysis for both short-term (three days immediately after acquisition) and longer-term (two years) performance. The analysis, of 415 domestic acquisitions and 43 cross-border ones, also took into account the size of the company.

Benefits of Foreign Acquisition

The results of the analysis showed that there was a strong and significantly positive increase in short-term performance for domestic acquisitions compared to foreign transactions, for which the results showed a marginally (and insignificant) negative result. In the longer term, however, the results were reversed, with foreign acquisitions showing a significant positive increase compared to losses for domestic acquirers. The impact was much greater for the larger firms than it was for the smaller operations. The results of the sectoral analysis also showed that resource-related mergers generate short-term profits.

The results imply that there is significant benefit in such outward acquisition as long as the acquiring company is large enough. There are, however, wider implications. As the researchers note: “The data do not support political concerns regarding the shift of power from West to East and the accompanying loss of control over scarce economic resources” – although they go on to observe that the context of Chinese investment abroad remains a matter for discussion and a focus for further research.