Internationalisation of Chinese Enterprises

A Comparative Study of Cross-border Mergers and Acquisitions

Jia Zongda

• Editorial: Routledge
• Año: 2021
• ISBN:
  9781000390421
• Edición: 1
• Categoría: Business
• Categoría: Investimenti e titoli

This book investigates cross-border mergers and acquisitions (M&A) conducted by Chinese enterprises seeking to evaluate the pivotal factors that influence the results of this dominant form of China's outbound direct investment.

In contrast to previous studies, the author places a particular focus on the provenance of the supply side as a determinant of overseas M&A, comparing acquisitions where target companies originate from developed and developing countries. Other major indices identified include cultural and industrial differences between targets and buyers, enterprise ownership, deal payment forms, types of consolidation and the market environment. Based on investment theories, quantitative analyses and several in-depth case studies, the book elucidates how these factors synergistically determine the success or failure of an acquisition attempt and the short- and long-term performance of Chinese companies' M&A undertakings.

This work will be a practical reference for M&A practitioners as well as academics interested in transnational corporations and mergers, capital market and international investment.

1 Introduction

It is a prominent phenomenon in modern economic history that a company becomes a large enterprise through M&A.

(George Joseph Stigler, Nobel Prize winner in Economics)

1.1 Questions raised and logic of the book

As this book was first being drafted, academic circles were judging that China’s outward foreign direct investment in 2014 would exceed inbound foreign investment to China. Cross-border M&A are increasingly becoming the main form of China’s outward foreign direct investment.

This book studies cross-border M&A by Chinese enterprises in China’s outward foreign direct investment from the perspective of enterprises. In this study, the core concerns of enterprises involve factors affecting cross-border M&A, success or failure as well as their performance of these cases. Therefore, this book is a specific study of the relationship between the affecting factors, the success or failure and performance of cross-border M&A conducted by Chinese enterprises.

The relationship between the influencing factors and the performance of the cross-border M&A cases, from the perspective of Chinese enterprises, is essentially a question of comparison and selection. For instance, the major question that enterprises are confronting is making a judgement on whether cross-border M&A are necessary. Once they decide to conduct cross-border M&A, the following questions will be critical for the decision-makers. What are the influencing factors for cross-border M&A and their impacts on the success or failure and performance of cross-border M&A? Should the target company be chosen in developed or developing countries? Since there are options, of course, comparisons will be needed to choose the right target company. Therefore, this book focuses on the comparative study of the success or failure and performance of cross-border M&A by Chinese enterprises.

The title of this book is A Comparative Study on the Success or Failure and Performance of Cross-border M&A by Chinese Enterprises. To study this problem, there are different levels of logical progression. The first level is the foundation, while the second level is the expansion and answer to the first level. That is to say, studying the second level is to explain and answer the first level.

The key to the success of cross-border M&A by Chinese enterprises lies in comparative selection. The influencing factors of an M&A may be beneficial or unfavourable to the success of the M&A, may be unfavourable or beneficial to the performance of the M&A, may be beneficial or unfavourable in developed countries and may be unfavourable or beneficial in developing countries; the former is the comparative choice of whether or not to merge and how to merge, and the latter is the comparative choice of a target company in developed or developing countries. On such a basis, the factors affecting the success or failure and performance of cross-border M&A are what need to be analysed, as well as how these factors affecting cross-border M&A work in the success or failure and the performance of M&A and what their comparisons are, and evaluating the performance and comparisons of target companies that choose developed versus developing countries. The questions that need to be analysed in this book also include how to address the existing theories and literature, at home and abroad, and outline the background influences and effects of waves, motivations and risks of Chinese enterprises’ cross-border M&A on the success or failure and performance of Chinese enterprises’ cross-border M&A.

To summarise, this book takes the development stages or waves, motivations and risks of Chinese enterprises’ cross-border M&A, existing theory and literature as background and foundation, analyses the influencing factors of cross-border M&A by Chinese enterprises, compares the same or different influencing factors of cross-border M&A in terms of success or failure and performance, in developed and developing countries, answers the relationship between the influencing factors of cross-border M&A and the success or failure and performance of cross-border M&A and provides reference for the comparative selection of cross-border M&A by Chinese enterprises. The book will address the main factors affecting the success or failure and performance of cross-border M&A by Chinese enterprises, and explore whether a certain factor has the same or different impact on the success or failure and performance of cross-border M&A in developed or developing countries.

1.2 Research background

1.2.1 International background

1.2.1.1 Waves of M&A abroad

1.2.1.1.1 Overview of waves of M&A abroad

1.2.1.1.1.1 Waves of M&A from developed countries to the world

It is of practical significance to study and discuss waves of M&A, which are based on the historical background and enable the contemporary M&A to draw lessons from history. When it comes to M&A abroad, it is often said that there have been six waves of M&A in the history of international M&A, which is not strictly accurate. Six waves of M&A refer to domestic M&A in the United States; internationalisation of waves of M&A is a new trend that emerged in the past 20 years of the 100-year M&A history; if one wave of M&A in the 21st century is counted, there are six waves of M&A. If not, there are five.

The history of the real international waves of M&A includes six in the United States in 120 years, five waves of M&A in the United Kingdom in 45 years, three waves of M&A in the European Union in 25 years and the baptism of the big waves of M&A experienced by emerging market countries represented by BRICS (Brazil, Russia, India, China and South Africa) countries in recent decades (Sudarsanam, 2013). It can be seen that waves of M&A, sweeping the world from developed countries, have become a world economic phenomenon that require attention and study.

1.2.1.1.1.2 Six waves of M&A in the United States

The waves of M&A in the United States, which are the most representative, typical and most often studied, and have become common sense in the field. The first wave of M&A, at the turn of the nineteenth and twentieth centuries, was characterised by horizontal M&A, aimed at economies of scale. It formed a monopolistic market structure, and saw the completion of the world’s first large-scale M&A above one billion U.S. dollars. Today’s global industrial giants – such as U.S. Steel, DuPont, General Electric Company and American Tobacco – all stem from this wave of M&A. The second wave, in the 1920s, was characterised by vertical M&A, forming an oligopoly industry structure. Some well-known second wave companies, such as the General Motors Corporation and IBM, have survived to the present. The third wave, in the 1960s, was characterised by mixed M&A, resulting in diversified companies and comprehensive enterprises. The characteristics of the fourth wave in the 1980s turned to leveraged M&A and hostile M&A. The fifth wave, in the 1990s, was characterised by cross-border M&A, which was reflected not only in the United States but also in the wave of M&A across Europe during the same period, as well as in the synchronous and significant growth of M&A in Japan of Asia and Canada of North America. The sixth wave of M&A, at the beginning of the twenty-first century, was characterised by M&A of emerging industries. This period of M&A has been more globally spread than previously seen.

1.2.1.1.2 Motivations of waves of M&A abroad

M&A is not only an economic phenomenon, but also a form of operation, and is often considered to be the fastest and most effective way for enterprise expansion. The motivations for M&A are discussed in this book, including macro, micro, interactive and comprehensive impacts. The motivations of waves of M&A mainly come from macro-impacts, which scholars attribute to the stock market, economic cycle, major events, etc. Of course, these are also the motivations for M&A, or the backgrounds causes of M&A.

1.2.1.1.2.1 Waves of M&A and stock market

Waves of M&A abroad, or even the M&A itself, are influenced by the stock market or coincide with the stock market, which is an important influencer of M&A. M&A enter and remain in the minds of the public in the form of waves, which roughly coincide with the stock market; after the climax of each M&A, there will be a serious depression (Bruner, 2008). It’s clear from this that the development of M&A is closely related to the stock market. M&A activities mostly take place in a bull market period (Sudarsanam, 2013). M&A are related to the overvaluation of a stock market, and the misevaluation of high stock price may have a systematic impact on M&A (Antoniou & Zhao, 2009).

1.2.1.1.2.2 Waves of M&A and business cycles

Waves of M&A will coincide with an economic cycle as an economic phenomenon. M&A are periodic and there is a causal relationship between the stage of a cycle and the occurrence of M&A (Sudarsanam, 2013). M&A generally occur in waves during a period of strong economic expansion (Nuehauser, 2009). External factors for M&A are constantly changing and so they can be understood as a strategy for enterprises to cope with the changing external environment (Sudarsanam, 2013).

At the same time, the time intervals between waves of M&A are getting shorter, the scale of M&A is getting larger and the scope of M&A is more and more globalised. Six waves of M&A in the United States have shown this. M&A by enterprises have cyclical characteristics in which the activities have features of industry clustering, intensity and density of waves of M&A that formed under the conditions identified above that are increasing with time (Sudarsanam, 2013).

Of course, there are often many factors coexisting and interacting hat influence waves of M&A. For example, Lin J. et al. (2011) argue that global M&A practice has a history of more than 100 years. Each wave of M&A has its own characteristics, but common basic fundamental reasons can be summarised as overall synchronisation within the M&A cycle, different business cycles in different industries, technological progress, politics, policy factors and even more factors.

1.2.1.1.2.3 Waves of M&A and major events

Major events, especially of the legal and political kind, affect the economy and can trigger waves of M&A.

Legal systems, for example, have a direct regulatory effect on M&A and, thus, on waves of M&A. Therefore, legal and political factors have a significant impact on triggering of waves of M&A. For example, the United States has a comprehensive legal regulation of M&A (Chen, & Chen, 2006). Japan, on the other hand, attaches great importance to the development of small- and medium-sized enterprises and actively supports their foreign direct investment (FDI) (Zhang, 2011). An important cause of the fifth wave of M&A in the 1990s was that governments of all countries relaxed the supervision of monopolies in order to improve the competitiveness of their enterprises. Only in this way could the monopolistic Boeing and McDonnell-Douglas undertake their M&A. The European Union laws on electricity and natural gas, aiming to create an internal energy market, also triggered a wave of M&A (Trillas, 2009). The history of emerging waves of conglomerate M&A in the U.S.A is the result of the U.S. legislation and the government’s anti-trust position.

Of course, there are other reasons for waves of M&A, which are not mentioned here. In this book, the motivations for M&A will be explained one by one because, to a certain extent, the motives triggering waves of M&A are the same as motives for M&A. Motivations for M&A are more important to this book’s explanations.

1.2.1.2 Multi-economic implications of cross-border M&A

1.2.1.2.1 Cross-border M&A is the main form of global FDI

M&A, including cross-border M&A, are the transfer of enterprise property rights and management rights. Economic analysis and other relevant evidence show that the market of corporate control is beneficial not only to shareholders and companies but also to society (Jensen, 1988). In the United States, large-scale modern enterprises have mostly been created through waves of M&A, especially in the wave that occurred between 1897 and 1903 (Wang, 2012). The enormous sums involved and the use of digital transactions in cross-border M&A not only have a great impact on national economies and the world economy but are difficult to achieve through forms of FDI other than cross-border M&A.

The November 1999 announcement that Vodafone LSE had acquired Mannesmann in June 2000 with a transaction value of $202.8 billion is an example of this, as is the AOL acquisition of Time Warner Inc. announced in January 2000 – which had a transaction value of $164.7 billion.

Cross-border M&A have become the dominant form of global FDI as attested by data summarised by Sudarsanam (2013). The proportion of cross-border M&A in global FDI was 52 per cent in 1987, 83 per cent in 1999 and 85 per cent in 2006. In many developed economies, cross-border M&A account for foreign direct investment at even higher levels (Lin et al., 2011). Therefore, cross-border M&A represent a significant change in global capital and corporate control and represent the typical form and main characteristic of global FDI today.

1.2.1.2.2 Causal interaction between foreign direct investment including cross-border M&A and economic globalization

The wave of economic globalisation of the 1980s has been closely linked to the world economy. Neuhauser (2009) believes that many M&A in the late 1990s are the products of economic globalisation. Cross-border M&A exceeded $1 trillion in 1999 and reached $4 trillion in 2006. This illustrates a causal interaction between economic globalisation and foreign direct investment such as cross-border M&A. Since economic globalisation is characterised by global value chains, different products and services are separated and dispersed across countries in the global value chain. Input and output across national boundaries generate a value chain network which directly promotes foreign direct investment, including cross-border M&A (World Investment Report, 2013).

Therefore, along with the development trend towards world economic globalisation, cross-border M&A are gradually replacing greenfield investment and are becoming the main method of foreign direct investment (Yang, 2014). In today’s era of economic globalisation, cross-border M&A can form and realise cross-border input and output value chain networks and can also facilitate rapid global expansion for enterprises.

1.2.1.2.3 Cross-border M&A and other foreign direct investment mainly come from trans-national corporations

Trans-national corporations (TNCs) are a dominant force in the world economy and a concentrated embodiment of a country’s competitiveness, in that they are prominent representatives of advanced productive forces, advanced management and advanced science and technology. It is estimated that there are more than 40,000 parent companies and more than 270,000 branches of trans-national corporations in the world. The annual sales revenue of the world’s largest ten TNCs exceeds the total GDP of the world’s smallest 100 countries. Over 90 per cent of the world’s cross-border M&A and other foreign direct investment stems from trans-national corporations (Li, 2012). In 2011, there were 69 million employees in branches of trans-national corporations with sales of $28 trillion (World Investment Report, 2012).

In 2010, trans-national corporations accounted for a quarter of global GDP (Wang, 2012). In the same year, the export of branches of trans-national corporations accounted for one third of the total GDP of the whole world (World Investment Report...