Internationalisation of Chinese Enterprises: A Comparative Study of Cross-border Mergers and Acquisitions 2020053857, 2020053858, 9781032004402, 9781032005980, 9781003174837

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Internationalisation of Chinese Enterprises

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. Jia Zongda, Ph.D. in Business Administration, is Senior Partner at Beijing Tiantai Law Firm based in Shanghai, China. He is experienced in cross-border acquisition and also specialises in security issues and capital markets.

China Perspectives

The China Perspectives series focuses on translating and publishing works by leading Chinese scholars, writing about both global topics and Chinarelated themes. It covers Humanities & Social Sciences, Education, Media and Psychology, as well as many interdisciplinary themes. This is the first time any of these books have been published in English for international readers. The series aims to put forward a Chinese perspective, give insights into cutting-edge academic thinking in China, and inspire researchers globally. To submit proposals, please contact the Taylor & Francis Publisher for China Publishing Programme, Lian Sun (Lian​.Sun​@informa​​.com) Titles in Business currently include: Organizational Learning in China Building a Multilevel Approach Yu Haibo Internationalisation of Chinese Enterprises A Comparative Study of Cross-border Mergers and Acquisitions Jia Zongda For more information, please visit https​:/​/ww​​w​.rou​​tledg​​e​.com​​/Chin​​a​-Per​​spect​​ ives/​​book​-​​serie​​s​/CPH​

Internationalisation of Chinese Enterprises

A Comparative Study of Cross-border Mergers and Acquisitions Jia Zongda

First published 2021 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2021 Jia Zongda Translated by Zhang Xiaotian and Xu Jun The right of Jia Zongda to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. English Version by permission of Fudan University Press. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Jia, Zongda, 1965- author. Title: Internationalisation of Chinese enterprises: a comparative study of cross-border mergers and acquisitions / JIA Zongda. Other titles: Zhongguo qi ye kua jing bing gou cheng bai he ji xiao dui bi yan jiu. English Description: Milton Park, Abingdon, Oxon; New York, NY: Routledge, 2021. | Series: China perspectives | Includes bibliographical references and index. | Identifiers: LCCN 2020053857 (print) | LCCN 2020053858 (ebook) | ISBN 9781032004402 (hardback) | ISBN 9781032005980 (paperback) | ISBN 9781003174837 (ebook) Subjects: LCSH: International business enterprises–China–Management. | Corporations, Chinese–Management. Classification: LCC HD62.4 .J45313 2021 (print) | LCC HD62.4 (ebook) | DDC 338.8/8951–dc23 LC record available at https://lccn.loc.gov/2020053857 LC ebook record available at https://lccn.loc.gov/2020053858 ISBN: 978-1-032-00440-2 (hbk) ISBN: 978-1-032-00598-0 (pbk) ISBN: 978-1-003-17483-7 (ebk) Typeset in Times New Roman by Deanta Global Publishing Services, Chennai, India

Contents

List of figures List of tables Foreword I Foreword II Acknowledgements 1 Introduction

vi vii ix xii xiv 1

2 Theoretical review and literature review

56

3 Hypothesis development and research design

91

4 Empirical study and analysis

109

5 The success or failure and performance of cross-border mergers and acquisitions of iron ore resources by Chinese state-owned enterprises

141

6 Conclusion

155

7 Overseas supplement

160

References Index

171 179

Figures

1.1 Number of transactions and average transaction value for crossborder M&A by Chinese enterprises from 1990 to 2012 13 1.2 The number of cross-border M&A by Chinese enterprises and the transactions with disclosed values from 1990 to 2012 14 1.3 Number and value of transactions by Chinese enterprises in crossborder M&A in industries from 1990 to 2012 29 1.4 Three-stage model of cross-border M&A process and risk by Chinese enterprises 42 4.1 CAR for the short-term performance of cross-border M&A by Chinese enterprises 123 4.2 Long-term performance ROE indicators of cross-border M&A by Chinese enterprises 131 4.3 Long-term performance ROA indicators of cross-border M&A by Chinese enterprises 132 4.4 Long-term performance debt to asset ratio indicators for crossborder M&A by Chinese enterprises 132 4.5 Indicators of the year-on-year annual growth rate of long-term performance operating revenue of cross-border M&A by Chinese enterprises 133 4.6 Indicators of the year-on-year growth rate of long-term performance operating profit of cross-border M&A by Chinese enterprises 133 5.1 China’s average CIF of imported iron ore from 2000 to 2012 142 5.2 Amount of China’s iron ore imports from 1995 to 2013 142 5.3 Annual net profit of SHPSAA from 1998 to 2013 Annual export FOB price of SHPSAA ore 151 5.4 Annual export FOB price of SHPSAA from 1994 to 2012 151 7.1 China’s FDI flow and growth rate from 2006 to 2017. Data source: WIND Database 162 7.2 The number and growth rate of cross-border M&A by Chinese enterprises from 2000 to 2018 165 7.3 Financial amount and growth rate of cross-border M&A by Chinese enterprises from 2000 to 2018 166

Tables

2.1 Data of China’s GDP and GNP from 1990 to 2012 4.1 Full dataset for the success or failure of cross-border M&A for Chinese enterprises 4.2 Dataset for the success or failure of cross-border M&A by Chinese enterprises in developed countries 4.3 Dataset for the success or failure of cross-border M&A by Chinese enterprises in developing countries 4.4 Dataset for short-term performance of cross-border M&A by Chinese enterprises 4.5 Regression dataset for the short-term performance of cross-border M&A by Chinese enterprises 4.6 Dataset for the long-term performance of cross-border M&A by Chinese enterprises 4.7 Main regression and grouped regression results for the success or failure of cross-border M&A by Chinese enterprises 4.8 Short-term performance of cross-border M&A by Chinese enterprises: Full sample t-test results 4.9 Short-term performance multiple regression results of crossborder M&A by Chinese enterprises 4.10 Short-term performance of cross-border M&A by Chinese enterprises: A dataset for t-test results 4.11 T-test results for long-term performance variation of cross-border M&A by Chinese enterprises 7.1 China’s GDP and GNP from 1990 to 2018 7.2 China’s FDI flows in different countries from 2003 to 2017. Unit: U.S. $100 million 7.3 China’s FDI stock by industry from 2008 to 2017. Unit: U.S. $100 million 7.4 The numbers and financial amount of cross-border M&A by Chinese enterprises from 2000 to 2018

63 110 111 111 112 113 115 117 123 124 126 135 161 163 164 165

viii Tables 7.5 Statistics on the number and financial amount of cross-border M&A by Chinese enterprises by industries from 2010 to 2018. Unit: U.S. $100 million 7.6 Numbers and financial values of cross-border mergers and acquisitions by Chinese enterprises by country from 2000 to 2018

167 168

Foreword I

Communication, exchange and co-operation are becoming the dominant themes of the whole world. With an increasingly developed network, the vast Earth is turning into a small “global village”. Mutual understanding, learning and “winwin” cooperation are becoming the new ideas and goals of every global villager. Only in this way can the world make real progress and the wheels of history turn more steadily. Since the beginning of the millennium, at a time when the world economic landscape has undergone and will continue to undergo profound changes, the Chinese mainland is becoming the most important growth centre of the world economy. The relationship between Hong Kong and the Chinese mainland is becoming increasingly unified, complementary and mutually beneficial. Both regions have reached consensus on economic integration with sincere co-operation in trade, investment and industry, as well as in other fields such as culture and education. Under these circumstances, the College of Business at the City University of Hong Kong and School of Management at Fudan University jointly launched the Doctor of Business Administration degree programme (DBA programme) in 2010, which has lasted for six years to date. The opening of this programme is of great significance in the context of the increasing ties between the mainland and Hong Kong: It is not only the concretisation of exchanges and co-operation, but also productive exploration and innovation around the new training methods of senior management talents under these new circumstances. Under the business environment of “globalisation”, the management of any enterprise striving for excellence requires an international perspective and rigorously logical thinking. The DBA programme, incorporating the distinctive advantages of both the City University of Hong Kong and Fudan University, distinguishes itself from traditional counterparts. It values multi-faceted training on thinking patterns and re-shaping the mindset of entrepreneurs, developing their insight, analysis, prediction and determination, which places more emphasis on the effect of applying theory to practice. Drawing on the experience of both the mainland and Hong Kong, the business graduates cultivated by the DBA programme are truly globalised international management talents combining both local experience and global business perspectives.

x Foreword I From the perspective of modern managers, the book series written by doctors presents unique insights into modern management mechanisms as well as community management. As far as the methodology and practice are concerned, it also attempts to propose new ideas and recommend innovative solutions to some specific problems, by virtue of integrating theoretical deduction with empirical analysis, which has positive and practical significance for the management of modern organisations. Apart from rigorous reasoning and considered arguments, this series also reveals the authors’ humanistic care and original thinking on the current reality behind the serious academic research, just as the words “mood behind the paper” has described. Such kinds of concern for current society are not only out of the affection for the land nourishing them, but also the influence of the two prestigious universities with profound humanistic connotations, the City University of Hong Kong and Fudan University. All the thinking in this book is based on reality, rooted in the current social context and motivated by an aspiration to bring benefits to society and enterprises. This is the common starting point and cornerstone of the book series, which is also the most important foundation for the co-operative education programme between the City University of Hong Kong and Fudan University. With the constant development of management science, excellent managers should be experts and scholars in their specific fields, which is well demonstrated by the authors of this series. Through the solid academic training and practical thinking acquired from the DBA programme, as well as completing tens of thousands of words of papers, they have acquainted themselves with the diverse theories and gained a deep understanding of the topics in their research field, and their research findings have been verified in their enterprise management work. The authors are scholars in academic fields, as well as experts in their chosen industries. This is the desired outcome that DBA programme strives to achieve: Theories derived from practice will, conversely, be applied to guiding practice. These authors are committed to contributing their unique insights and experiences to the discipline of management science. This volume comprises five articles, two of which pertain to a project related to internationalisation, focusing on internal and external perspectives. The article written by Zhan Yuhong considers the example of the Chinese seed industry that receives foreign direct investments as to discuss the dynamic relationship demonstrated by the seed industry under the investment theory and the industry influence theory. Supported by empirical data, the parameters in the Model of Action Mechanism in Motivation are significantly affected by the foreign direct investment model, and the author puts forward some constructive recommendations on how to avoid competitive risks. As for the external article, Jia Zongda has written about the overseas investment of by Chinese enterprises. The author utilises solid data to analyse and discuss the investment as well as long-term and short-term performance under the categories of China’s state-owned and private enterprises, developed and developing countries. Hence, the author expresses a well-founded concern about the pattern of mergers and acquisitions as well

Foreword I  xi as long-term performance. In the third and fourth articles, Zhang Biao and Li Huaibin both conduct in-depth studies, respectively, on community construction and government-led real estate development. These are of guiding significance for China’s real estate industry, which is supposed to have entered a period of long-term and relatively painful integration. The fifth article, which is related to lawyers’ social identity, written by Luo Jianrong, injects indispensable humanistic consideration into this volume. As a renowned poet, Lu You, in the Song dynasty pointed out in one of his poems, “Practice goes deeper than theoretic knowledge”. It is hoped that the book series written by doctors will be helpful and enlightening for managers, providing new ideas for their future management practice. I also wish the authors of this series to “build to last” and to create more works for readers in the future. Houmin YAN Dean College of Business The City University of Hong Kong

Foreword II

During the four decades that have passed since China’s Reform and Opening-up Policy, initially proposed and implemented in 1978, the ever-changing Chinese economy has put forward a series of new challenges and research topics for various business practices. Hence, this context determines that the upgrading of knowledge and theories in management disciplines and the improvement in management education can never rely on hollow and plausible armchair strategies. The upgrading and improvement must be nurtured by the experiences and tested through real interactions in the actual business world. Thereafter, it also needs to undergo further infiltration, speculation, tempering and refinement in a superior academic platform before it develops into innovative breakthroughs, which will help entrepreneurs develop a forward-looking vision, grasp opportunities of the era and lead enterprises to stand out from the intense competition of the global market. For this reason, the School of Management at Fudan University and the City University of Hong Kong jointly set up the doctoral programme of business administration (DBA), which is dedicated to developing the research-based thinking and strategic decision-making ability of senior management personnel through rich practical experience and profound theoretical literacy. DBA students here receive rigorous and systematic training in research methods, and conduct relevant applied research. The integration of their cumulative personal experiences and professional knowledge acquired in the DBA programme enables them to put forward innovative solutions to given problems, in support of enterprises and the given industry to go out of plight and to pursue further development. Now, the forthcoming series is a tribute from our DBA graduates. It may not be perfect, but it is a valuable contribution for each area they are concerned with as well as each graduate involved. Firstly, the book series focuses on cutting-edge issues arising within current economic and social development. These topics are closely associated with economic and commercial activities, although they are not only confined to economy and commerce in a narrow sense. In terms of internal problems within enterprises, relevant studies revolve around the structure, system and operation of enterprises. Studies that deal with the external environment of enterprises cover dimensions of institution, law and people’s livelihood. All propositions that can apply

Foreword II 

xiii

knowledge of management discipline are incorporated into the research scope, which fully reflects the broad vision and humanistic care of DBA students. They cast their eyes on practice and life, and explore problems closely related to cities, communities, industries and enterprises, through which they have established a three-dimensional and diversified research vision. Secondly, if the book series can be taken as a whole, its feature of multidisciplinary, or so-called “cross-field research”, is quite distinctive. For instance, attempts are made to combine psychology with management, and mathematics and statistical methods are employed to investigate issues like management strategies. Actually, it is also the advocacy and characteristic of the School of Management at Fudan University to open the invisible boundaries between disciplines and to view the same proposition from a broader perspective through methodological integration. Ultimately, being graduates of the DBA programme, the authors of the series have been well trained academically. Their research not only has realistic significance but also pays attention to literature research and the construction of theoretical models which displays their own scientific rigour. Therefore, their research results can contribute their value in all aspects of academic progress, business practice and policymaking. Management is a wide-ranging subject, which is inherently comprehensive and pluralistic with its own perspective and research paths. I believe that whether business leaders, academic researchers, entrepreneurs or students in relevant industries, can draw certain inspiration from this series, helping to shed some light on their future directions of exploration. As a rising power, China is facing challenges and uncertainties, global and local alike, whereas opportunities will also be entwined with them along our journey forward. The DBA programme of Fudan University and the City University of Hong Kong is committed to cultivating academic managers with future-leading vision by fully integrating their advantages in solid theoretical research and rich practical experience, and to take delight in disseminating their research findings after years of assiduous study. I also expect more graduates, illuminated by the light of truth, to proceed from their bold assumptions which are based on practice, and to seek out research findings through careful verification, which belong to themselves as well as to the whole society. Their contributions will be unique to the commercial prosperity of China and even the world, promoting the progress of commercial civilization. LU Xiongwen Dean School of Management Fudan University

Acknowledgements

I would like to thank my tutor Wu Xueping of the City University of Hong Kong, for careful guidance! I would like to show my gratitude to my tutor Sun Qian of Fudan University, for his kind guidance. Special thanks are extended to the doctoral candidate Xing Yadan at Fudan University, my research assistant, who helped me throughout the process! Thanks are given to my colleagues without the support of whom, my paper would not have been finished smoothly! My sincere appreciation also goes to all teachers and schoolmates at the City University of Hong Kong and Fudan University! Thank you all!

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

2 Introduction 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 crossborder 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

Introduction  3 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.

4 Introduction 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

Introduction  5 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

6 Introduction 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 crossborder 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, 2011). Cross-border M&A can form trans-national corporations, while in turn, the formation of trans-national corporations can directly promote cross-border M&A and other foreign direct investment. 1.2.1.2.4 THE CHANGING PATTERNS OF CROSS-BORDER M&A AND OTHER FOREIGN DIRECT INVESTMENT IN THE POST-FINANCIAL CRISIS ERA AND CHINA’S OPPORTUNITIES AND DEVELOPMENT

The global financial crisis has changed the world pattern of cross-border M&A and other foreign direct investment. The role and status of China and other BRICS countries, as developing and transition economies, are becoming increasingly important. The global financial crisis in 2008 led to a 43 per cent decline in global outflows of FDI including a cross-border M&A in 2009, among which the number of cross-border M&A decreased by 34 per cent and the value declined by 65 per cent (World Investment Report, 2010). In this context, there were different data on cross-border M&A and FDI in developing and transition economies, BRICS countries and China. In 2009, cross-border M&A and other foreign direct investment in developing and transition economies accounted for a quarter of the world’s total GDP, leading the recovery of FDI (World Investment Report, 2010).

Introduction  7 In 2010, the proportion was 29 per cent (World Investment Report, 2011) and was 23 per cent in 2011 (World Investment Report, 2012). Therefore, after the financial crisis, cross-border M&A and other foreign direct investment immediately stopped declining and recovered quickly. In 2010, cross-border M&A grew by 36 per cent (World Investment Report, 2011). In 2011, cross-border M&A increased by 53 per cent and global FDI flows enhanced, mostly driven by crossborder M&A (World Investment Report, 2012). Nevertheless, BRICS countries continued to act as major sources in cross-border M&A and other foreign direct investment among emerging investors. Their outflows of foreign investment were just seven billion U.S. dollars in 2000 but reached 145 billion U.S. dollars in 2012 and accounted for 10 per cent of the world total (World Investment Report, 2013). By 2012, China had risen from the sixth to the third place among the world’s largest investors (World Investment Report, 2013). With the rapid development of China’s economy and continuous improvement of its economic strength, the process of internationalisation of Chinese enterprises rapidly advanced. A number of Chinese trans-national corporations were rising and actively participating in economic globalisation. The method of foreign direct investment by Chinese enterprises was also undergoing significant changes. Enterprises chose crossborder M&A and added various links in the global value chain. While the global financial crisis provided opportunities for the development of China’s cross-border M&A and other foreign direct investment in the post-financial crisis era, both began accelerating to the forefront of the world in the global economic structure. 1.2.2 Domestic background 1.2.2.1 Overview of China’s cross-border M&A and other foreign direct investment 1.2.2.1.1 THE DEVELOPMENT OF CHINA’S CROSS-BORDER M&A AND OTHER FOREIGN DIRECT INVESTMENT

The roots of the current situation with China’s cross-border M&A and other foreign direct investment can be seen in the following basic data from 2010 to 2012. In 2010, the flow from China’s cross-border M&A and other foreign direct investment amounted to 68.81 billion U.S. dollars with a stock of 317.21 billion U.S. dollars. Furthermore, there were 16,000 foreign direct investment enterprises with $1.5 trillion total asset of overseas enterprises (Ministry of Commerce, 2011). In 2011, the flows of China’s cross-border M&A and other foreign direct investment amounted to 74.65 billion U.S. dollars with a stock of 424.78 billion U.S. dollars. Furthermore, there were 18,000 foreign direct investment enterprises with nearly $2 trillion total asset of overseas enterprises (Ministry of Commerce, 2012). In 2012, the flow from China’s cross-border M&A and other foreign direct investment was 87.8 billion U.S. dollars with a stock of 531.94 billion U.S. dollars. Furthermore, there were nearly 22,000 foreign direct investment enterprises and the total assets of foreign enterprises exceeded 2.3 trillion U.S. dollars (Ministry of Commerce, 2013). As a result, by

8 Introduction the end of 2012, China’s cross-border M&A and other foreign direct investment had been distributed in 179 countries and regions around the world with 1.493 million staff in overseas enterprises, 709,000 employees in foreign countries and 89,000 employees in developed countries (Ministry of Commerce, 2013). The development status and general situation for China’s cross-border M&A and other foreign direct investment are based on the growth of the previous decade. China’s cross-border M&A and other foreign direct investment grew for ten consecutive years with an average annual growth rate of 41.6 per cent from 2002 to 2012 (Ministry of Commerce, 2013). Cross-border M&A in foreign direct investment reached a peak in 2012 and cross-border M&A through China’s foreign direct investment, whether measured in terms of project quantity or transaction amount, were the highest in history (Ministry of Commerce, 2013). Cross-border M&A and other foreign direct investment are generating a new source of profit for Chinese enterprises with increased importance. Both are considered to be high-yield assets (Wang et al., 2012). In 2011, Chinese state-owned enterprises under central government control, known as central enterprises, gained higher rates of growth and profits abroad than domestically. Cross-border M&A and other foreign direct investment are becoming a new area of growth and source of profit for central enterprises (Li, 2012). This is a landmark indicator of Chinese enterprise development, China’s foreign direct investment and China’s cross-border M&A. In fact, China’s cross-border M&A and other foreign direct investment under economic globalisation and trans-national corporations have developed rapidly both at macro-level and micro-level. Taking the Industrial and Commercial Bank of China (ICBC) as an example, since June 2009 ICBC has shown it can implement a cross-border M&A or greenfield investment to establish a new overseas institution within an average of 45 days. By the end of 2012, the ICBC had established nearly 400 overseas institutions in 39 countries and regions, 1516 agencies in 134 countries and regions, covering five continents. The ICBC has achieved the global strategic plan within three years that the Bank of China has been striving to achieve for decades (Yang, 2013). Cross-border M&A have enabled the ICBC to expand rapidly around the world. Cross-border M&A are increasingly becoming the main form of China’s foreign direct investment. Since 2000, foreign direct investment and cross-border M&A have gradually replaced greenfield investment as the main way for Chinese enterprises to invest abroad (Liu, 2011). 1.2.2.1.2 PROBLEMS IN CHINA’S CROSS-BORDER M&A AND OTHER FOREIGN DIRECT INVESTMENT

From macro- to micro-perspectives, China’s cross-border M&A and other foreign direct investment have demonstrated both historical opportunities and rapid development. Meanwhile, there are many problems which deserve attention, appreciation, analysis and research.

Introduction  9 Firstly, China’s cross-border M&A and other foreign direct investment – when compared with economic indicators of China – are still not fully developed and leave a large development-level gap compared to other countries, especially developed countries. Although China’s foreign direct investment, including cross-border M&A, has developed rapidly (in the context of $60 trillion in foreign direct investment assets of America), China is not a truly global investor (Li, 2012). Horizontally, China’s cross-border M&A and other foreign direct investment accounted for 0.9 per cent of GDP in 2011, while the global average was 2.4 per cent. Longitudinally, China’s share in 2011 was only the same as that of the late 1980s. From the perspective of the world economic pattern, China’s GDP accounted for 10 per cent of global GDP, import and export accounted for 9 per cent and cross-border M&A and other foreign direct investment accounted for 3.8 per cent. Certainly, it can also be said that China’s foreign direct investment, including cross-border M&A, still presents great potential and space (J. Wang, 2013). Secondly, China’s overall foreign direct investment lacks advantages and target industries are single. Due to the absence of “ownership advantage”, China’s crossborder M&A and other foreign direct investment fail to make full use of “location advantage” which cause the gap to be increasingly broad compared to the world’s major foreign direct investment countries (Li & Gao, 2005). China’s cross-border M&A and other foreign direct investment have a great tendency towards energy resources. Taking energy as an example, China’s average consumption growth in the past decade was 38.9 per cent. In 2010 China’s energy consumption accounted for 20.3 per cent of the world’s total while the United States accounted for 19 per cent. Under such development, China’s energy consumption will likely account for more than 50 per cent of the world total in 2020 (Li, 2012). Thirdly, China’s cross-border M&A and other foreign direct investment have been questioned abroad. For example, China’s cross-border M&A and other foreign direct investment in Africa are endowed with different roles such as “development partner”, “economic competitor” and “colonizer” (McNamee, 2013). Hence, the doubt that subsequently arose is whether China’s cross-border M&A and other foreign direct investment can lead to long-term mutually beneficial and win-win development or short-term seizure of energy resources. In addition, China’s stateowned enterprises are questioned abroad. Among these developments and problems, what are the success or failure and performance of cross-border M&A by Chinese enterprises? What are the factors that affect them? What are influencing factors unique to the Chinese style? How are they performing in developed and developing countries? Based on these questions, this book will conduct research in the following chapters. 1.2.2.2 The development stage or waves of cross-border M&A in China 1.2.2.2.1 THE WAVES OF CROSS-BORDER M&A IN TAIWAN, CHINA

The development of Taiwan precedes that of mainland China, so its waves of cross-border M&A can be used for reference. That is, experiences from

10 Introduction previous successes and failures can provide lessons of great importance for future practice. This is exactly what Taiwan enterprises have done. Taiwan experienced waves of cross-border M&A in the late 1980s and late 1990s. Practitioners in the second wave learned a lot by studying M&A cases of the first wave (Yang, 2014). 1.2.2.2.2 THE BACKGROUND OF THE WAVES OF CROSS-BORDER M&A IN CHINA

As previously noted, China’s cross-border M&A and waves of M&A have global and international backgrounds. From the perspective of internal and external factors, China’s accession to the World Trade Organization (WTO), its integration into globalisation and promotion of waves of cross-border M&A were not accidents but good opportunities (Qiu, 2004). The specific conditions and characteristics of China’s economic development also play a vital role in cross-border M&A and other foreign direct investment. For example, the export of Chinese enterprises has a considerable stimulating effect on overseas investment (Xiang, 2009). As a result, China’s cross-border M&A and other foreign direct investment grew rapidly from 2002 to 2009 at an average annual rate of 54.4 per cent (Ministry of Commerce, 2010). There are also considerable transactions in cross-border M&A by Chinese enterprises. For example, China National Offshore Oil Corporation (CNOOC Ltd.) acquired Nexen Inc. in 2013 with a transaction value of 15.1 billion U.S. dollars, making it the largest cross-border M&A ever completed by a Chinese enterprise (Yang, 2014). Of course, as previously noted, there are also problems and gaps with China’s cross-border M&A and other foreign direct investments. For example, the number of cross-border M&A by Chinese enterprises still accounts for a relatively low proportion of foreign direct investments (Li et al., 2010). There is also an investment gap between China and other countries. Taking China’s investment in Association of Southeast Asian Nations (ASEAN) countries as an example, by 2012 China had invested 28.2 billion U.S. dollars in ASEAN countries whereas Japan had invested 121 billion U.S. dollars (Oliver & Stahler, 2014). Though these amounts are very different, their influencing factors cannot be easily compared. 1.2.2.2.3 THE DEVELOPMENT STAGES OR WAVES OF CROSS-BORDER M&A IN CHINA

This book mainly focuses on the development stages or waves of cross-border M&A by Chinese enterprises. By contrast, the following stage theories, of course, pay attention to not only cross-border M&A by Chinese enterprises, but also foreign direct investment or domestic M&A by Chinese enterprises. At a certain stage of categorisation, domestic M&A and cross-border M&A together constitute M&A by Chinese enterprises, and cross-border M&A and greenfield investment together form foreign direct investment by Chinese enterprises. They are either difficult to distinguish or correlated with each other, so it is reasonable to discuss them in the same breath. Moreover, stage theories described below

Introduction  11 can reflect the development stages of cross-border M&A by Chinese enterprises or the research status of cross-border M&A. As a result, in this book, development stages or waves of cross-border M&A by Chinese enterprises also refers to development stages or waves of domestic M&A and FDI by Chinese enterprises. However, attention will be paid to waves of cross-border M&A by Chinese enterprises in the following analysis. From the point of view of existing literature, the stage division and occurrence time points of waves or development stages of cross-border M&A by Chinese enterprises are different, and they include the twostage theory, three-stage theory, four-stage theory and seven-stage theory which are described in the following paragraphs. Two-stage theory: Sun (2005) studies and concludes China’s accession to the WTO as the occurrence time point. Three-stage theory: Xu et al. (2013) focus on the impact of the global financial crisis on the national strategies of “bringing in” and “going out”. Ai (2011) deems that 1992 and 2003 are key time periods in the development stages of cross-border M&A by Chinese enterprises. Wu (2013) is concerned about China’s accession to the WTO and the global financial crisis. Zhang (2012) believes that the process of cross-border M&A by Chinese enterprises is basically the same as the process of cross-border M&A by state-owned enterprises. Yang (2012) focuses on state-owned enterprises and believes that the period from 2011 to present is a rapid development stage for cross-border M&A by state-owned enterprises. Li (2012) pays attention to overseas investment by central enterprises and takes major historical events such as the Third Plenary Session of the Eleventh Central Committee of CPC, Deng Xiaoping’s Southern Talk and WTO accession as the key time periods. He and Ke (2010) take major M&A events of the waves of cross-border M&A by Chinese enterprises as key moments and divide stages and believe that among three waves of cross-border M&A, the latter did not learn from previous experience. Lin et al. (2011) divide the stages of cross-border M&A in China based on the transfer of sovereignty over Hong Kong and other related factors. Four-stage theory: Wu (2011) highlights the transfer of sovereignty over Hong Kong and Macao, WTO accession and global financial crisis as vital stages and key moments of cross-border M&A by Chinese enterprises. Li (2003) focuses on the development process of M&A by Chinese enterprises from domestic to overseas. Ma and Zhang (2011) study the stages of crossborder M&A by Chinese enterprises according to Deng Xiaoping’s Southern Talks, China’s WTO accession and the global financial crisis. Zhang (2007) focuses on the process of location selection for FDI by Chinese enterprises, Tian (2010) looks the impact of the WTO accession and the global financial crisis for cross-border M&A by Chinese enterprises, while Yang (2014) places importance on the transfer of sovereignty over Hong Kong, cross-border M&A led by listed companies, the global financial crisis and other related events. Zhou (2008) emphasises Deng Xiaoping’s Southern Talks and the transfer of sovereignty over Hong Kong. Liu (2007) attaches great importance to Deng Xiaoping’s Southern Talks, the transfer of sovereignty over Hong Kong and

12 Introduction WTO accession. Wang (2012) also pays attention to Deng Xiaoping’s Southern Talks and WTO accession. Seven-stage theory: Hurst (2013) notes major events affecting China’s FDI, including the Reform and Opening-up, Deng Xiaoping’s Southern Talk, Asian financial crisis, WTO accession, global financial crisis and its recovery. 1.2.2.2.4 THE FORMATION OF WAVES OF M&A IN CHINA

1.2.2.2.4.1  The formation time of the waves of cross-border M&A by Chinese enterprises  On the basis of these theories, there are two mainstream views regarding the waves of cross-border M&A by Chinese enterprises. The time period around China’s WTO accession is Cleary a key moment, and 2005 is another. The former is mainly based on major events. Although China entered WTO in 2001, the market saw its impact before 2001. Therefore, the years 2000, 2001, 2002, or before and after 2001 are all referred to as Year One of China’s cross-border M&A. For example, Yu and Liu (2004) believe that 2002 is the first year of M&A in China. Taking 2005 as the Year One of Chinese M&A is based on the data from China’s cross-border M&A and other foreign direct investment, as well as major cross-border M&A by Chinese enterprises. For example, Rosen and Hanemann (2013) believe the turning point for China’s FDI was around 2005, when a large number of M&A of overseas mining enterprises by state-owned enterprises promoted the rapid growth of China’s FDI. Zhang (2012), concurrently, believes that 2005 was the first year of cross-border M&A in China. In the same year, a series of major cross-border M&A events occurred, such as M&A of America’s UNOCAL by CNOOC and M&A of Petrol Kazakhstan by China National Petroleum Corporation (CNPC) (Yang, 2014). He (2013) comments that crossborder M&A by Chinese enterprises in the field of energy and resources have attracted widespread international attention. In fact, China’s overseas investment in energy resources began in the 1990s, but only after the twenty-first century did it draw international attention. The scale of China’s overseas investment in energy resources has grown quickly, especially since 2005. At present, China’s overseas investment in energy resources has spread to West Asia, North Africa, South America, Southeast Asia and Central Asia. Overseas oil investment has obtained 20 million tons of equity oil output annually, while overseas iron ore equity resources are about 80 million tons, which equates to about 20 per cent of China’s total import of iron ore (He, 2013). It can be seen that cross-border M&A by Chinese enterprises, which have been growing rapidly since 2005, are concentrated in the field of energy resources and especially in the overseas mining industry. Behind such industry characteristics, the enterprise characteristic is that cross-border resource M&A are mostly initiated by Chinese state-owned enterprises and will be discussed later in this book. 1.2.2.2.4.2 The formation time for waves of cross-border M&A by Chinese enterprises from statistical data  The most accurate way to study or propose

Introduction  13 the division of the key stages and the vital time points of waves of cross-border M&A by Chinese enterprises is direct data statistics and analysis. This research performs a statistical analysis of this matter. Data source: Thomson Financial SDC Platinum Merger and Acquisition Database Sample: All cross-border M&A events by Chinese enterprises from 1990 to 2012 Screening criteria are: ·· ·· ··

M&A announcements that were made between January 1990 and December 2012. The relevant companies should be the acquirers in Mainland China and overseas target companies, including the targets in Hong Kong, Macao and Taiwan. M&A transactions have been completed.

As a consequence of the chosen data source and screening criteria, the statistical results may not be entirely consistent with those from official data in China. However, the combination of other statistical data in this book and the analysis of existing research can fully attest to the division of key stages and time points of waves of cross-border M&A by Chinese enterprises and can illustrate the basic situation. The number of cross-border M&A transactions and the average transaction value from 1990 to 2012 for Chinese enterprises can be seen in Figure 1.1. The number of cross-border M&A transactions and the number of transactions

45 000

Transaction Amount (million U.S. dollars) Average Transaction Amount (million U.S. dollars)

300

40 000

250

35 000

200

30 000 25 000

150

20 000

100

15 000 10 000

50

0

1990 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

5 000

0

Figure 1.1  Number of transactions and average transaction value for cross-border M&A by Chinese enterprises from 1990 to 2012

14 Introduction

Number of Transactions Number of Transactions with Disclosed Amount

250 200 150 100

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

0

1990

50

Figure 1.2  The number of cross-border M&A by Chinese enterprises and the transactions with disclosed values from 1990 to 2012

with disclosed amounts from 1990 to 2012 by Chinese enterprises can be seen in Figure 1.2. According to Figure 1.1, a wave of cross-border M&A by Chinese enterprises began around 2005 in terms of the number of transactions. However, Figure 1.2 shows that it could also be claimed a wave of cross-border M&A began around 2002 in terms of the number of transactions. Since there are a limited number of transactions in 2002 and the average transaction value begins to increase significantly in 2005 rather than in 2002, claiming 2005 as a key stage for M&A is more in keeping with the results of statistical analysis by this book. Therefore, this book believes that the wave of cross-border M&A by Chinese enterprises began around 2005 with a characteristic of being large-scale resource M&A by state-owned enterprises. The large-scale resource M&A by state-owned enterprises characteristic will be confirmed and strengthened by other statistical data when this book discusses the resource acquisition of special inverted market motivation for crossborder M&A by Chinese Enterprises. 1.2.2.3 General and special motivations for cross-border M&A by Chinese enterprises General and special motivations for cross-border M&A by Chinese enterprises, especially the analysis of general motivations for cross-border M&A, are similar at home and abroad. Existing academic research is comprehensive, complete and mature. Therefore, the analysis of general motivations for cross-border M&A by Chinese enterprises in this book aims to summarise existing literature

Introduction  15 with an intent to present an analysis of special motivations for cross-border M&A by Chinese enterprises. The special motivations for cross-border M&A by Chinese enterprises reflect the domestic context and Chinese ways leading to the success or failure and performance of cross-border M&A by Chinese enterprises, and is the focus of this book. To analyse and compare general and special motivations for cross-border M&A by Chinese enterprises is to analyse and compare similarities and differences in motivations for cross-border M&A by foreign countries and by China. The comparative differences are what make China distinctive. 1.2.2.3.1 THE MOTIVATIONS FOR CROSS-BORDER M&A ABROAD

Although overseas research into motivations for cross-border M&A involves those for both M&A and FDI, owing to their similarities, it does not influence the study of motivations for cross-border M&A in this book. Because of the motivation theories discussed later, the generalisation and summary in this section focus mainly on the specific motivations for non-theoretical cross-border M&A abroad. The same applies to the summary of the motivations for cross-border M&A by Chinese enterprises. 1.2.2.3.1.1  Motivations for enterprise development  The economic and managerial behaviour of enterprises can be attributed to their development. Therefore, some researchers have explored motivations for corporate M&A or cross-border M&A from this perspective. For example, Gaughan (2010) summarises motivations for M&A and asserts that the most basic motivations for M&A include such as enterprise development, internal expansion or external M&A. External M&A are quicker and less risky than internal expansion, especially for cross-border M&A compared with greenfield investment. Enterprise strategy, in a sense, is the plan of enterprise development. Sudarsanam (2013) deems that the number of M&A carried out by companies abroad has increased significantly in recent years. This kind of cross-border M&A is driven by many strategic considerations that are not the same as those driving pure domestic M&A. Although enterprise development is a broad topic, in general, considerations such as the rapidity and low risk for external M&A, as well as strategic considerations for cross-border M&A, are also specific motivations. 1.2.2.3.1.2  Motivations of the stock market or other market changes  In foreign countries, the stock market and cross-border M&A are all determined by the market, and the stock market can be the motivation for cross-border M&A. Shleifera and Vishny (2003) believe that the stock market can trigger M&A. Antoniou and Zhao (2009) suggest that incorrect valuation by the stock market and the ability of management to grasp market opportunities are the main driving forces behind M&A activities. Therefore, the stock market can be a core reason and motivation for foreign M&A and in waves of foreign M&A.

16 Introduction Except for the stock market, other market changes resembling the stock market, such as inflationary bull market or cliff-like bear market, are not common in foreign countries. This is especially true in developed countries unless they are in an economic crisis. 1.2.2.3.1.3  The acquisition motivation of market, resources, brand, technology, etc.  Generally speaking, the operation of productive enterprises is nothing more than syllogism, obtaining raw materials, producing and selling to the outside. In the first stage, the core elements are resources. In the second stage, the core elements are technology and brand. In the third stage, the core elements are markets. Resources such as the foundation, technology and brand are the key, but the final and decisive factor is the market. Non-productive enterprises can conduct a similar analysis. Therefore, for cross-border M&A, what enterprises need to understand is nothing more than the elements of the three stages. To sum up, the elements are the market, resources, brand and technology. Cross-border M&A is not the only option for a company to achieve its goals when it finds its products or services with profitable opportunities in foreign markets (Sudarsanam, 2013). Enterprises also have other options, such as exports. Moreover, the markets served by FDI, such as cross-border M&A, may be in the host country, in the home country or a third country (Clegg & Voss, 2013). In other words, most of them are in the host country because they are close to the market. However, despite so many different options, a large number of surveys and studies have confirmed the market, resources, brand, technology and other acquisition motivations for cross-border M&A. Taking Europe as an example, survey results of the motivations of cross-border M&A in Europe are market share, new products or services, economies of scale and others. Seeking market is more important than other motivations (Sudarsanam, 2013), also indicating that the market is the ultimate determinant of business operation. 1.2.2.3.1.4  Motivations for major events  Major events related to the economy or influencing the economy can be regarded as the cause of a wave M&A or crossborder M&A at macro level as well as the specific motivations of M&A or crossborder M&A at micro level, which are two sides of the same question. For example, European Economic Integration is a driving force behind the rapid growth of M&A (Gaughan, 2010). Other significant economic forces are also motivations for crossborder M&A, such as the establishment of the Euro Zone, the Eastward Expansion of the European Union and the privatisation reforms of state-owned enterprises in European countries (Sudarsanam, 2013). Major events undoubtedly play a driving and even decisive role in M&A as well as cross-border M&A. 1.2.2.3.1.5  Other motivations, such as finance and taxation  Finance, taxation and other factors can be motivations for cross-border M&A. At the same time, in the acquisition of shares of other companies a particular type of financial investment is used. In other words, financial motivation can also be direct or even

Introduction  17 unique. Accordingly, enterprise expansion, financial factors and tax factors are therefore all possible motivations for M&A (Gaughan, 2010). Financial and tax factors, sometimes together with other factors, affect the M&A by enterprises, including cross-border M&A. For instance, Erel et al. (2012) argue that geographical proximity, bilateral trade and other factors increase the possibility of M&A between two countries. Moreover, the high-quality accounting disclosure, strong stock market, appreciation of local currency, high market price and other factors usually render the acquiring enterprises, whereas factors such as low-quality accounting disclosure and weak economic performance may make enterprises become targets. 1.2.2.3.1.6  Other abnormal motivations  Other abnormal motivations for crossborder M&A can also be called non-developmental motivations. A motivation for enterprises is that cross-border M&A are beneficial to their development and so regard the development of enterprises as an objective. The other abnormal and non-developmental motivations may not be favourable to the development of enterprises, but other non-developmental motivations could become the main trigger for cross-border M&A. Not every M&A has the same motivations to maximise corporate value (Halpern, 1983). In M&A there are abnormal motivations such as irrational impulse (Sudarsanam, 2013). Therefore, although abnormal motivations occur under the conditions of the market economy, they may originate from within the enterprise itself, from the decision makers within the enterprise, from the external environment and from other influences within the enterprise. However, no matter what the specific motivations are, they are all abnormal under the temptation of the market. Examples are irrational abnormal impulses in the stock market or the unreasonable expansion of a company through crossborder M&A motivated by decision makers wishing to increase their own salaries or blind FDI motivated by an abundance of cash flow of enterprises within an enterprise, each of which may become the motivations for M&A or cross-border M&A by enterprises. 1.2.2.3.1.7  Theoretical explanation of motivation and other research Motivation theories about cross-border M&A will be briefly discussed here but they will be explored in more detail later in this book. Theory is a systematic and authoritative explanation of economic phenomena and corporate behaviour in the context of this book. Motivation theories about cross-border M&A, like other related theories, are mainly the result of foreign research. Foreign researchers have studied motivations for cross-border M&A for decades and have formed manifold varied interpretations including scale-economy theory, undervaluation theory and so on (Lin et al., 2011). As theories of M&A, in general, include theories of cross-border M&A and will be mentioned later, the motivation theories of M&A summarised here also include motivation theories of cross-border M&A. Neuhauser (2009) summarises motivations for M&A and concludes that although there is no unified theory

18 Introduction specific to M&A, efficiency theory, market power theory, agency theory and others have received empirical support. Similarly, the motivation theories about FDI are also motivation theories about cross-border M&A. Hurst (2013) agrees with Dunning’s theories that market seeking, efficiency seeking, resource seeking and strategic asset seeking are the four main motivations for a country’s foreign direct investment. Many researchers in other fields also pay attention to and study motivations for M&A and cross-border M&A, which demonstrates that M&A, and cross-border M&A, are definitely not academic concerns in a single realm. Researchers in various fields have shown increasing interest in motivations for M&A (Haleblian et al., 2009). 1.2.2.3.2 THE MOTIVATIONS OF CROSS-BORDER M&A IN CHINA

Background motivations for cross-border M&A by Chinese enterprises include not only international economic globalisation and opportunities resulting from the global financial crisis but also domestic economic development, foreign exchange reserve growth as well as specific decisions by enterprises for cross-border M&A rather than greenfield investment in foreign direct investment. For example, Yang (2003) believes that cross-border M&A have developed rapidly with a profound international background. Economic globalisation, technological progress, deregulation and capital market development have become important motivations for promoting cross-border M&A. Lin and his co-workers (2011) find that from the perspective of national strategy, M&A motivations have energy demands and competition needs, while the international financial crisis also provides opportunities for cross-border M&A by Chinese enterprises. China’s foreign exchange reserves facilitate cross-border M&A by Chinese enterprises as well as other foreign direct investment. The continuous and rapid growth of China’s foreign exchange reserves not only constitutes an important part of national wealth but also forms the background factors for China’s cross-border M&A and other foreign direct investment (Zhang & Wang, 2013). However, choosing between cross-border M&A or greenfield investment depends on a number of factors for enterprises. Huang and Li (2008) argue that the reason why companies do not create but instead choose M&A lies in the existence of enterprises with q