A Study Of Foreign Mergers And Acquisitions' Performance

The fifth wave of Mergers and Acquisitions (M&As) characterized by Cross-border M&As has spread throughout the world since the 1990's. As one of the largest emerging economies in the world, China is playing a significant role on the global stage. With the foreign acquisition policies gradually unlashing in China, foreign capital has largely entered the fields of manufacturing, steeling, retailing and financing in recent years. Foreign capital has brought advanced technology and management concepts to China's economic reform and growth, however, we are obliged to review the foreign acquisition policies after acquisitions of Xugong Construction Machinery by the Carlyle Group and Shuanghui Investment & Development by Goldman Sachs Group. Questions about the affects of foreign acquisitions to Chinese enterprises, i.e., whether it creates positive effects on companies operation and performance, what influence it has on the long-term and short-term performance of the listed companies in China, and whether tunneling exists, need to be focused and researched on in terms of capital market development.The paper studies the long-term and short-term performance involving foreign mergers and acquisitions from 1995 to 2007 in the framework of Cross-border M&A theories, Agency Cost and Internal Capital Markets theories. The analysis studies the background of Foreign Investment Induction policies in China, also the factors of long-term and short-term performance and tunneling.We find that outcome of the short-term performance of the target companies of foreign mergers and acquisitions is significantly positive, while the outcome of long-term performance is negative but insignificantly by the univariate mean test. The study indicates that the short-term result of foreign M&As tends to be better than private mergers, while the long-term performance of foreign M&As is lower than that of the private ones by the independent samples T test. It is found that although there is positive expectation on improvement of advanced management concept, technology introduction and corporate governance of the target companies in Chinese capital market, but the positive effects are not sustained in the long run.The evidence shows that companies with controlling power transfer performed better than those without such transfer in the short-term, and lower in the long-term, while more tunneling occurs by the multi-regression analysis. Performances of the red chip acquisition of the target companies are lower than the non red chip acquisition in the short-term, but there is no significant difference in the long-term and tunneling. There is no significant difference between foreign financial acquisitions and non-financial acquisitions both in the short-term and long-term, nor in tunneling. There is no significant difference between direct and indirect foreign acquisition in the short-term, but direct acquisition performs poorer and more tunneling occurs in the long-term than the other.The results suggest that the operational effectiveness of foreign mergers and acquisitions is under satisfaction in the long term despite the high expectations of them in the capital market in the short term. The paper concludes that although the contribution of foreign investment to the economic reform and growth in the past 30 years in China cannot be underestimated, it is highly necessary to make adjustments of China's foreign mergers and acquisitions policies to intensify supervision and support of foreign M&As by and providing incentives and restrains.