| Merger and Acquisition (M&A) has become an effective measurement to allocate capital and resource in China. On the historical socialism background, the M&A activities in China are diversified. As the development of Chinese capital market is short compared with the west, it is difficult to observe different types of M&A behavior in a horizontal longer time frame. However, if we observe the M&A activities in a specific period, i.e. to drill down in a vertical section, the result are diversified, which is different from the west to demonstrate the Chinese style M&A. The characteristic of target companies is an important topic in M&A research fields, which is also the major topic in our research. In the past Chinese researches on characteristic of target companies are focusing on market-driven M&A. those on non-market-driven M&A (including affiliate and government predominated M&A) are rare. As researchers are always focusing on single type of M&A, we can not fully understand the whole picture on the characteristic of target companies in this diversified Chinese market.Among those characteristics of target companies, the efficiency is one of the important characteristics. The influence of this index has covered the theoretical and practical application. However, this index is not widely used and studied in the past. When reviewing past studies, many issues are required to be improved and are summarized as follows. First, the usage of this index is always mixed with effectiveness, which is always performed in the financial index with single input/output ratio form which can not fully reflect the multi-input/output characteristic of efficiency; Second, we summarize the insufficient of Chinese target company studies which are especially in the environment characteristics; Third, most studies are focusing on market-driven M&A and few are on non-market-driven M&A (i.e. affiliate-predominated M&A and government-predominated M&A) which can not reflect the whole picture of M&As in China; and last issues are on the selection of research time period, most studies are either before2005(which reforms the share trading regulation) or across this year and does not consider the influence of regulation changes.This research is supported by the following three hypotheses. The first one is the Market for Corporate Control(MCC). For more effective MCC operations, there are two conditions.The first condition is if poorly performing firms are not taken over, it’s evidence of MCC malfunction. To make the market fully effective, the second condition must be met (Dickerson et al.,2002). Our research has adopted the first condition to support the importance of the efficiency characteristics. The second one is Pareto Optimality, which is the hypothesis of data envelopment analysis. The third one is the merger wave theory. This theory has combined reasons behind M&A and the influence of macro economic factors, which is used to support the phenomenon for the changes of Chinese M&A over time.Considering the Chinese situation and the insufficient on past studies, our research is trying to identify the characteristic of target companies from the four angles, i.e. finance, share structure, environment and efficiency; and covers market-driven and non-market-driven M&A in the period2005-2009which is a significant period of stock market after the share-trading reform period. The transaction data is collected from database and reconciled by the data field which is more objective. Under this presumption our research process can be divided into two stages, the first stage is to analysis whether the DEA efficiency variable is qualified to be applied in the characteristics of target company studies; and the second stage is to apply this efficiency variable to identify characteristics of target companies. The first stage can be drilled down into three topics, that is, what is the efficiency of target companies; what is the relationship between efficiency and being acquired; and is it feasible to apply the efficiency on characteristics of target company studies. When the first stage is analyzed to be feasible, then we proceed to the second stage and analyze three topics, including efficiency, what are other characteristics of target companies; what is the M&A behavior behind those characteristics; and will the M&A theories be improved via efficiency variable.As to the methodologies, our research mainly uses DEA method to quantified the efficiency variable, and to prove the feasibility on the efficiency variable applying in M&A. After the proven procedure we will apply this index and combine variables on finance, ownership structure and environment into the logit model to study characteristics of target companies in China.Our conclusion and application are summarized as follows:1. DEA can be used to describe the efficiency characteristic of target companies. The results demonstrate that target companies are not necessarily inefficient. As to the corporate efficiency indicator of all takeover companies,54%are underperforming in the peer group, however, only11%are falling under the range of extremely inefficiency, which reject the hypothesis thattarget companies are inefficient.As to the relationship of efficiency between the three types of M&A, it is government-predominatedM&A>market-driven M&A> affiliate predominated M&A. The result demonstrates that the efficiency of targets from government-predominated takeovers are significantly higher than others, which is in line with the fact that the state dominates and allocates resources in the socialist economy.2. Concerning efficiency variable,target companiesare positively correlated with being acquired. The results of complete M&A data set demonstrate that efficiency are positively correlated with being acquired.If we breakdown to the individual M&A,then the above-mentioned fact is mainly contributed by the government-predominated M&A, and partially contributed by market-driven M&A as the P-value is close to the critical value P=0.1nearby. Those findings support the hypothesis that the efficiency characteristics are correlated with being acquired.3. By using efficiency variable measured by DEA the identification of the target companies’ characteristics will be improved. In comparison to the difference between two characteristic identification models (with/without efficiency variable), the identification capability of the model (with efficiency variable) is superior to the one without efficiency variable. We also conduct the robustness test to see whether the relationship between efficiency and being acquired will be changed after new variables are inserted, and the result is robustness, therefore, our conclusion is the relationship will not be influenced.4. From the prospective of efficiency generated by DEA to identify the characteristics of target companies, the diversified Chinese M&A activities are more clear.Our research clearly demonstrates the diversified Chinese M&A activities from the prospective of efficiency. During2005-2009period of a booming cycle in the stock market, acquirers prefer to obtain targets with larger size, better efficiency, but poor performance, especially in the market-driven M&A; such kind of behavior are different from the past looking for small shell companies. The non-market-driven M&As perform the phenomenon intervened by stakeholders, and the acquirers of government-predominated M&A prefer targets with more efficiency. This findings support the state dominates and allocates resources in the socialist economy. Therefore, from the prospective of efficiency we can clearly analysis the behavior and motivation of acquirers to understand the phenomenon in the Chinese transforming economy. Moreover, it can be applied as an M&A target identification tool for Chinese enterprise when they expend overseas. 5. The M&A theory will be expended if studying from the prospective of efficiency. One of our topics is to study on the identification mechanism of market for corporate control (Marine,1965) in China. If we use the definition of efficiency in our research to analysis Manne’s argument, our conclusion is there is no identification mechanism of market for corporate control in China. However, our research finally adopts the traditional viewpoint of efficiency which uses effectiveness to describe efficiency, and our conclusion is the identification mechanism of market of control power in China is partially functioning, which can be identified from the target companies of market-driven M&A as they are underperforming. This conclusion has echoed those western studieswhich assert the inefficient management will be punished under the market of corporate control (Palepu,1986; Morck et al.,1989; Barnes,2000; Dickerson et al.,2002; Brar et al.,2009).However, as the findings are not comprehensive to appear in every kind of Chinese M&A, it has also echoed the argument that the mechanism of market for corporate controlis not fully functioned in the transforming economic (Zhang,2007). But on the other hand, by adding a new efficiency angle to analysis the characteristics of target companies, researches are also enhanced as there is a new dimension on the characteristic description. Our proposed argument is the identification mechanism of market for corporate control is well functioning, however the acquirer will select better efficiency targetsfrom the punished list as they are clever. This argument is supported byour research.6. It will be helpful to the study the characteristic of target companies in the transforming economy by distinguishing Chinese M&A into different types.In the past most of studies on characteristics of target companies in China are analyzing either individual types of M&A or the aggregate M&A. Our empirical research has demonstrated that it will be helpful to the study the characteristic of target companies in the transforming economy by distinguishing Chinese M&A into different types. Except for the empirical study to demonstrate the explanation of variables for distinguished samples being higher than the aggregated sample, our research also demonstrates the coexistence of market-driven M&A and government-predominated M&A in the transforming economy. For example, the fact of size and high-efficiency preference for targets are significant at both market-driven and government-predominated M&A, however, the explanation are different. For the market-driven M&A, such preference reflects the intension of management team to expend business under severe market competition; for the government-predominated M&A, this phenomenon is not only reflect the fact that government dominates resources, but also the requirement to adjust the industry structure which prefers larger size for their self-interest.7. The characteristic of Chinese target companiesare more similar to the developing market. Past studies on the characteristic of target companies in Chinaare always with reference to the western study, however, based on our empirical findings our conclusion is it will be much more similar to the developing countries. Facts are target companies with larger size, more concentrating ownership, and the intension of stock price synchronicity, which is much more similar to developing countries. Our recommendation is Chinese studies can be reference to studies in developing countries.8. As time passes Chinese M&As has presented the phenomenon on merger wave.It is the so-called merger wave theory that interprets reasonsbehind M&A from micro and macroskeptical together. Our research is focusing on2005-2009after the reform of share trading regulation. The finding is the purpose of market-driven M&A has changed to search scalable targets for the group rapid expansion. Although reverse listing still happens in the market, however, this phenomenon is different from transactions looking for small shells in the past,which implies that the M&As in China are changing in comparison with reverse listings before2005(Li&Tseng.2003). Though the period of Chinese economy reform is still short so far. and the policy is changing quite often, however, however, this fact reveals that the Chinese M&A activity is influenced by macro economy, and the merger wave theory will influence the Chinese M&A activities and related researches in the long run.Many new findings and innovations are included in this study. To sum up, this study applies DEA to measure the efficiency characteristics of target companies which is an innovated approach in this kind of research. Then this study conducts overall feasibility studies on applying this variable as one of characteristics of target companies. After the previous analysis is completed, we apply this variable on target identification in China. By creating a new dimension, this research has many new findings in comparison with previous studies, and also enriches theory on market of corporate control. Therefore, the innovation of our research can be demonstrated in the new conception.
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