The Performance And The Influencing Factors Of M & A In China

According to the world-class market data releasing company DEALOGIC, the trading volume of China’s mergers and acquisitions which amounted to 65 billion U.S. dollars overtook Australia for the first time in 2005 and China evolved into the largest M&A market in Asia-Pacific region except Japan. The latest news shows that, despite the global economic crisis that began in 2007, the value of M&A deals in China increased 44 percent in 2008. Chinese cross-border activity reached its highest level in 2008, with a record 51 percent increase from 2007. China has indeed come a long way. In 1985, when China’s economy began opening up to the world and one of the first M&A transactions was completed, transaction values totaled a mere US$ 124 million that year. More than 20 years later, transaction values in China topped US$ 160 billion.By now, some research papers have been done on certain period of the M&A cases in China. As the capital market of China developed very late, the vast majority of these researches concentrated on samples ranging from 1998 to 2002 in China’s capital market which failed to accurately predict the actual state of merger and acquisition of listed companies at present. Current practice of M&A is more standardized and systemized along with the continual perfection of law system. It is essential that studies on mergers and acquisitions of listed companies have to be performed after 2002. So in my article, the sample selection is based on the companies which initiated M&A in 2003 and 2004, the time which is after the law《Ordinance in Publicly Held Corporation Acquisition》being issued. In order to completely observe the changes in the performance of pre- and post-acquisitions to companies, the sample selection should cover a certain time periods. Because of the time span from 2003 to 2004 is a little short, I am considering half of a year as one time unit. Taking the half year during which the M&A transaction is completed as period t, changes in the financial index is measured from period t-3,t-2, t-1, t, t+1,t+2 and t+3 total 7 periods, to test the performance of the firms. With regard to the sample selection, it should follow some rules:(1) The acquiring firms must belong to the publicly listed companies. (2) Small transactions are excluded where either the transaction value is less than 1,000,OOORMB or the acquiring firm is bidding for less than 20% of the target firm.(3) In this study, only one transaction of the one acquiring company within the sample period is examined. Based on the standards set above, there are 178 transactions remaining.After comparing the event research method and the financial index method, the second one is chosen. Effect Market Hypothesis (EMH) considers that the stock price of the publicly listed company can fully reflect all information of the firms. The security prices rapidly adjust to the arrival of all new public information. In other ways, the stock price can tell the information of the investors’expectation and estimation of the performance in the M&A transaction. So, in the more advanced and integrated western markets, the event research method has become the main choice in study of M&A performance. However, many researchers have pointed out that Chinese market is far from weak-form efficient market. Although profit manipulation phenomenon exists in the financial statement of publicly listed companies, some researchers stated that the manipulation on the financial index is temporary. Given enough time horizon, he said that the changes in the performance of pre- and post-acquisitions would be eventually reflected on the financial statement.The statistical summary shows that (1) The number of large-size M&A transactions increase significantly year by year---24 M&A cases in 2003 and 154 M&A cases in 2004 (2) Acquiring firms prefer to acquire the asset of the target companies, which account 51.12% of the total sample. (3) Most of the acquiring firms belong to stated-owned firms. Meanwhile, state-owned enterprises are likely to acquire state-owned enterprises, comparing to acquire private enterprises (21:5). While with regard to the private enterprises as the acquiring firms, there is no such tendency (6:9). (4) M&A happens of ten when the acquiring firms have either high (higher than 50%---15% of the cases) or very low (lower than 10%---46% of the case) state-owned shares. The situation is very similar for the legal person shares as well. The acquiring firms with either a very low proportion of legal person shares (18% of the case) or very high (39% of the case) tend to initiate M&A. (5) 40% of M&A happen when the sum of the second to tenth shareholding is less than half of the top one shareholder and 63% of the M&A transactions take place when the sum of the second to tenth shareholding is no more than that of the top one shareholder. The statistical data indicate that listed companies with concentrated ownership tend to initiate M&A. (6) Excluding the missing data,56% of the M&A transactions belong to related party transactions in the remaining sample, while 44% of the M&A transactions are diversified transactions.Considering the financial indicators selection,9 crucial financial indicators are chosen to measure the three aspects of the acquiring firms---profitability, operating capacity and growth ability. These 9 financial indicators are EPS, ROE, ROA, Net profit margin, EBIT margin, Operating cycle, Total asset turnover, Growth rate of revenue, Growth rate of EBIT.In my paper, factor analysis is applied to study the performance changes of pre- and post-acquisitions of the company. Through the principal component analysis, the integrated model is built to calculate each company’s score in the 7 periods, respectively. The higher the score, the better the performance it is. The average value of the performance score of the 178 companies in each period (t-3, t-2, t-1,t,t+1,t+2,t+3) is considered as each-period performance in pre- and post-acquisition. Through the calculating value, we observe that the performance of the acquiring firms is up and down before acquisition. Especially during the period of t-1 to t, the performance is declining sharply. After the acquisition, the performance rebounds immediately. In the second period after the acquisition, the performance of the acquiring firms start to fall, while it stops decreasing and goes up a little during the third period(t+3). Because the financial indicators are collected from the mid-year and annual financial statement, that is to say the time unit of each indicator is half year. The deeper analysis conducted by calculating the average value of the final score of pre- and post-acquisitions. The final result indicates that the performance of post- acquisition is not better than that of the pre-acquisition. Paired-samples T test is also applied to measure the changes in the sample periods (pre-/current, current/post- and pre-/post-). The testing results demonstrate that the performance of pre-acquisition period is better than the performance of the current period at the significance level of 5%. Meanwhile, the Paired-samples T test is applied to conclude that the post-acquisition performance is not better than the performance of the current period. Lastly, the paired samples test shows that the change in the performance of pre- and post-acquisition is still not significant, which means M&A transaction doesn’t have significant effect on the overall performance of the acquiring firms in the long run.The regression and the correlated analysis are applied to study the relationship of the influencing factors and the excess return of the M&A performance. The variables found to be related to the acquiring firms’returns include managerial share ownership, company holdings of cash, firm leverage, management overconfidence, industry relatedness between acquiring and target firms, competition during acquisitions, payment methods and relative size of the target to the bidder. However, due to the special characteristics of the Chinese stock markets and the M&A transactions, as well as the difficulties of obtaining data on target firms, in this study only ownership structure of the acquiring firms, the concentration of the shareholders’ ownership in the acquiring firms and the related party transaction or diversified transaction. The regression analysis shows that (1) State ownership is positive to the performance of the M&A transaction at the significant level of 5%; (2) The legal-person ownership is negative to the performance of the M&A transaction at the significant level of 5%; (4) There is positive relationship between the concentration of the shareholders and the excess return of the performance and;(5) Comparing with the excess return of related M&A transaction, the performance of the non-related M&A transaction is worse in the long run. It makes sense that the synergies arise from the merger of the two firms that are closely related.