Completion of Chinese overseas acquisitions: Institutional perspectives and evidence
Introduction
Cross-border acquisition attempts are frequently abandoned – only 68.7% of worldwide acquisition attempts announced between January 1982 and March 2009 were completed,1 according to data from the Thomson Financial Merger & Acquisition database (accessed from the website http://banker.thomsonib.com/ta/ on April 2009). Success or failure, in terms of completion or incompletion of an announced acquisition, of international acquisition has attracted vast empirical studies, which have concentrated on investigating the determinants of the outcome of acquisition attempts (e.g. Branch et al., 2008, Brown and Raymond, 1986, Cotter et al., 1997, Duggal and Miller, 1994, Henry, 2002, Henry, 2004, Hirshleifer and Titman, 1990, Hoffmeister and Dyl, 1981, Holl and Kyriazis, 1996, Holl and Pickering, 1988, Luo, 2005, Officer, 2003, O'Sullivan and Wong, 1998a, O'Sullivan and Wong, 1998b, O'Sullivan and Wong, 1999, Raad and Ryan, 1995, Sudarsanam, 1995, Sudarsanam, 1996, Walkling, 1985, Weir, 1997). Their findings suggest that certain factors, such as target management resistance to acquisition bids, managerial ownership, target company size, deal structure, termination fees, toehold shareholding levels of bidder companies, and the existence of competing bidder parties and the level of bid premiums offered in takeovers and ownership structure determine the end results of acquisition attempts. In general, these studies draw insights mostly from finance, corporate governance and management to study the acquisition phenomena in the context of developed countries, reflecting the current state of the art.
Here, we use a different approach to study the international acquisition activities by drawing insights from institutional theories (North, 1990, Scott, 1995), which emphasize the effects of institutional pressures on the success and survival of organizations. Specifically, we examine the success of Chinese overseas acquisitions in different institutional contexts. We focus on the case of China, because the determinants of success of acquisitions from a fast-growing developing country like China remain untouched, although China has been recognized as an important foreign direct investment (FDI) exporting country (Athreye & Kapur, 2009). Thematically, we argue that the success of Chinese overseas acquisitions, measured as the completion likelihood of Chinese’ firm's cross-border acquisition, is influenced by institutional factors such as host country's institutional quality, institutional restrictions in the specific target industry, and institutional constraints on target or acquiring firms. Empirically, we test our theoretical claims by estimating logit models using data containing 1324 cross-border acquisitions engaged by Chinese firms between January 1982 and March 2009.
Certainly, our approach follows development in acquisition literature that emphasizes institutional influence on acquisition completion. Earlier work has revealed that regulatory factors are even more important than firm-level characteristics in determining the acquisition completion in the newspaper industry (Muehlfeld, Rao Sahib, & van Witteloostuijn, 2007). Furthermore, Dikova, Rao Sahib, and van Witteloostuijn (2010) made efforts to investigate how formal and informal institutional difference affects the likelihood of a cross-border acquisition being completed. However, these earlier studies only focus on acquirer and target nations that are disproportionately in the developed world. This current study extends this line of research to the case of China, a developing country active in international acquisitions targeting both developing and developed countries. Moreover, our approach complements earlier ones in two ways. First, we emphasize the influence of the country-level institutional quality, while extant studies focus on effect of institutional distance. With our approach, we can distinguish the effects of good and bad institutions, while the distance approach is unable to do so.2 For example, the US–China institutional distance may equal to Nigeria–China institutional distance, as measured by the distance measure. In such case, institutional distance is not revealing. Second, we emphasize industry-, firm-specific institutional constraints, which vary across industries and across firm forms and result in different patterns.
Next, we briefly review institutional theories and elucidate our logic which leads to a series of hypotheses. In Section 3 we present data, variables and estimation procedure, which is followed by report of the estimation result. In closing, we summarize our finding, discuss some empirical issues, and mention limitations of this study.
Section snippets
Theoretical background and hypotheses
There is an emerging body of theoretical and empirical studies in internationalization literature that concern the institution-based view (Buckley et al., 2007, Mudambi and Navarra, 2002, Peng, 2002, Peng et al., 2008, Scott, 2002, Wright et al., 2005). These views are built on the ground of institutional theory (North, 1990, Scott, 1995). North (1990) defines the institution as the rules of a game that are humanly devised to shape human interaction. These rules can be formal constraints
Data
The data of this study, which contain all the 1324 cross-border acquisition attempts announced by Chinese firms between January 1982 and March 2009, are cropped directly from the Thomson Financial Merger & Acquisition database (retrieved from the website http://banker.thomsonib.com/ta/ on April 2009). This database collects information on mergers and acquisitions worldwide from a number of resources, such as news media in different countries, fillings at the US Securities and Exchange
Result
The details of logistic regression model results are presented in Table 2. As a benchmark specification, Model 1 includes a constant and control variables. Model 2 gives the result with the first explanatory variable added: the factorized institutional quality. Model 3 gives the result with industry-level explanatory variables added. Models 4 and 5 are added with firm-level predictors. Models 6 and 7 include interaction terms. For each model, we report the coefficients, standard error, value of
Discussion
In this study, the success or failure of Chinese overseas acquisitions was theorized as an outcome of institutional contingencies, which was analyzed at multiple levels. At country level, we argued that good-quality institutions in the host country will benefit Chinese overseas acquisition. At the industry level, we claimed that institutional constraints are stronger in some specific industries. At the firm level, our argument holds that state-owned target and acquiring firms face stronger
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