Transcript Government-controlled acquirers

SOVEREIGN ACQUIRERS: A NEW FORCE IN GLOBAL MARKETS
G. Andrew Karolyi
Professor of Finance and Global Business
Alumni Chair in Asset Management
Keynote Address
NTU International Conference on Finance
December 10, 2010
Taipei, Taiwan
Sovereign acquirers: A new force in global markets
• Sovereign acquirers – which include Sovereign Wealth Funds
(SWFs) and government-controlled corporations – are attracting
attention in global financial markets as they pursue overseas
investments because:
– Diversity of objectives and investment philosophies
– Potential political and economic ambitions
– Different degrees of transparency of objectives & ambitions
– Size ($3.8tr in SWF assets, another $1tr in acquisition deals)
• SWFs as government-created investment vehicles funded by
commodity export revenues or transfers from foreign-exchange
reserves get major headlines
• But many large, government-controlled corporate acquirers
increasingly active in cross-border deals
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Global Current Account Imbalances Drive Growth
Sovereign Acquirer Assets
Deficits
Surpluses
Japan
$126b
US
$465b
Eurozone
$110b
China
$364b
Russia
$41b
Asia ex
Japan,
China
$124b
Middle
East
$134b
Source: The Economist, January 2, 2010
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Who are the important players?
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Rise of Sovereign Acquirers Affect Several
External Market Participants…
Global Corporations
Global Asset Managers
+ Potential Source of Funding
+ Potential Strategic Co-investors
- Support for National/Political Goals
+ Large Pool of Investment Capital
+ Potential Co-investors
- Competition for Assets
Source: Citigroup,
2008, Journal of
Applied Corporate
Finance, Volume
19(1), p. 74.
Rise of Sovereign
Acquirers
Overseas Governments
+ Source of Global Liquidity
- Independence of Strategic Assets
- Concerns about Transparency
- Lack of Market Access Reciprocity
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Some recent controversial deals
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Growing media focus & concern
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Foreign Investment & National Security Act of 2007
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Recent Legislative Actions in Other Countries…
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A New Study
• G. Andrew Karolyi and Rose Liao, 2010, “What is Different about
Government-Controlled Acquisitions in Cross-Border Acquisitions?”
Cornell University working paper (http://ssrn.com/abstract=1571560)
• We examine the motives for and consequences of 4,026 failed and
completed cross-border acquisitions constituting $434 billion of
activity over 1990-2008 involving government-controlled acquirers
• Benchmark against 123,027 corporate-led acquisitions worth $8.4tr
• We seek answers to the following questions:
– Are country factors that drive cross-border acquisitions by
government-controlled acquirers different?
– Are attributes of target firms of cross-border acquisitions by
government-controlled acquirers different?
– Are target firm’s market reactions to announcements of cross-border
deals by government-controlled acquirers different?
– Is longer-run financial & operating performance different?
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Cross-border activity of government acquirers
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Our Findings
• There is large cross-country variation in cross-border activity led by
government-controlled acquirers by home of acquirers (China,
France, Singapore) and by countries of targets (US, HK, UK)
– Government acquisitions are relatively more intense for geographicallyclose, industrially less-similar countries, acquirers more likely to come from
countries with larger current account surpluses, foreign currency reserves…
– BUT…overall explanatory power of differences is low
• Government-controlled acquirers are more likely to target larger, more
financially-constrained firms and market reactions (CMARs) to
acquisition announcements are somewhat lower…
– BUT…explanatory power of different target firm choices are very low
– BUT…market reactions statistically indistinguishable after controls
• Longer-run consequences are not significantly different
• Conclusion? Concerns about objectives of government-controlled
acquirers may be misplaced
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The Roadmap
•
•
•
•
Sovereign Acquirers: Who & what?
Motivation
Summary
Data
– Sample of Firms
– Summary Statistics
• The Four Experiments
– Determinants of Cross-Border Acquisition Activity
– Logit regressions of Target Firm Choices
– Market reactions and cross-sectional tests
– Newer findings: Long-run financial & operating performance
• Concluding Remarks
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Data and Sample
• Thomson Reuter’s Security Data Corp (SDC) Platinum Mergers and
Corporate Transactions data yields 127,053 deals between 1990 &
2008 with total value of $8.9 trillion (in Constant 2000 US $)
• Deal characteristics: fractional stake in target >5% (majority if >50%),
announcement date, failed/withdrawn, target’s name, status (sub, JV,
private or govt-owned), intermediate & ultimate parent name/status, deal
value (if disclosed), SIC code, terms of payment, open market purchase or
private negotiation
• Excluded: buyouts, spinoffs, recaps, self-tender offers, exchange offers,
repurchases and privatizations, & acquirers from UK, Dutch tax-haven
territories (Bahamas, Cayman, Guernsey, Dutch Antilles)
• Government-controlled acquirers
– SDC’s AUPPUB status is government, requires 50%+ control
– Double-check by hand using annual reports, filings, news stories, etc
– 733 deals ($153 billion) of SWFs and state-controlled funds held back
(cross-check with www.swfinstitute.org)
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Summary Statistics
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Largest Government-Led Deals in the Sample
• Top Govt Acquirers: China Unicom Ltd ($22b, 5 deals), EDF (France, $21b,
41), CNOOC ($16b, 5), Japan Tobacco ($21b, 5), Petrochemical Inds (Kuwait,
$9b, 3), Telia AB (Sweden, $9b, 23), Swisscom ($7b, 11), Petronas ($6b, 15)
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The Roadmap
•
•
•
•
Sovereign Acquirers: Who & what?
Background
Summary
Data
– Sample of Firms
– Summary Statistics
• The Four Experiments
– Determinants of Cross-Border Acquisition Activity
– Logit regressions of Target Firm Choices
– Market reactions and cross-sectional tests
– Newer findings: Long-run financial & operating performance
• Concluding Remarks
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Experiment #1:
Determinants of Cross-Border Acquisition Activity
• Does deal activity led by government-controlled acquirers emanate from
some countries more than from others? Are they more likely to pursue
targets in some countries more than others?
• We compute yearly cross-border ratios (AGit) of government-led deal
activity (by counts and by cumulative dollar value) in two ways:
– Between acquirer country i & target j relative to all activity from country i
– Between acquirer country i & target j relative to all activity to country j
• We repeat the same computations for corporate-led acquisitions (ACit)
and, separately for both types, for minority and majority deals
• Finally, we evaluate excess ratios of government-led to corporate-led
acquisition activity between country pairs i and j, or
ExcessAGit = AGit - ACit
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Cross-Border Target Acquisitions by Origin of Acquirer
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Cross-Border Acquisitions By Major Target Regions
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Determinants of Cross-Border Acquisition Activity
• Our central null hypothesis is that cross-border acquisition activity
between country pairs involving government-controlled acquirers is no
different than that for corporate acquirers
• Specific, testable alternatives guide us where to look for differences:
– Valuation Motives (Market index returns, foreign currency returns)
– Corporate Governance Motives (Legal, Accounting Standards, PolityIV)
– Political Economy Motives (Industry dissimilarity, WB Govt effectiveness,
Govt expenditures per GDP, Govt domestic acquisition activity, Current
account surplus, Foreign currency reserves per GDP)
– Control Variables (Market correlation, GDP per capita, real GDP growth
differences, Geographic distance, EU dummy, Tax haven dummy)
• What do we find?
– Govt-led and corporate cross-border deal activity influenced by exchange &
market returns, but strongly positively related to proximity & correlations
– BUT… indistinguishably between two types of deals (low R2 for excess ratios)
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Experiment #2:
What Target Attributes Attract Government Acquirers?
• Country-level analysis ignores many target firm characteristics & dealspecific factors that can affect the decision to acquire a target
• Deal-level analysis focuses on public target firms for which sample
drops by 90% among corporate deals (123,027 to 12,669), 70% for govtled deals (4,026 to 715), even more depending on Worldscope
• Logit regressions; dep variable = 1 for govt-led deals and 0, for corp
• Same valuation, governance, political economy motives, additional
target-specific ones to guide alternative hypotheses:
– Product market relationship & contracting costs
– Financial constraints
– Firm-specific control variables (B/M, ROA, Sales growth, Log assets,
Debt/assets, Worldscope’s Closely-held shares)
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Logit Regressions of Government Led Deals (Table 4)
Gov’t deals more
likely to fail..
Gov’t acquirers
prefer targets with
more assets,
higher M/B,
more financial
constraints
Big economic effect?
A “highly” constrained
target firm (21% of sample)
has 0.6% greater likelihood
of a govt-led acquisition
Political economy
variables weak
(not shown here)
The headline finding?
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Are SWFs and Other State-Controlled Funds Different?
SWFs less likely to fail
SWFs, state funds are
less likely to pursue
targets in developed,
more democratic
economies that are
industrially dissimilar
Less theory to guide, but
more explanatory power
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Experiment #3
Target Firm’s Market Reactions to Government Deals?
• How do shareholders of target firms react to announcement of crossborder deal led by government-controlled acquirer? Differently than
corporate-led acquisition?
• Cumulative market-adjusted returns (CMARs) using local VW market
indexes over three windows (21-day, 11-day & 3-day) for both
government-controlled & corporate acquirers, minority & majority
acquisition deals separately
• We also compare market reactions to SWF acquisitions to those of other
government-controlled acquirers
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Market Reactions to Government Deals (Tables 6 & 7)
• Table 7 cross-sectional regressions show differences are negligible
when financial constraints, ownership and controls added
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Market Reactions to SWFs & State-Controlled Funds?
• How do shareholders of target firms react to announcement of crossborder deal led by SWFs and state-controlled funds?
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Experiment #4:
Is Long-Run Performance of Target Firms Different?
• We compare percentage changes from Year -1 to +1 in:
• Capital Expenditures-to-Assets (CAPEX)
• Sales growth
• Profitability (EBIT)
• Likelihood of equity capital raising within two years
• Long-run 12- to 24-month buy-and-hold-returns (BHARs)
• Government-controlled acquirers have smaller increases in CAPEX
(3.5% vs 5.9%), slower sales growth (12.2% vs 22.7%), more negative
12-month BHARs (-3.5% vs -2.6%), bigger increase in EBIT (13.4% vs
3.7%), higher likelihood of equity capital raising (22.8% vs 15.6%)
• But differences are statistically insignificant
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The Roadmap
•
•
•
•
Sovereign Acquirers: Who & what?
Background
Summary
Data
– Sample of Firms
– Summary Statistics
• The Four Experiments
– Determinants of Cross-Border Acquisition Activity
– Logit regressions of Target Firm Choices
– Market reactions and cross-sectional tests
– Newer findings: Long-run financial & operating performance
• Concluding Remarks
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Concluding Remarks
• Cross-border acquisition activity involving government-controlled
acquirers over the past 20 years is substantial and growing
• Our study is the first assess whether the motives and consequences of
such deals are different from those of corporate acquirers
• While there is significant cross-country variation in government-led acquisition
activity, it is difficult to explain much of it and it is also hard to distinguish
differences in target firm characteristics and market reactions to acquisition
announcements at the deal level
• Conclusion? Concerns about overreaching goals of governmentcontrolled acquirers may be greatly overblown
• There are important implications for recent policies adopted in the US
and other countries to restrain foreign acquisitions, in general, and by
government entities, in particular
• There are many, many avenues for further study
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