State Capitalism’s Global Reach: Evidence from Foreign Acquisitions by State-owned Companies By G. Andrew Karolyi and Rose C. Liao 1 February 2013 Keywords: Cross-border acquisitions; government-controlled corporations; sovereign wealth funds. JEL Classification codes: G3, F3. 1 Professor of Finance and Global Business and Alumni Chair in Asset Management, Johnson Graduate School of Management, Cornell University and Assistant Professor of Finance, Rutgers Business School, Rutgers University, respectively. This project was initiated while Karolyi was a professor and Liao was a Ph.D. student at the Fisher College of Business at Ohio State University. Karolyi tha nks Ohio State University’s Dice Center for Financial Economics for financial support. The authors thank Yiorgos Allayannis, Ilona Babenko, Warren Bailey, Christos Cabolis, Willie Chan, Paul Choi, Philip Davies, David De Angelis, Leo De Bever, Roberto De Santis, Louis Gagnon, Isil Erel, Rudi Fahlenbrach, Kristin Forbes, Ruoran Gao, Di Huang, Han Kim, April Knill, Henry Kwok, Pedro Matos, Bill Megginson, Derrick Man Yew Meng, Michel Nadeau, Jim Ee Puah, Stefano Rossi, Samir Saadi, Rex Santerre, Mark Seasholes, Tow Heng Tan, Kelsey Wei, Mike Weisbach, Ying Wu, Bernard Yeung, Yildiray Yildirim, and participants at the American Finance Association 2011 meetings (Denver), Alberta’s AIMCo Distinguished Lecture, 2010 Asian Finance Association Meetings, 2010 Dimensional Fund Advisors Investment Conference, 2010 Darden International Finance Conference, NUS Business School’s 2010 CAMRI Lecture, 2010 NBER International Finance and Macroeconomics Conference, National Taiwan University International Finance Conference and at Arizona State, Calgary, Concordia, Connecticut, Cornell, Georgetown, HEC Paris, Michigan, Northeastern, Queen’s, and Rutgers. Detailed suggestions of NBER discussant, Kathryn Dominguez, were especially helpful. Paul Karolyi provided useful research as sistance. This paper has previously circulated under the title of “What is Different about Government Controlled Acquirers in Cross- Border Acquisitions?” Contact: Professor G. Andrew Karolyi, Johnson Graduate School of Management, Cornell University, 348 Sage Hall, Ithaca, NY, 14853, Phone: (607) 255-2153, Email: gak56@cornell.edu.
Abstract We examine the motives for and consequences of 4,026 cross-border acquisitions constituting $434 billion of total activity that were led by government-controlled acquirers over the period from 1990 to 2008. We compare this activity with cross-border acquisitions involving corporate acquirers and government funds, including sovereign wealth funds (SWFs), and find that government-controlled acquirers are much more like corporate acquirers than SWFs in the characteristics of target countries and firms they pursue. Positive share-price reactions to the announcements of acquisition deals led by government acquirers are, like those of corporate acquirers, much larger than deals led by government funds. Policy implications are discussed, especially in light of recent regulatory changes in the U.S. and other countries that seek to restrict foreign acquisitions by government-controlled entities. 1
The growing participation of government-controlled firms in the market for cross-border acquisitions has drawn much attention in the media and among policymakers. Prominent deals include the failed $19.5 billion investment by Chinalco, China’s state -owned metals group, in Rio Tinto, the U.K. and Australian dual-listed mining company, in 2009 and the acquisition attempt by Dubai World Ports, a port management company owned by the government of the United Arab Emirates (UAE) to acquire Peninsular & Oriental Steam Navigation for $6.8 billion in 2006. Though some of the largest deals involving sovereign acquirers gaining the most attention did indeed fail, many have been successfully completed. Some sovereign acquirers involve large sovereign stabilization, savings or wealth funds (SWFs), like the Abu Dhabi and Kuwai ti Investment Authority, Singapore’s Temasek Holdings and the China Investment Corporation, but the vast majority of deals involve state-controlled corporations and agencies, like Malaysia’s Petronas, China’s National Overseas Oil Corporation, and Japan Tobacco Inc. There are serious and growing concerns about the expanded role of governments in global capital markets in general, and about foreign acquisitions led by government agencies, in particular. Their objectives and behavior are not well understood and there is opaqueness surrounding their governance and activities. Yet, to date, researchers have devoted relatively little attention to their study. What little has been done has focused just on SWFs and not the many large government-controlled corporations that have become increasingly active in transactions around the globe. The main goal of this paper is to remedy this deficiency with a comprehensive global study of all government-led cross-border acquisitions over the past two decades. Our approach is novel as we are able to benchmark our analysis of cross-border deals involving government-controlled acquirers against those of corporate acquirers. Few, if any, of the existing studies of SWFs benchmark their investment decisions to evaluate their motives and to accurately gauge the economic magnitude of their consequences. We pursue a number of open questions. Do government-controlled acquirers pursue targets domiciled in countries that differ from cross-border acquisitions led by corporations from the same home country? Are the attributes of the target firms different for government-controlled acquirers? Are the target firm’s share-price reactions around the deal announcement involving government-controlled acquirers higher or 1
lower? To calibrate our findings, we also test whether these motives or consequences differ for SWFs compared to other government-controlled acquirers though they all belong to a continuum of sovereign investment vehicles active in cross-border deals (Butt, Shivdasani, Standavad, and Wyman, 2008). Our surprising finding is that government-controlled acquirers are actually much more similar to corporate acquirers than to SWFs in the target firms and countries they pursue and in the market ’s reactions to those cross-border announcements. The finding is important for how predictions from existing theory have been interpreted and for on-going public policy debates. Theory predicts important differences between government and corporate acquirers should arise. Target firms become, at least, partially state-owned in such transactions and, as such, a major concern is they become less efficient or less profitable than if they remained privately-owned firms following the acquisition. Studies rationalize how public enterprises are inefficient with excess employment/wages and with goods production that is closer to the needs of self-interested politicians or bureaucrats than any consumers. This view arises naturally in models of bargaining (through subsidies/bribes) between politicians and managers in Shleifer and Vishny (1994) and through agency problems in the internal organization of governments between bureaucrats and politicians. Tirole (1994) refers to these problems as “dissonant objectives” in the division of labor within government entities (d ue to information problems or bad incentive contracts). 2 Another view regards public enterprise objectives as one of maximizing social welfare, curing market failures, and improving on the decisions of private enterprises when externalities introduce divergences between private and social objectives (Atkinson and Stiglitz, 1980). Tirole (2001) devises a model of stakeholder capitalism and investigates how managerial incentives and control structures need to be modified to deal with deadlocks in decision-making and the lack of clear missions for management. Most empirical studies of SWFs emphasize this view and hypothesize that social, economic, and political 2 Indeed, there is supportive empirical evidence of this inefficiency view in the poor performance of state-owned banks and banking systems (by, among others, Berger, Clarke, Cull, Klapper and Udell, 2005; Mian, 2006; Micco, Panizza, and Yanez, 2007; and, Taboada, 2011) and of existing state-owned and newly-privatized firms (such as, Boyko, Shleifer and Vishny, 1993; Megginson, Nash and Randenborgh, 1994; and, Dewenter and Malatesta, 1997, 2001). 2
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