Measuring the success of the recent wave of UK acquisitions by listed Chinese companies

Listed Chinese companies have been increasingly active in acquiring UK businesses in recent years. Research from Cass Business School assesses how successful these acquisitions have been in creating shareholder value.

The last few decades have seen a substantial increase in the number of cross-border mergers and acquisitions. Chinese firms have been heavily involved in this activity, with the UK proving to be one of the most popular targets for their investment, thanks partly to its reputation as an open and flexible economy in which to do business. There were 91 Chinese cross-border M&A investments in the UK from January 2012 to June 2016, demonstrating the upward trend for the last few years.

There can be numerous motives behind the instigation of cross-border M&A activity, and equally wide-ranging thought towards their efficacy or otherwise. For example, one of the prevalent views about M&A is that most deals fail in the primary aim of increasing value to shareholders. In light of the great increase in investment in the UK by Chinese companies, the research paper "An Analysis of Short-Term Performance of UK Cross-Border Mergers and Acquisitions by Chinese Listed Companies" by the M&A Research Centre (MARC) at Cass Business School investigates what effect these deals have had on shareholder value.

The paper poses the following three questions:

1) What is the short-run stock performance of Chinese-listed companies acquiring assets in the UK;

2) To what extent have M&A announcements resulted in value creation for the acquirer;

3) Which factors affect the short-run value creation process.

It finds that Chinese acquiring firms made significant positive abnormal returns (these being returns generated over a period of time that is different from the expected rate of return) on the day following the announcement of a deal in the UK. It also found that these positive returns dissipated as the event day passed. Extending the analysis to specific industries, the paper finds that the majority of positive abnormal returns came from sectors such as real estate, oil & gas, consumer, industrial, technology and utilities. In contrast, the financial sector generated negative abnormal returns for the purchasing firm.

The size of the deal was also found to be significant, with smaller deals proving more successful in the short-run period. Finally, the formation of the acquisition also had bearing on the success of the deal - UK private target firms earning higher abnormal returns than public targets.

This paper presents a new focus of study of cross-border merger activity. Where there already exists a large body of literature reviewing cross-border activity between developed countries, there is sparse focus on developing countries. This therefore represents the first time a detailed study of inbound Chinese investment has been carried out.

Solid, reliable data regarding M&A deals related to China is notoriously difficult to obtain and confirm. Therefore, this research was made possible by utilising the proprietary database of Chinese deals compiled by Grisons Peak LLP where the final sample was 44 UK acquisitions by Chinese publicly-listed companies where deal sizes were greater than $5 million and the deals resulted in control (over 50% ownership) of the target companies.

Professor Scott Moeller is the Director of the M&A Research Centre at Cass Business School, and the co-author of the recent publication "Why Deals Fail and How to Rescue Them: M&A lessons for business success"

This research was featured in the Financial Times on 7th November 2016 (subscription required) - China's M&A deals in UK hit record in mid-2016