Mergers &Acquisitions in China in the 21 Century

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MERGERS &ACQUISITIONS IN CHINA IN THE 21ST CENTURY

A Comparison Study between Strategically Acquired and Financial- Sponsored Investments

Ruilin Xu Advisor: Professor Shannon Mudd 04/28/2011 Ruilin Xu

Abstract

This study compares the differences in the market perceptions and the actual performances of strategically acquired firms and of financial-sponsored firms in China from 2006 to 2009. Two main hypotheses here are: 1) A merger & acquisition (M&A) activity creates value for acquired firms, regardless of the types of investors;

2) Strategically acquired firms create less value over the same time period compared to the financial investor-backed firms due to the differences in the acquirers’ motivations. In order to prove these hypotheses, standard event studies that look at the cumulative abnormal returns of the acquired firms over periods of [-20, 20] and [-120, 80] are used.

Our results confirm that mergers & acquisitions do create market values for the acquired

firms. Our results also show that while in the short term the market perceives M&A

activities involving strategic investors to be slightly better, this difference diminished

after the 07-08 financial crisis. In the long run, the financially sponsored firms have

gradually performed better than the strategically acquired firms, especially after 2007.

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Acknowledgements

I would like to express my sincerest gratitude to my advisor and mentor, Prof. Shannon

Mudd: this paper could not have been written without your constant guidance and support.

Many thanks to the Haverford Economics Department: it is my huge privilege to learn from and work with all the professors and students.

Special thanks to Mr. Michael Kim’85 and Mr. Takaaki Tsubaki of PanAsia Partners.

And to my parents, Feng Li and Junqian Xu.

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Table of Contents

I. Background Information & Hypotheses ...... 8

II. Empirical Methodology ...... 17

1) Standard Event Study ...... 18

2) Nonparametric tests for actual performance during [-120, 80] ...... 21

3) Multivariate Regressions ...... 22

III. Data Overview ...... 25

IV. Results ...... 27

1) Standard Event Study ...... 27

2) Nonparametric tests for actual performance during [-120, 80] ...... 31

3) Multivariate Regressions ...... 33

V. Conclusion...... 36

VI. Appendix ...... 39

References ...... 46

List of strategically acquired transactions ...... 47

List of sponsor-backed transactions ...... 52

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Two different types of investors engage in mergers & acquisitions (M&A)

activities: strategic investors and financial investors. Both are active investors in emerging markets like China. Strategic investors entered China first in a wave of M&As that occurred within a limited number of cities in 1987. Due to China’s need both to reform its state-owned enterprises (SOEs) and to develop its stock market, a second wave of acquisition activities (the majority of which were cross-border) occurred, between

1991 and 1996 (Chen, 2009). The third wave came when China joined the World Trade

Organization (WTO) in 2001 as many Chinese firms realized that M&A provided a useful way to expand and better compete in the global arena.

While in recent years, the overall number of M&A deals in China has been increasing by an impressive 20% annually (China Business, 2005), that number hides a shift in the type of investors coming into China. According to a recent report from Bain

& Co (2009), private equity (PE) deals in China grew at a compound annual rate of 45% in 2000-2007(pre-crisis).1 The period of 2006 to 2007 was the height of the deal frenzy,

when credit was affordable and money was readily available. Total debt during this

period was six times cash flow, nearly doubled what it had been in 2001 (Finkel, 2010).

After 2007, as people became more cautious about easy credit, leverage buyouts were no longer “in fashion”, and the market went back to basic values and growth-oriented investing. Nevertheless, this growing trend continued through the first half of 2009, as deal volume topped $7.2 billion, nearly matching the total for all of 2008 (for the overall

1 This percentage increase here includes all types of investments (e.g., M&A, private placement) done by private equity firms. However, the deal data I use in Graph A1 (in Appendix) as well as for the rest of the paper comes from the transactions that are listed as “Mergers & Acquisitions” in Capital IQ. Although a fair number of transactions listed as “Private Placement” can be considered as M&A activities in terms of transaction size and acquired percentage to my discretion, in order to simplify the data-collection process and avoid further confusion, only the “Mergers & Acquisitions” deals are used here. Hopefully this explains why Graph A1 does not show the 45% annual increase as mentioned in the Bain report.

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trend from 2000-2010, refer to Graph A1). China is now on par with the region’s mature

economies such as Japan and Australia / New Zealand as a destination for new

investment.

Both types of investors continue their investment interests in China in the

21st century (see Graph A1). From the graph, while strategically acquired investments are

still the major type in China’s M&A activities and have been growing exponentially in

terms of number of deals, the number of acquisitions involving financial sponsors is

growing steadily as well, although at a much slower rate. Both types of acquisitions were

affected by the global financial crisis, but have shown signs of recovery.

While both provide capital to the acquired firms, there are important differences

between strategic investors and financial investors. Strategic investors are generally firms

that operate in the same industry as their acquired firms. Beyond basic capital, these

investors provide the acquired firms with know-how, technology, management skills,

marketing techniques, intellectual property and clientele. Financial investors,2 on the

other hand, consist of private equity firms, venture capital firms and other financial

institutions whose primary goal is to supply investment capital to firms that require this

capital to grow. The investment is made with the expectation of earning a profit from the

capital investment. While these firms may choose to become involved in general

management decisions, it is less likely they will have the specific experience and knowledge of the industry to add more than this. The strategies of the different types of financial investors vary somewhat. Private equity (PE) firms are investment managers

2 In this paper, the terms “financial investor” and “financial sponsor” are often interchangeable. The firms that are invested by financial investors may sometimes be referred as “sponsor-backed”.

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that provide capital for a company through a variety of modes including leveraged buyout

and growth capital. Venture capital (VC) firms specifically target early-stage, high-

potential, start-up companies which usually have a novel technology or a unique business

model in high technology industries, such as biotechnology, IT, software etc. Due to the

fact that most VC-invested firms are private start-ups with very limited public

information attainable to analyze, in this study, we will be mainly focusing on the PE-

backed firms, which are more likely to acquire public firms whose financial data are

readily available to us.

Given these two types of investors, the question arises which type of investor

contributes more (as measured by changes in market values) to the acquired firm.

Investors may add value either through improved performance of the firm or simply by

affecting market perceptions. If there is a difference between the two types of investors, it is also helpful for us to think about the reasons why one investor is able to create more

values for their acquired firms than the other.

The remainder of the paper is organized as follows: in Section I, I will review the

previous literature, summarize the motivations of both types of investors and examine

how they might differ in their impact on acquired firms’ value creation. I will also state

the main research question and the hypotheses. In Section II, I will introduce the

empirical model. In Section III, I will provide an overview of the data. In Section IV, I

will present the results of the empirical investigation. In Section V, I will present my

concluding comments, including a discussion of the limitations of this research and

suggestions on how future research can be done.

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I. Background Information & Hypotheses

A number of studies have sought to measure value creation from mergers and

acquisitions, primarily those involving strategic investors. Some studies find that

acquired firms experience positive value creation (Bain & Co., 2009; Cybo-Ottone &

Murgia, 2000). Caruse and Palmucci (2008) examine M&A activity in the banking sector

investigating the determinants of value creation among the characteristics of the banks,

regulation and the role of minority shareholders. They find a positive effect of M&A

activity on the performance of the acquired banks while the acquiring banks actually

experience a negative impact. In addition, looking at the cumulative abnormal return

(CAR) of the combined acquired and acquiring banks they find no significant effect. This

result points to the possibility of a redistribution of value between acquiring banks and shareholders of the acquired banks. Similarly, Tourani-Rad and Van Beek (1999) also find a positive effect of M&A activity for the acquired banks in Europe. However, they find that the M&A activity does not have a significant impact on creating value for the acquirers, indicating no net increase in value across the acquired and acquiring firms.

Other studies provide similar findings in industries other than the banking sectors.

M.C.Park, et al (2002) investigate how the market participants react to M&As involving telecommunication companies. Their paper shows that the market reacts negatively to

M&A announcements on the acquiring firms’ performance, and the negative reaction is greater for acquirers involving cross-border M&As than domestic ones. The reasons accounting for the differences in market perceptions between cross-border M&As and domestic ones, as concluded by Park, et al, are: 1) the premium paid for the required level of performance is impossible to reach even for the best managers; 2) M&A deals will

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become more complicated when cross-border cultural, financial and monetary effects are

factored in (Reed & Lajoux, 1998); 3) the inability to overcome system integration issues contributes to many M&A failures in the telecommunication industry. However, despite all these, people are still pursuing M&A activities in this industry as they are looking to achieve economies of scale through reducing average cost and expanding network.

Further, after looking at the initial market reaction before and after the M&A announcements using event studies, Park, et al examine the changes in revenue, operating income and net income of the bidder during the subsequent year: eleven out of seventeen bidders show negative changes in their net income – which means that value creation or synergy realization is not warranted even though it may increase the firm’s size.

While Park, et al examine the value creation through M&As by looking at both short term market reactions (a month before the acquisitions to five days after the acquisitions) and long term firm performances (yearly changes in revenues profits),

Akdogu (2003) focuses on the announcement effect of all acquisitions on both the acquirers and their non-merging competitors in telecommunication industry. He compares the returns to acquirers and the acquired over multiple mergers and those of their competitors. He finds that the acquirers in the telecommunication industry earned

insignificant negative returns of -0.266% and the acquired firms (targets) earned positive

and significant returns of 13.59% on average during the two days (t=-1, 0) around the

announcement dates. His results show that the rivals of the acquirers experience negative returns, especially around the announcement period.

A major modification we have in this study that is different from the previous literature is that we focus on acquired firms only, rather than focusing on both the

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acquired firms and the acquiring firms (the investors). As some strategic investors and the

majority of financial investors are private companies, it is impossible to collect their stock prices over time to examine their performances. We will examine the effect of the different types of investors on the market performances of the acquired firms who were public before the acquisition and remained public after the acquisition. We will follow closely to the methods introduced in these papers.

In order to determine whether an investor creates value for its acquired firm, it is important to understand if value creation is actually a goal and a motivation for its initial investment. The different motivations of strategic vs. financial investors may play an important role in the level of value creation in the acquired firm.

There are many ways for a strategic investor to acquire a firm, and every mode of acquisition represents a different level of 1) extent of investment and risk; 2) degree of

ownership and control. Generally speaking, higher investment means higher risk, but also

allows more control and thus, higher profit. Clearly the strategic acquirers have different

motivations when they decide to acquire– some may want to acquire 100% of a firm to

expand their operations whereas others may want to obtain a minority stake to diversify

their products or test out a pilot project in an unfamiliar industry. The motivations for a

strategic investor to engage in M&A activities can be summarized as follows:

1. Expand to new market: Strategic investors foresee the substantial growth in China’s

economy (see Graph A2) providing an enormous potential market. An investment in

an existing Chinese firm is one strategy for entering the domestic product market

(Cooke, 2006). As the proportion of middle-class in emerging markets such as China

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and India grows over the years, many multinational as well as domestic investors have

increased their expansion effort in order to meet the increasing demand. When an

acquisition occurs, the parent firm will experience increase in its scale of operations

and obtain “a larger revenue and asset base” (Lumpkin, 2003). At the same time, firm

expansion can also extend the life cycle of a product that is in the maturity stage in a

firm’s home base but that has greater demand potential elsewhere. Companies may

choose to acquire a wholly-owned subsidiary instead of building a “greenfield

venture”3 because an existing enterprise lowers the cultural barriers in an unfamiliar

location and helps the acquirers to achieve their goals of expansion to new markets in

a timely fashion (Hill, 2009).

2. Reduce cost: Larger firms may benefit from economies of scale when they are able to

spread a large fixed cost over a larger base, thus reducing the cost per unit. Larger

firms may also have more bargaining power when dealing with suppliers so that the

variable costs of the products are reduced as well. Cost of production can be further

reduced in terms of local manpower and other resources, transportation and logistics

(Cooke, 2006), government incentives and the local tax structure (Chen, Chi, & Zhu,

2009), as well as achieving synergies by combining the resources of the two firms.

3. Reduce risk: Both foreign and local strategic investors are able to reduce their business

risks and financial risks by engaging in M&A activities (Chen, Chi, & Zhu, 2009)

through the diversification in their products and industries. While relocating their

plants in another country may help them reduce costs, it may also help them to reduce

3 Greenfield Venture: A form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up.

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risk through an economy that works differently than the one in their home countries.

Table A1 shows that China was the least negatively affected country during the 2008

financial crisis, which may explain the increase in M&A activities in China even after

2007 (Jo, Costa, Hallstrom, Tryhus, Winter, 2009). The relative economic stability

that China managed to maintain during the crisis is probably due to China’s large

growth rate as an emerging market as well as its relatively closed financial system that

places “China in a position in which it has ample liquidity and spending on

infrastructure to support the economy throughout the crisis” (Channel News Asia,

2009). The economic environment in China in the 21st century minimizes the risk of

China plummeting into a severe financial crisis and attracts investors both within and

outside of the country.

4. Enjoy favorable regulations and incentives: In 1978, Deng Xiaoping, China’s first

Vice Premier, committed China to adopting the “Open Door” Policy which promotes

foreign trade and foreign investment. Since then, China opened up its economy and

has been readily creating opportunities that favor both foreign and domestic investors.

Both strategic investors and financial investors have been utilizing these opportunities

to actively participate in M&A activities. One such example would be China joining

the World Trade Organization (WTO) in 2001. As China enjoys lower tariffs and

provides a business environment that protects intellectual property, foreign investors

are more confident in investing in China. Another example would be 2005 China non-

tradable share reform: this reform addressed the problem that holders of non-tradable

shares were unable to benefit from the increase in share prices on the tradable share.

(Jingu, Kamiyama, 2009). Smaller holders of nontrandable shares and public –market

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shareholders used to have very limited influence either on the governance of these

companies or their investment decisions. The government instituted new policies in

2005 requiring companies to merge the two classes of shareholdings – in essence,

making the nontradable shares liquid. Over the next five years, all shares in China’s

SEOs were to become fully tradable. These reforms encourage the development of the

country’s M&A market by allowing industries to consolidate, improving corporate

governance at SOEs, and expanding capital markets (McKinsey Quarterly, July 2007).

5. Preempt competitors: Sometimes strategic investors may acquire their competitors to

gain monopoly power in its industry (personal interview with Mr. Rafael Fogel,

Partner of Falcon Investment Advisors).

Different from strategic investors, financial investors only have one motivation: they seek a return on their investment through one or any combinations of the following:

. Debt repayment or cash accumulation through cash flows from operations.

. Operational improvements that increase earnings over the life of the investment -

raising the firm’s valuation.

. Selling the business for a higher multiple of earnings than was originally paid.

As most PE funds are 8-10 years, the ultimate goal of PE firms is to let their acquired companies exit from their portfolio within the fund period. Majority of the acquired firms are held for around five years before their financial investors allow them to exit (personal interview with Mr. Takaaki Tsubaki, Co-Founder of Pan Asia Partners).

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There are many exit methods for the sponsor-backed companies. The graph below

illustrates the main exit strategies for the private equity investments in China.

Graph 1. Exit Strategies for China’s Private Equity investments (by case)

Other 17%

M&A IPO 13% 50%

SALE 20%

Note: Chart recreated from China’s Private Equity Market, Jingu, Kamiyam (2008). Based on the 152 exits from private equity in 2006. Source: Nomura Institute of Capital Markets Research, based on Zero2IPO

The pie chart above shows that going public is the most popular exit method for

the sponsor-backed firms in China, which indicates that most sponsor-backed companies

in China were private companies at least during the period when they initially received

investments from financial investors.4 Other methods include selling the portfolio companies to other investors (can be both strategic and financial) and buybacks.

Based on the goals for financial investors to obtain returns from their investment, we can conclude that the motivations for financial investors are as follows:

4 Despite the fact that most sponsor-backed firms are private, all the sponsor-backed cases used in this study are public firms due to the difficulties in collecting data for private firms.

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1. Invest in firms with growth potential: firms with good performance are more likely to have better earnings over the years and achieve higher market valuations over time.

Previous literature has shown that industries in China such as real estate, infrastructure, retail, telecom, and bioscience that are growing fast and in need of capital have become the “fertile grounds for global PE funds” (Banerjee, 2008).

2. Improve management: PE firms that have an investment philosophy of active investing in their portfolio companies help to improve the companies’ management team which can be the key for the growth of a company. While PE firms prefer not to change the original management, as owners of the companies they do sometimes interfere with the management when they see areas that need to be changed (Finkel, 2010). When a PE firm acquires more than 20% stake in a company, they are more likely to send in a part-time director on the board of that company to oversee the management (personal interview with Mr.T.Tsubaki).

3. Buy potentially undervalued firms: the surging capital market in China is creating opportunities for PE funds to exit the market at higher valuations. Finkel(2010) talks about the possibility of PE firms purposely buying undervalued firms and selling them for much higher values in the future. Firms are undervalued due to mispricing and market timing problems. Sometimes the market may not be able to access the true value of a firm based on the fundamentals such as revenue and profit. The reasons for undervaluation include economic downturns, industry fluctuations, one-time events associated with a firm. Any of these incidents may upset the market and change the short-term perceptions on the firm. Undervaluation may be frustrating to the management but it is a potential investment opportunity to investors. Once these problems are corrected or situation

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reversed, the firm will again be valued correctly. In these cases, although the financial

investors (and sometimes the strategic investors as well) are involved, they do not create

value for the acquired firms. According to Mr. Tsubaki, most of the Japanese PE firms are more interested in investing in “deep discounted” firms than actively creating values for the portfolio companies.

From these motivations and the observed M&A activity in China we surmise that financial investors have gradually realized the potentials in certain firms and industries and have gained confidence in China’s economy. As the study tries to compare the differences in values created for acquired firms between strategic and financial investors, extreme cases of buying undervalued firms and selling them in the short run are avoided

– the sponsor-backed firms in my data were all held by financial investors for at least one years to ensure that the financial investors here did put effort in helping the acquired

firms grow.

Note that this comparison of the effects of strategic and financial investors is one contribution of this paper. I have been unable to identify any previous literature that directly compares impacts of strategic investors and financial investors on their acquired

firm. The motivations listed above lead to the following thesis: financial investors are

more motivated to create value for their acquired firms whereas strategic investors are

more concerned about how the acquisition of the target firms can help them increase

combined profits. This leads to following two testable hypotheses:

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Hypothesis 1.An M&A activity creates value for firms acquired by either a strategic investor or a financial investor.

Hypothesis 2. Strategically acquired firms create less value over the same time period compared to the financial investor-backed firms due to differences in acquirers’ motivations.

In addition to testing these hypotheses, the empirical investigation will also examine a number of control variables expected to impact the level of value creation.

Various literature has shown that investment factors and acquired firm characteristics may all influence the value creation process to varying extents. We will further discuss the control variables in Section II.

II. Empirical Methodology

Three empirical methods will be used for this study: 1) a standard Event Study to establish whether the market attaches a positive value to the M&As by strategic and financial investors during the period surrounding the announcement; 2) a comparison between the distributions of cumulative abnormal returns prior to and after the acquisition to test the actual effect on returns; 3) an extended event analysis to determine whether there are longer term effects of the M&A activity on returns taking into account firm fundamentals and deal characteristics.

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1) Standard Event Study

The Standard Event-Study Methodology is used in several papers studying M&A value creations (Caruso & Palmucci, 2008; Akdogu, 2003; Silva & Miguel Diz, 2006).

This methodology basically examines whether the market attaches a positive benefit to the M&A activity be examining returns immediately before and after the M&A activity announcement. Previous research conducted a residual return analysis of the impact of an M&A event on the rate of return of the stockholder. The residual, or abnormal return

(AR), is calculated as the difference between the actual returns and a projected market

returns. The actual return is calculated based on the stock prices of the acquired firms in

two consecutive trading days. The projected market returns is calculated based on the

standard capital asset pricing model (CAPM):

(1) Rjt=aj+bjRmt+ e

where Rjt is projected return of a share j at time t and Rmt is the realized return on a

general market (eg, Shanghai SE Composite, Hong Kong Hang Seng, Singapore Straits

Times, S&P 500).

Firstly we estimate the coefficients aj and bj of each stock by using the ordinary

least squares (OLS) regression model. The market model was estimated over a 90-day

period beginning 30 days prior to each M&A announcement (the time period used to

5 estimate coefficients aj and bj is [-120,-30]). Next we use the CAPM model to estimate

the projected returns, Rjt for the 40-day period that is the focus of this analysis (20 days

prior to the acquisition announcement date and 20 days after the acquisition date, [-20,

5 This period is [-120,-20] for the 2009 deals.

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20]). ARs are then calculated as the differences between actual returns and projected

returns.

(2) ARjt= Rjt-actual- (aj+bjRmt)

An important consideration for the empirical investigation of the model is over

what time period to examine returns. While the actual date of the merger could serve as

time zero, we are concerned about whether an increase in firm value might occur prior to

the announcement due to speculation about the M&A activity itself. This would artificially inflate pre-M&A returns and bias our results from finding any positive affect

of M&A activity based on abnormal returns alone. For this reason we begin the analysis

20 days prior to the recorded announcement date (using [-20, 20] instead of [0, 20]).

In addition, instead of using AR, we use the cumulative abnormal return (CAR) to

capture the total firm-specific stock movement for an entire period when the market

might be responding to new information. CARs are often used to evaluate the impact of

news on a stock price. In addition, it is the accumulated return that is the focus of

investors holding stock over a period of time.

To get the CARs cross-period and cross firm, first, we calculate the mean of the

CARs of all firms for a single day. After we obtain the CAR means for every day during

the [-20, 20] window, we use t-statistics to test statistical significance of CARs over this

time period.

(3) CARj(t=-20)= AR j(t=-20)

(4) CARjt=∑

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(5) CARt = (∑CAR jt)/N

Equation (6) provide the t-statistic for CARs for[-20, 20]

(6) t = [(∑ )/N] / (S/√)

where N is the number of firms and S is the standard deviation of the CAR.

This short-period event study method provides the announcement effect of the

M&A on the acquired firms and indicates the market’s perception of the value of the

M&A activity.

We next use a “paired comparison test” to see if the difference of the means from

the strategic and financial investor samples is significantly different from zero. Given our

expectations that financial investors will are more motivated to affect returns, we expect

the market to value financial investor M&A activity more highly and for the difference in

the means to be significantly different from zero.

The t-statistics with N-1 degree freedom is computed as:

(7)

Where,

∑ , sample mean difference

di =difference between the ith pair of observations

=standard error of the mean difference = √

sd = sample standard deviation

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2) Nonparametric tests for actual performance during [-120, 80]

We now extend the analysis beyond the window surrounding the announcement

date, t=0, to examine the (slightly) longer term performance of the acquired firms. Here

we compare the distributions of abnormal returns before and after the acquisitions

separately for strategically acquired firms and sponsor-backed firms.6

The event window selected for this method is [-120, 80]. Instead of using the

announcement date to divide the whole period into “before the acquisition” and “after the

acquisition”, we define the time period for “before the acquisition” as [-120, -20] and

“after the acquisition” as [-20, 80]. We shift the break point to 20 days prior to the

announcement because sometimes the market picks up rumors of M&A activity before

the announcement date and reflects its reaction to the stock prices of the acquired firms immediately. Choosing 20 days before the announcement date as the divider to distinguish the periods before and after acquisitions helps us dampen the rumor effect.

First we draw histograms for the CAR distributions before and after the

acquisitions, both strategically acquired and sponsor-backed firms. Then we use the 2-

sample K-Smirnov test to study if the before and after distributions are significantly different from each other.

The basic model is as following:

(8) ARjt= a+bstrat_aftDstrat_aft+bspon_aftDspon_aft

(9) CARt= a+bstrat_aftDstrat_aft+bspon_aftDspon_aft

6 Carmen Reinhart and Vincent Reinhart (2010) used this method to study the effects of adverse economic shocks on GDP, unemployment, inflation, bank credit and real estate prices.

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Where CARt_bef=∑ , ARt=(∑ ARjt)/N, ARjt= Rjt- (aj+bjRmt)

CARt_aft=∑

3) Multivariate Regressions

The third empirical estimation uses an event study methodology adding control variables to our model:

(10) CARt= a+bstrat_aftDstrat_aft+bspon_aftDspon_aft+ X

X – Controls:

PER – % Sought

MKTCAP - Size (Market Cap): Market Capitalization on the date of announcement

(US$ in millions at historic value)

REV – YTD (year-to-date) revenue on the date of announcement (US$ in millions at historic value)

PARENTNAT – Chinese (=0) / Foreign Acquirer(=1): Buyer’s country

Control Variables:

 Firm-specific factors:

Initial market capitalization of the acquired firm (US$MM): If the investment is in a relatively small firm, it will take time for the investors to recruit the right manager for the firm. Thus, Finkel (2010) argues that it is easier for financial investors to generate more

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value from their investments if the investments are made into big companies as there will not be unnecessary changes in the management.

The Year-To-Date (YTD) Revenue of the acquired firm at the time of acquisition

(US$MM): Revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. Holding size constant

(with asset size) higher initial revenue may indicate greater profitability and may signal future success of the acquired firm.

 Investment factors:

Percentage acquired / sought: Generally the larger the percentage acquired, the more the acquirer has a say in the acquired firm’s management. However, some acquirers believe that they could also get positive returns from taking minority stake of the acquired firm and let the management make their own decisions. F. Warren Hellman from Hellman &

Friedman LLC says, “Unlike many private-equity firms, which insist on majority ownership of their portfolio companies, we have a wealth of experience taking minority stakes in companies and helping transform their strategies even though we cannot exert the typical majority ownership controls. Part of our results, I am convinced, arose from the fact that we had left such a large portion of the ownership in the hands of employees who then became exceptionally motivated to deliver results.”

Nationality of acquirer (Chinese or foreign): The majority of the investors from the assembled dataset are domestic investors. This is consistent with the overall investment environment in China (see Graph A5 for the comparison between the number of domestic deals and that of inbound deals). Arguably, foreign strategic investors can bring in new

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knowledge and technology to China. Cross-border acquisition activities are considered to

create the potential for learning and innovation across country boundaries, especially in

high tech industries (Harzing, 2002). This allows local firms not only to transfer

knowledge faster but also to innovate at lower costs. M&A activities may influence the

overall innovative performance of an industry. M&A may enable local firms to utilize

external technology and enhance technological capacity through intra-industry spillover

(Roller, Stennek & Verboven, 2001). However, people complain about the ‘glass-ceiling’

in the management after the cross-border M&As. On the other hand, foreign investors are

also concerned about the higher levels of risks associated with emerging markets

primarily due to “political instability, poorly established markets for trading and low

confidence in the national economic systems, such as currency stability of banks”. (Jo,

Costa, Hallstrom, Tryhus, Winter, 2009) As a result of this concern, in recent years more

strategic investors are domestic firms. I found no previous literature that indicates

whether the nationality of the financial investors can affect the value created for the

acquired firms. However, experienced financial investors have found out that the most successful PE funds tend to be locally managed (Personal interview with Mr. T.Tsubaki).

Based on the hypotheses and the model, we are expecting the following:

Hypothesis 1. An M&A activity creates value for both strategically-acquired and

sponsor-backed companies.

• baft-spon>0, baft-strat>0

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Hypothesis 2. Strategically acquired firms may created less value over the same time

period compared to the financial investor-backed firms due to the differences in the

acquirers’ motivations.

• baft-spon> baft-strat

The signs of the coefficient on the control variables are expected to be:

• bPER >0, bMKTCAP>0,bREV>0

III. Data Overview

Most of the transaction details are taken from Capital IQ. The transactions used in

this research include all ‘Announced’, ‘Effective’ and ‘Closed’ M&A transactions. All

target companies are public. The ownership statuses for the acquired firms are prior

sponsor-backed, current sponsor-backed and current strategically acquired.

Please refer to Table A2 in the appendix for the list of transaction details collected from Capital IQ. Individual stock quotes and market indices were collected from Yahoo!

Finance. Individual stock returns and market returns were calculated based on the data collected.

Data was collected and formatted in two batches. First, we collected the relevant data for 2008 and 2009. Later, in order to expand the data set, we went ahead to collect two more years of transaction data, 2006 and 2007. We can see from Table 1 and Table 2, the percentage of shares acquired by both types of investors decreased in 08-09 as compared to that of 06-07.

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As we mentioned at the beginning of this paper, pre-crisis (2000-2007) was the

deal frenzy period.7 Although China was not affected by the global financial crisis as

severely as many other countries (see Table A1), investors may still have been hesitant to

resume the investment at the levels of the pre-crisis period. In post-crisis period we

observe investors choosing to acquire smaller percentages, resulting in smaller average

transaction values in 2008 and 2009.

Table 1. Overview of data (08-09 transactions only)

# of Transaction Value($mm) % acquired Market Cap at t=0 ($mm) Revenue at t=0 ($mm) deals

mean max min mean max min mean max min mean max min Strategicall 80 358.2 7048.7 2.9 14.6 100 0.2 6780.7 191460.1 70.3 1646.4 37734.4 0.4 y acquired Sponsor- 38 794.6 7290.0 0.9 11.1 41.0 0.1 22048.9 191460.1 66.6 4872.1 37734.4 7.7 backed

Table 2. Overview of data (06-07 transactions only)

# of Transaction Value($mm) % acquired Market Cap at t=0 ($mm) Revenue at t=0 ($mm) deals

mean max min mean max min mean max min mean max min Strategicall 54 89.2 988.0 0.8 19.3 59.7 0.2 8407.5 165345.3 34.8 1245.0 18787.0 0.4 y acquired Sponsor- 29 55.69 230.27 0.8 15.7 73.3 0.2 15087.0 165345.3 47.8 1950.5 18787.0 0.1 backed

7 Please note that the lower number of transactions in 2006-2007 than in 2008-2009 is the result of data selection only. The early transactions often lack part or all of the transaction details, so we have to omit those from our dataset. For example, one very common reason why we omitted a lot of transactions is that the acquired firm stopped trading multiple days and even months before and after the M&A announcement date. In this case, we have no data for the [-20, 20] market perception event study or [-120, 80] nonparametric tests.

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Table 3. Overview of data (06-09 transactions)

# of Transaction Value($mm) % acquired Market Cap at t=0 ($mm) Revenue at t=0 ($mm) deals

mean max min mean max min mean max min Mean max min Strategicall 13 235.1 7048.7 0.8 16.5 100 0.2 7431.4 191460.1 34.8 1487.0 37734.4 0.4 y acquired 4 Sponsor- 67 473.3 7290.0 0.8 13.0 73.0 0.1 18989.9 191460.1 47.8 3588.4 37734.4 0.1 backed

IV. Results

1) Standard Event Study

First we use the standard Event Study to examine the announcement effect of

M&As. We want to see how the market reacts to the strategically acquired investments

and sponsor-backed investments.

Table 4. Short term event study result (06-09 transactions)

CARt_ strategic CARt_sponsor Paired [-20,20] [-20,20] Comparison

Mean 0.042536 0.036144 0.000164

Std. Deviation 0.030302 0.020596 0.012806

T-stat 8.878026 11.09904 3.156456

The initial results were based on all 2006-2009 transactions (see Table 4), which

include 134 strategically acquired firms and 67 sponsor-backed firms.8 The mean of

cumulative abnormal returns for the strategically acquired firms is 0.043 and that for the

8 For the complete lists of [-20, 20] AR and CAR means for 2006-09, please refer to Table A3 & A4.

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sponsor-backed firms is 0.030. Both results are significantly different from zero, showing

that the acquired firms under both types of investors experience positive returns as a

result of the M&A. The paired comparison test on the two sets of CARs gives a t-statistic of 3.16, indicating that the CAR mean for the strategically acquired firms is significantly higher than that of the sponsor-backed firms. During the period of 2006 to 2009, the market shows more positive reactions to the M&As in which strategic investors are involved.

Table 5. Short term event study result (08-09 transactions only)

CARt_ strategic CARt_sponsor Paired [-20,20] [-20,20] Comparison

Mean 0.030075 0.030954 -0.00088

Std. Deviation 0.019983 0.012171 0.014985

T-stat 9.518759 16.08453 -0.370831

However, if we run the test again using only 2008 and 2009 data that consists of

80 strategically acquired firms and 38 sponsor-backed firms, we find some different

results (see Table 5).These results show that the mean of CAR for the strategically

acquired firms is 0.03 and that for the sponsor-backed firms is 0.031. Both results are significantly different from zero, showing that the acquired firms under both types of

investors experience positive returns as a result of the M&A. The paired comparison test

on the two CAR means gives a t-statistic of 0.371, indicating that they are not

significantly differently from each other. The market reacts the same to strategically

acquired and sponsor-backed transactions, at least within the [-20, 20] period. The paired

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comparison tests for 2006-09 and 2008-09 gives us two different results. The market either became more confident in financial investors’ ability to create values for their acquired firms, or lost some optimism to strategically investors as a result of the financial crisis or previous negative news on strategically acquired M&As.

When we take a closer look at the CAR curves during this period of 40 days

(Graph 4 & 5), we see that the market generally starts to pick up the “rumor effect” around 10 days before the acquisitions and the upward trends of stock prices continue to about three days after the acquisition is officially announced. After that, the market’s reaction cools down, and the CAR shows a much slower and steadier growth. On the other hand, the CAR for sponsor-backed firms shows a steady “10-day cycle” (see Graph

5) or a “15-day cycle” (see Graph 4) growth.

This result of a positive impact of the announcement on CARs is consistent the literature that we presented earlier: an M&A activity leads to acquired firms experiencing positive returns, even in China’s nascent markets. As financial investors’ only investing motivation is to seek return, their involvement in a particular M&A continuously generates a wider interest in the acquired firm from other market participants. Park, et al

(2002) shows that the means of CARs (which measures market reaction) are the most significant during the periods of [-30, 5] and [30, 0] for both domestic and international strategic M&As in the telecommunication industry in the U.S, EU and Asia. Our mean of

CAR for strategic acquired firms demonstrates similar findings.

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R-squares for both strategically acquired and sponsor-backed curves for 2006-

2009 are around 0.85, which shows that the linear relationship can explain about 85% of the variation in the data.

Graph 4. Cumulative Abnormal Returns immediately before and after M&As (2006-2009)

Cumulative Abnormal Returns, [t-20,t+20] 0.1 y = 0.0024x + 0.0413 R² = 0.8591 0.08

0.06

0.04 y = 0.0016x + 0.0353 R² = 0.8469 0.02

0 -25 -20 -15 -10 -5 0 5 10 15 20 25 -0.02 Strategically Acquired Sponsor-backed Linear (Strategically Acquired) Linear (Sponsor-backed)

Graph 5. Cumulative Abnormal Returns immediately before and after M&As (2008-2009)

Cumulative Abnormal Returns, [t-20,t+20] 0.07 y = 0.0015x + 0.0293 0.06 R² = 0.7639 0.05 0.04 0.03 y = 0.0009x + 0.0305 R² = 0.7529 0.02 0.01 0 -25 -20 -15 -10 -5-0.01 0 5 10 15 20 25 Strategically Acquired Sponsor-backed Linear (Strategically Acquired)

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2) Nonparametric tests for actual performance during [-120, 80]

Although we use event windows to analyze stock prices again, we hope to find

out if there is any actual impact on the market performance of the acquired firms as a

result of M&A by looking across a longer time period before and after the acquisition.

We use the data from 2006 to 2008 here, which include 89 strategically acquired and 49 sponsor-backed transactions.

As mentioned in Section II, the [-120, 80] window is divided at 20 days prior to the acquisition into the “before acquisition” ([-120, -20]) and “after acquisition” periods

([-20, 80]).

While a visual examination of the distribution of CARs indicates that the “after acquisition” period is different from that of the “before acquisition” period (See Graph

A3 & A4), a two-sample K-Smirnov test further confirms our observations – the p-values

for combined K-S is a significant zero, showing that the distribution of CARs is

significantly different for the period before the acquisition and that after the acquisition.

The above two methods show that an M&A is adding values to an acquired firm, both

from the market perception and actual performance, at least in the short five month

period following the M&A activity.

Next, we use regression analysis to test if there is a difference in returns for the

strategically acquired firms and the sponsor-backed firms using the model:

(8) ARjt= a+bstrat_aftDstrat_aft+bspon_aftDspon_aft

(9) CARt= a+bstrat_aftDstrat_aft+bspon_aftDspon_aft

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The event window is still [-120, 80], CARs are calculated in the same way as above: using CARt=-120 as the starting point for “before acquisition” period and “after acquisition” period. We use panel data analysis to capture the ‘within firm’ variation over time. This method eliminates the uncertainty in CARs means that may be caused by extreme values and considered each firm’s data on a case-by-case basis. The inclusion of

Equation (8) for AR is for robustness. We use robust standard error instead of normal standard error to make sure that the model will adjust to the presence of any potential outliers. The results of the regression are shown below:

Table 6. [-120, 80] Regression Results for Strategic and Sponsor Dummies

08 transactions only 06-08 transactions with 06-08 transactions percentage acquired >10% (55 obs) (71 obs) (126 obs)

ARjt CARjt ARjt CARjt ARjt CARjt (tinitial=- (tinitial=-120) (tinitial=-120) 120) βstrat_aft .000578 -.0043692 0.0018678 0.1281283 0.0014447 0.103821 (0.001037 ) (0.005853) (0.000818)** (0.045452)*** (0.000575)** (0.033685)***

βspon_aft .0016111 .0934238 -0.0004979 0.0604564 0.0003563 0.075119 (0.001243) (0.007731) (0.001377) (0.086136) (0.000844) (0.05188) α -.0001016 .0234833 0.0002009 0.0103573 0.0001711 0.014498 (0.000177 ) (0.021917 ) (0.000197) (0.015656) (0.000130) (0.010782)

Note: * means significant at 10% level; **means significant at 5% level; *** means significant at 1% level. Numbers in parentheses indicate robust standard errors.

From Table 6, the only significant coefficients here are the ones for strategically acquired firms’ both in the ARs and CARs regressions. Different from our hypothesis, strategically acquired firms shows better market performances (as indicated by the CARs) as compared to sponsor-backed firms.

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3) Multivariate Regressions

We extend the analysis by holding constant certain control variable utilizing the

model:

(10) CARjt= a+bstrat_aftDstrat_aft+bspon_aftDspon_aft + X,

Data are again drawn from M&A activity that occurred in 2006-2008, including a total of

89 strategically acquired and 49 sponsor-backed firms. As discussed in Section II, the

controls that we select are: total transaction size, percentage acquired, market

capitalization on the date of announcement, YTD revenue on the date of announcement,

and acquirer’s nationality. Again, robust standard errors are calculated to take into

account any outliers.

Table 7. Results from the Multivariate regressions (06-08 transactions)

CARjt # obs strat_aft spon_aft percent mkt_cap revenue parent

Model (1) 126 0.103821 0.075119 (0.03368) ** (0.148)

Model (2) 113 0.107402 0.110265 -0.000494 -1.44e-06 6.59e-06 0.014929 (0.03630)*** (0.04777)** (0.00154) (4.39e-7)*** (2.10e-6)*** (0.04491)

Model (3) 113 0.107393 0.1102824 -1.35e-06 6.31e-06 0.016702 (0.03630)*** (0.04777)** (3.84e-7)*** (2.07e-6)*** (0.04573)

Model (4) 125 0.103860 0 .096853 -1.32e-06 6.64e-06 (0.03368)*** (0.04827)** (3.06e-7) *** (1.66e-6) ***

Note: * means significant at 10% level; **means significant at 5% level; *** means significant at 1% level. Numbers in parentheses indicate robust standard errors.

For the period of 2006-08, strategically acquired firms were doing better than the

sponsor-backed firms approximately five months after the acquisitions (100 days after t=-

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20) if only the types of investors were concerned (see Model (1) above). Once we add

other controls to the regression, this difference becomes smaller and even reversed. Tests

on the coefficients of the two independent dummies show that they are not significantly

different from each other. Models (2), (3) and (4) show that two controls are significant here, market capitalization and revenue. The sign on the coefficient of revenue is consistent with our previous speculation of a direct relationship between YTD revenue and CAR. Holding everything else constant, the market is more confident in the acquired firms that have greater YTD revenue on the day of acquisition. However, the sign on the coefficient of market capitalization is opposite to our expectation that a larger market capitalization will increase the firm’s CAR during the [-120, 80] period. Market capitalization is often used as a way to measure the size of a firm. Historically markets have favored acquired firms that are bigger in size because fewer changes would be made

to the management (Finkel, 2010). However, since revenues are also included, market

capitalization may not be indicating firm size here. Market capitalization is the number of

outstanding shares times the share price. Assuming the number of outstanding shares

does not fluctuate too much and everything else (revenue, percentage acquired, acquirer’s

nationality) holds constant, a larger market capitalization may mean that the firm’s stock

was priced relatively high. The consequence of a higher-priced stock will result in a more

modest increase in CAR as compared to a lower-priced stock.

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Table 8. Results from the Multivariate regressions (08 transactions only)

CARjt # obs strat_aft spon_aft percent mkt_cap revenue parent

Model (1) 55 0.025957 0.085247 (0.06136) (0.07673)

Model (2) 54 0.02612 0.135981 -0.00200 -5.02e-06 .0000142 0.219937 (.06132) (0.06128)** (.00264) (2.26e-6)** (8.07e-6)* (0.08515)***

Model (3) 54 0.02610 0.136013 -4.65e-06 0.000013 0.228635 (0.06132) (0.06126)** (2.24e-6)** (7.99e-6)* (.08436) ***

Model (4) 54 0.026120 0.135975 -1.54e-06 0.239053 (0.06133) (0.06127)** (6.09e-7) ** (.08822)***

Note: * means significant at 10% level; **means significant at 5% level; *** means significant at 1% level. Numbers in parentheses indicate robust standard errors.

Turning to the most recent acquisitions, the year 2008 alone (see Table 8), the

coefficients on the sponsor-backed firms after the acquisitions are very significant and

much higher than those on the strategically acquired firms. Considering the impact of the

financial crisis that started in late 2007 and lasted throughout 2008 and the different

motivations of strategic investors and financial investors, the market could have

developed different opinions towards different investors during the course of that crisis.

Financial investors seeking long term returns invested in firms even in downtimes when

firms may have been significantly undervalued. Strategic investors might acquire firms

that were encountering operational and managerial difficulties during this time in order to

pursue their future expansion goals. Models (2) and (3) produce the same signs on the

coefficients of market capitalization and revenue as the regressions for 2006-08 data.

Lastly, also different from what we expected, Models (2), (3) and (4) show that an

acquisition that involves foreign investors has a positive effect on the market

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performance of the acquired firm during the period [-20, 80]. This may be due to the fact that the market has more confidence in the more experienced foreign investors. The

Chinese domestic investors, particularly the financial investors, are still new in the global investment arena. The coefficients on percentage acquired are insignificant in all of our regressions, indicating that the percentage of a firm acquired does not affect the firm’s value creation as much as we previously expected.

V. Conclusion

Based on the data and results, this study has shown that M&As do create values for the acquired firm, a conclusion that is consistent with previous literature. For the period of 20 days prior to the acquisition and 20 days after the acquisition, the market perceives M&A activities involving strategic investors to be better before the financial crisis, but regards the M&As involving strategic investors and financial investors to be the same starting in 2008. However, for a longer period, such as [-120, 80] with the assumption that t=-20 is the starting day for any ‘rumor effect’ to kick in, strategically acquired firms did slightly better than the sponsor-backed firms for the overall period of

2006-08, and the difference diminished when other controls were considered. For post- crisis period (2008 only in this study), sponsor-backed firms were performing much better than the strategically acquired ones, indicating that firms would perhaps prefer additional capital support to synergy and overall management improvement after the financial crisis. We have identified that market capitalization on the acquisition date shows a negative relationship with CAR, whereas larger YTD revenue on the announcement date and foreign acquirers have positive effect on CAR.

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Inevitably, there are areas that can be improved to make this study better. First, the present study is limited by the size and the duration of the data. The [-120, 80] window is used to examine longer term performance of firms and it covers approximately ten months of stock prices. However, longer window periods such as [-300, 300] or even

[-600,600] can be used for Method 2 and 3 to obtain a better sense of the actual performance of the acquired firms. Also, the empirical test of this study is restricted by the small sample size, which was further shrunk by the strict criteria of the event study methodology. More pre-crisis and post-crisis transactions can be included to examine the general pattern of M&As in China in the twenty-first century. Second, some categories in the data can be broken down further to generate more accurate results. While some financial investors are actively creating values for their portfolio firms by becoming involved in the management, many others are passive investors that seek returns from undervalued firms only. It would be informative to identify those two groups and study them separately. In addition, the foreign acquirers in this study are defined as any investors that are not based in Mainland China. Therefore, investors from the Greater

China area (e.g. Hong Kong, Taiwan, Singapore) are considered foreign investors within the context of my data. In future studies, we can separate those investors that are based in the Greater China area from those in the rest of the world. While M&As by foreign investors are generally considered ineffective by the market due to cultural and managerial barriers, it may not apply to investors who are relatively more familiar with the social and economic environment in China.

The findings from this study have useful implications for the Chinese firms who want to achieve a higher level of productivity and profitability by obtaining external

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capital support and management/ organization improvement through M&A activities.

Will M&A ultimately create value for their firms? Should they work with strategic

investors or financial investors? What are the other factors for a “successful” M&A deal?

This study provides evidence to start to answer these questions.

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VI. Appendix

Graph A1. Number of transactions in China, 2000-2010. 2500 2151 2000 1849 1472 1537 1500 1093 1000 580

500 195 51 61 58 118 352 381 257 309 351 0 144 37 22 17 32 62

Strategically acquired Sponsor-backed

Note: All acquired firms are Chinese. Source: Capital IQ

Graph A2. China’s GDP (contant 2000 US$) and GDP Growth (%) , 2000-2009

GDP (constant 2000 US$) GDP growth (annual %) 16 3,500,000,000,000

14 14 3,000,000,000,000 13 12 2,500,000,000,000 11 10 10 10 10 9 9 2,000,000,000,000 8 88 1,500,000,000,000 6 1,000,000,000,000 4

2 500,000,000,000

0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: World Databank (WDI)

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Table A1. Growth Impact of Global Financial Crisis

Country Pre-Crisis Crisis Decline in Decline in Growth 2008-09 Growth 2009 (% of 05-07 (% of 05-07 growth) growth) (Avg.2005-07) (Avg.2008-09) 2009 Japan 2.1 -1.5 -2.6 167.6 221.2 UK 2.6 -1.1 -2.8 139.8 206.0 Germany 2.1 -0.6 -2.5 128.8 220.2 France 2.1 -0.3 -1.9 114.4 191.3 US 2.6 -0.4 -1.6 113.6 162.0 South Korea 4.8 -0.6 -4.0 111.5 183.9 Mexico 3.7 0.8 -0.3 80.0 108.0 Russia 7.3 2.8 -0.7 62.3 109.6 India 9.4 6.2 5.1 34.2 45.9 China 11.3 7.9 6.7 30.5 40.7 Brazil 4.1 3.8 1.8 7.5 56.2 Source: Bergsten, Fred. “Needed: A global response to the global economic and financial crisis.” Mar 28 2009. www.voxeu.org/index.php?q=node/3359

Table A2. Details collected for each transaction

Target ticker

Target industry

Buyer Country/ Industry

Total Transaction Value

%Sought

Implied EV (Enterprise Value)

EV on the date of announcement

Current EV

Market Capitalization on the date of announcement

Current Market Capitalization

Revenue on the date of announcement

Current Revenue

EBITDA on the date of announcement

Current EBITDA

IPO date

(Note: all money terms are in US dollar based on historical exchange rate)

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Table A3. 2008-2009 Abnormal Returns (AR) and Cumulative Abnormal Returns (CAR) for strategically acquired firms and sponsor-backed firms during [-20, 20] period

Strategically acquired Sponsor-backed

AR CAR AR CAR 20 0.000158 0.048911 0.005389 0.05019 19 0.001876 0.048753 -0.00072 0.044801 18 0.000968 0.046877 -0.00159 0.045516 17 0.002616 0.045909 -0.00375 0.047108 16 -0.00343 0.043293 0.000538 0.050853 15 0.001357 0.046723 0.002088 0.050316 14 -0.00061 0.045366 0.000146 0.048227 13 0.001883 0.045973 0.008261 0.048082 12 0.00401 0.04409 -0.00195 0.039821 11 -0.00156 0.04008 0.010379 0.041774 10 -0.00011 0.041638 -0.00304 0.031395 9 0.000489 0.041745 0.001923 0.034431 8 0.001929 0.041256 -0.00324 0.032508 7 -0.00574 0.039327 -0.00168 0.035743 6 -0.00212 0.045072 0.002017 0.037426 5 -0.00452 0.047191 -0.00424 0.035409 4 -0.00365 0.051715 0.004007 0.039652 3 -0.00023 0.055363 -0.00123 0.035645 2 0.005238 0.055593 0.007157 0.036878 1 0.008183 0.050355 0.00312 0.029721 0 0.006173 0.042172 0.005124 0.026601 -1 -0.00341 0.035999 0.004893 0.021477 -2 0.006187 0.039404 -0.0008 0.016584 -3 0.003775 0.033217 -0.00173 0.017381 -4 0.002841 0.029441 -6.9E-05 0.019106 -5 0.002194 0.026601 -0.00182 0.019176 -6 0.006898 0.024407 -0.00268 0.020994 -7 0.001594 0.017509 0.003773 0.023672 -8 0.009026 0.015915 -0.0096 0.019899 -9 0.001974 0.006889 -0.00256 0.029494 -10 0.004838 0.004915 6.51E-05 0.032054 -11 0.00033 7.66E-05 0.001616 0.031989 -12 -0.00081 -0.00025 0.002813 0.030374 -13 0.000741 0.000554 0.003361 0.02756 -14 -0.00185 -0.00019 0.006357 0.024199 -15 0.003437 0.001666 0.001864 0.017842

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-16 -0.00023 -0.00177 0.00123 0.015977 -17 -0.00101 -0.00154 0.006109 0.014748 -18 -0.00382 -0.00053 0.003744 0.008639 -19 0.003296 0.003296 0.004895 0.004895 mean 0.030075 0.030954 stdev 0.019983 0.012171 #obs 40 40 t-stat 9.518759 16.08453

Table A4. 2006-2009 Abnormal Returns (AR) and Cumulative Abnormal Returns (CAR) for strategically acquired firms and sponsor-backed firms during [-20, 20] period

Strategically acquired Sponsor-backed

AR CAR AR CAR 20 0.000781 0.074526 0.003275 0.064288 19 0.00207 0.073744 0.003879 0.061014 18 -0.00055 0.071674 0.000604 0.057135 17 0.001911 0.072226 -0.00334 0.056531 16 -0.00224 0.070315 0.002043 0.059874 15 0.001298 0.072554 0.000742 0.057832 14 0.002038 0.071257 0.000993 0.05709 13 0.002227 0.069219 0.002706 0.056097 12 0.004104 0.066992 -0.00331 0.05339 11 0.000189 0.062888 0.007665 0.056697 10 -0.00044 0.062699 -0.00153 0.049031 9 -0.00404 0.06314 -0.00409 0.050565 8 0.003626 0.067183 -0.00188 0.054659 7 -0.00252 0.063557 0.000286 0.05654 6 -0.00273 0.066077 0.001224 0.056254 5 -0.00497 0.068804 -0.0008 0.055029 4 -0.00172 0.073769 0.006401 0.055834 3 0.002599 0.07549 -0.00437 0.049433 2 0.005147 0.072891 0.005719 0.053808 1 0.00786 0.067744 0.004849 0.048089 0 0.01351 0.059884 0.009809 0.043241 -1 0.003482 0.046374 0.013837 0.033432 -2 0.006835 0.042892 0.001762 0.019595 -3 0.004841 0.036058 0.001167 0.017833 -4 0.005568 0.031217 0.006087 0.016666

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-5 0.004287 0.025648 0.001412 0.010579 -6 0.004577 0.021361 -0.00516 0.009167 -7 -0.00028 0.016784 -0.00086 0.014329 -8 0.007816 0.017061 -0.00464 0.015186 -9 0.003569 0.009245 0.002547 0.019827 -10 0.002548 0.005676 0.002512 0.01728 -11 -0.00027 0.003129 0.000376 0.014768 -12 0.001237 0.003395 -0.00189 0.014392 -13 0.001436 0.002158 -0.0007 0.016278 -14 0.000583 0.000722 0.002935 0.01698 -15 0.003157 0.000139 0.000213 0.014045 -16 -0.00018 -0.00302 -0.00053 0.013832 -17 -0.00129 -0.00284 0.005551 0.014359 -18 -0.00188 -0.00154 0.002819 0.008809 -19 0.00034 0.00034 0.00599 0.00599 mean 0.042536 0.036144 stdev 0.030302 0.020596 #obs 40 40 t-stat 8.878026 11.09904

Graph A3. Comparisons of CAR Distributions between [-120, -20] and [-20, 80] (2006-2008 transactions)

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Graph A4. Comparisons of CAR Distributions between [-120, -20] and [-20, 80] (2008 transactions only)

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Graph A5. Number of M&A deals and deal values in China from 1/28/2011-4/7/2011

Deal Value (US$MM) Deal Type 2/4‐2/10 2/11‐2/17 2/18‐2/24 2/25‐3/3 3/4‐3/10 3/11‐3/17 3/18‐3/24 3/25‐3/31 4/1‐4/7 Domestic 405.26 2171.92 1171.05 1294.29 1631.61 5857.02 1689.68 2431.48 8588.98 Inbound N/A 585.07 63.16 177.32 65.09 1223.42 30.24 343.65 54.74 Domestic Avg 40.53 55.69 19.20 20.22 29.67 90.11 24.49 24.56 N/A Inbound Avg N/A 41.79 10.53 9.85 9.30 305.86 5.04 20.21 N/A Source: Deloitte via Thompson Reuters

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References Ahn,J.; Cogman,D.(2007). A Quiet Revolution Fung, E. (2011). New Reliability for Real Estate in China’s Capital Markets. The McKinsey Pricing Numbers? China Realtime Report, Wall Quarterly, July 2007. Street Journal. http://blogs.wsj.com/chinarealtime/2011/01/26/n Akdogu, E.(2009). Gaining a Competitive Edge ew-reliability-for-real-estate-pricing-numbers/ through Acquisitions: Evidence from the Telecom Industry. Journal of Corporate Hasan,I.; Schmiedel,H.; Song, L.(2010).Growth Finance,Volume 15, Issue 1, p. 99-112. Strategies and Value Creation: What Works best for Stock Exchanges? Bank of Finland Research Amel,D.; Barnes,C.; Panetta, F.; Salleo,C.(2004). Discussion Papers, 2010. Consolidation and Efficiency in the Financial Sector: A Review of the International Evidence. Jingu,T.; Kamiyama,T.(2008). China’s Private Journal of Banking and Finance, Volume 28, Equity Market. Normura Capital Market Review, Issue 10, p. 2493-2519. Vol.11 No.3.

Banerjee, A. (2008). Private Equity in Jo,H.; Costa,C.; Hallstrom, J.; Tryhus,C.; Developing Nations. Journal of Asset Winter,B.(2009). Dancing with the Enemy: Can Management, Vol.9 Issue 2,p.158-170. China be a Viable Alternative for U.S. Investors? Journal of International Business and Cultural Caruso,A.; Palmucci,F. (2008). Measuring Value Studies. Creation in Bank Mergers and Acquisitions. http://www.efmaefm.org/efma2006/papers/3741 Lumpkin, G.T.; Dess, G.G. (2009). Strategic 74_full.pdf Management. McGraw-Hill.

Chen, J. (2009). Acquiring Capacity and Park,M.; Yang,D.; Nam, C.; Ha, Y.(2002). Acquiring Behavior of Chinese Firms. The Mergers and Acquisitions in the Journal of Entrepreneurial Finance & Business Telecommunications Industry: Myths and Ventures, Vol.12 Issue 4, p.87-104. Reality. ETRI Journal, Vol. 24, No. 1, p.56-64.

Cooke, F.L. (2006). Acquisitions of Chinese Reed, F.; Lajoux, A.R.(1998). The Art of M&A. State-Owned Enterprises by Multinational New York: McGraw Hill. Corporations: Driving Forces, Barriers and Implications for HRM. British Journal of Reinhart,C.M.; Reinhart, V.R.(2010). After the Management, Vol.17 No.S1, p.S105-S121. Fall. NBER Working Paper, Series 16334.

The Social and Economic Impact of Private Silva,J.; Diz,M.(2006). Mergers and Equity in China (2009). European Union Acquisitions in the Portuguese Banking Industry: Chamber of Commerce in China Private Equity Is There a Process of Value Creation? and Strategic M&A Working Group ( In http://129.3.20.41/eps/fin/papers/0503/0503002. partnership with Bain &Co.), pdf

Finkel, R.A. (2010). The Masters of Private Equity and Venture Capital. New York: McGraw Hill.

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List of strategically acquired transactions used in this study 2006-09 Announcemen Target Name Ticker Target Industry (Sorted Buyer Name Buyer Country & Transaction % Then Then t Date by CapitalIQ) Industry Value($mm) sought Mkt Cap Revenue ($mm) ($mm)

12/31/2009 Henan Yinge Industrial SHSE:600069 Paper Products Luohe Yinge Industrial China, Paper Products 6.22 759.94 342.99 Investment Holding Corporation 12/31/2009 Taiyuan Chemical Industry SHSE:600281 Diversified Chemicals 4.56 0.48 838.52 47.74 12/30/2009 Hubei Wuchangyu SHSE:600275 Diversified Real Estate 14.13 5.84 7.74 Activities 12/29/2009 Ningbo United Group SHSE:600051 Trading Companies and Zhejiang Rongsheng Holding China, Real Estate 112.92 29.90 536.16 414.69 Distributors Group Development 12/18/2009 Xiamen Eagle Mining Group SHSE:600711 Computer and Electronics 8.63 9.58 128.74 22.77 Retail 12/16/2009 Hebei Cangzhou Dahua SHSE:600230 Fertilizers and Agricultural Xinjiang Great Wall Financial China, Office Services and Supplies 1.52 847.22 226.92 Chemicals Leasing 12/11/2009 Lucky Film SHSE:600135 Photographic Products 12.37 59.35 95.74 12/3/2009 China CITIC Bank SEHK:998 Diversified Banks Banco Bilbao Vizcaya Argentaria, Spain, Diversified 1626.98 4.93 36454.68 4459.91 Corporation Ltd. S.A. Banks 11/24/2009 Henan Oriental Silver Star SHSE:600753 Diversified Real Estate Beijing Victory Star Archi& Civil 3.13 178.76 1.69 Investment Activities Engin Design 11/19/2009 Aerosun Corporation SHSE:600501 Construction and Farm China Aerospace Sci& Industry China, 23.98 577.46 295.20 Machinery Launch Tech Academy 11/19/2009 Shanghai Worldbest Industry SHSE:600757 Textiles 19.24 5.10 521.36 9.19 Development 11/16/2009 Huaxia Bank SHSE:600015 Diversified Banks Deutsche Bank AG Germany, 122.26 3.43 8821.86 183.38 Diversified Capital Markets 11/5/2009 Hunan Chendian Int'l SHSE:600969 Electric Utilities 4.00 414.69 23.45 Development 11/4/2009 Harbin Dongan Auto Engine SHSE:600178 Auto Parts and Equipment Aviation Industry Corporation of China, Aerospace 56.36 54.51 965.46 299.76 China and Defense 10/30/2009 Sichuan Mingxing Electric SHSE:600101 Electric Utilities Sichuan Electric Power China, Electric Utilities 2.70 347.51 97.40 Power Corporation 10/27/2009 Shanghai Forte Land SEHK:2337 Real Estate Development Shanghai Fosun High Technology China, Industrial 83.57 9.56 89.37 723.87 Conglomerates 10/20/2009 Little Sheep Group Limited SEHK:968 Restaurants Yum! Brands, Inc. United States, 38.74 7.30 574.14 215.44 Restaurants 9/28/2009 Fujian Longxi Bearing group SHSE:600592 Industrial Machinery Beijing Hualong Import & Export China, 6.42 325.92 8.00 Company 9/25/2009 Shanghai Modern SHSE:600420 Pharmaceuticals Shanghai Institute Of China, Life Sciences Tools and 3.48 55.57 165.42 Pharmaceutical Pharmaceutical Industry Services 9/18/2009 Hubei Triring SZSE:000883 Construction and Farm Hubei Energy Group China, Electric Utilities 1.00 226.45 594.15 Machinery 9/15/2009 Shinva Medical Instrument SHSE:600587 Healthcare Equipment Zibo Mining Group China, Coal and 8.78 29.00 276.00 17.62 Consumable Fuels 9/15/2009 Hangzhou Tian-Mu-shan SHSE:600671 Pharmaceuticals Hangzhou Jinbang Trading China, 6.99 7.74 169.16 37.12 Pharmaceutical 9/14/2009 Alibaba.com Limited SEHK:1688 Internet Software and 15.56 1.14 13752.12 486.84 Services 9/8/2009 Bank of Nanjing SHSE:601009 Regional Banks Nanjing Xingang High-Tech China, Industrial Conglomerates 11.17 4636.47 423.70 47

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8/5/2009 C&T Technology SHSE:600149 Technology Distributors Beijing Juanshixuan Property China, 14.48 367.81 0.44 Development Development 7/30/2009 Shandong Huayang SHSE:600532 Fertilizers and Agricultural Harbin Manhattan Multi-line China, Real Estate 17.74 25.10 227.38 72.81 Technology Chemicals Group Development 7/27/2009 Bright Dairy & Food Company SHSE:600597 Packaged Foods and Meats Bright Foods Group China, Packaged 226.87 3.18 12.14 177.82 Ltd Foods and Meats 6/17/2009 Foshan Plastics Group SZSE:000973 Commodity Chemicals Guangdong Foreign Trade Group China, Aluminum 9.34 2.78 677.39 57.69 6/12/2009 Shenzhen Development Bank SZSE:000001 Diversified Banks Ping An Insurance Co. of China China, Life and 2278.78 16.76 985.00 1118.87 Health Insurance 6/10/2009 DongGuan Fangda Renewable SHSE:600656 Tires and Rubber 138.62 45.32 Resources 6/5/2009 Shanghai Forte Land SEHK:2337 Real Estate Development Shanghai Fosun High Technology China, Industrial 7.74 1.00 845.16 616.95 Conglomerates 6/2/2009 Guangzhou Dongfang Hotel SZSE:000524 Hotels, Resorts and Cruise Guangzhou Lingnan International China, 14.36 324.76 37.82 Lines Enterprise Group 5/18/2009 Hunan Changfeng Motors SHSE:600991 Automobile Manufacturers Guangzhou Automobile Group China, Automobile 154.23 29.00 845.56 697.55 Manufacturers 5/7/2009 Tsingtao Brewery SEHK:168 Brewers 235.39 7.00 4416.72 2378.22 4/28/2009 Industrial and Commercial SEHK:1398 Diversified Banks 1900.00 1.17 19146.92 37734.4 Bank of China 2 4/28/2009 SAIC Motor Corporation SHSE:600104 Automobile Manufacturers Yuejin Motor Corporation China, Construction Machinery and 0.62 126.75 1518.48 Limited 4/27/2009 Wuzhou Minovo SHSE:600873 Heavy Electrical Equipment Meihua Bio-technology Group China, 1.00 117.28 133.15 4/10/2009 Xinjiang Hops SHSE:600090 Brewers 11.36 376.28 136.95 3/24/2009 Little Sheep Group Limited SEHK:968 Restaurants Yum! Brands, Inc. United States, 19.32 6.70 347.46 186.48 Restaurants 3/24/2009 Little Sheep Group Limited SEHK:968 Restaurants Yum! Brands, Inc. United States, 44.32 13.93 347.46 186.48 Restaurants 3/23/2009 Shanghai Belling SHSE:600171 Semiconductors China Electronics Corporation China, 78.94 27.81 426.88 75.69 Semiconductors 2/23/2009 Tibet Summit Industry SHSE:600338 Diversified Metals and 12.39 119.50 72.75 Mining 2/5/2009 Gansu Mogao Industrial SHSE:600543 Agricultural Products Gansu Nongken Group China, Environmental and Facilities 5.47 339.73 61.91 Development Svs 1/23/2009 Tsingtao Brewery SEHK:168 Brewers Asahi Breweries Japan, Brewers 667.23 19.99 2988.43 2348.11 1/23/2009 Haitong Securities SHSE:600837 Investment Banking and 39.42 0.17 13783.80 118.75 Brokerage 1/16/2009 Sichuan Changhong Electric SHSE:600839 Consumer Electronics IBM Global Services (China) China, IT Consulting 15.79 1.59 996.52 492.94 Company Limited and Other Services 12/29/2008 Taiyuan Heavy Industry SHSE:600169 Construction and Farm Taiyuan Heavy Machinery China, Industrial Machinery 8.36 767.59 918.18 Machinery 12/25/2008 Weifang Beida Jade Bird SHSE:600076 Communications Equipment Beijing Dongfang Guoxing China, Construction 1.58 12.28 13.79 2.33 Huaguang Sci-Tech Technology Development and Engineering 12/13/2008 Beihai Beihai Port SZSE:000582 Marine Ports and Services Xinjiang Great Wall Financial China, Office Services and Supplies 4.98 149.24 27.92 Leasing 12/11/2008 Shenzhen Changcheng SZSE:000042 Real Estate Development Nanchang Liantai Investment China, 18.71 237.57 134.51 Investment Holding 11/28/2008 China Construction Bank SEHK:939 Diversified Banks Bank of America Corporation United States, Other 748.68 8.38 12438.98 35136.5 Corporation Diversified Financial 9 Services 11/25/2008 Chongqing Swell Holding SHSE:600145 Building Products Shenzhen Yifengyuan Industrial China, 26.19 18.94 155.47 48.69 48

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11/15/2008 Hubei Fuxing Science & SZSE:000926 Steel Fuxing Group China, Industrial Conglomerates 26.28 516.39 494.56 Technology 11/10/2008 Zhaojin Mining Industry SEHK:1818 Gold Shanghai Yuyuan Tourist Mart China, Specialty 57.74 1.91 629.99 283.86 Stores 10/29/2008 Hefei Meiling SZSE:200521 Household Appliances Sichuan Changhong Electric China, Consumer 13.81 7.76 134.33 676.92 Electronics 10/27/2008 Harbin High-Tech Group SHSE:600095 Agricultural Products Zhejiang Xinhu Group China, Real Estate Development 3.59 134.42 82.66 9/2/2008 Xishui Strong Year Inner SHSE:600291 Construction Materials Beijing New World Interactive China, 17.40 5.00 388.55 8.46 Mongolia Multimedia Technology Communications Equipment 8/27/2008 Xugong Construction SZSE:000425 Construction and Farm Xugong Group Construction China, Construction Machinery and 5.98 1115.92 6.00 Machinery Sci & Tech Machinery Machinery 8/22/2008 Henan Oriental Silver Star SHSE:600753 Diversified Real Estate Beijing Xiangye Weituo China, 3.65 5.00 73.33 5.84 Investment Activities Investment 8/13/2008 Chang'an Information Industry SHSE:600706 Pharmaceuticals 5.00 7.29 42.95 7/25/2008 Shanghai Huitong Energy SHSE:600605 Trading Companies and East International Group China, 6.50 2.63 121.45 Distributors 7/17/2008 Guangxi Wuzhou SHSE:600368 Highways and Railtracks Guangxi Guohong Development China, Industrial Conglomerates 9.41 314.24 32.53 Communications Corporation 7/10/2008 Beihai Beihai Port SZSE:000582 Marine Ports and Services 23.51 166.26 3.57 7/9/2008 Qinghai Sunshiny Mining SHSE:600381 Coal and Consumable Fuels 13.40 5.00 299.20 4.31 7/3/2008 Anhui Xinke New Materials SHSE:600255 Diversified Metals and 11.37 3.89 312.92 611.57 Mining 7/2/2008 Sichuan Minjiang Hydropower SHSE:600131 Electric Utilities Xinhua Water Conservancy & China,Power Producers and Energy 16.77 4.74 15.87 Power Investment Traders 6/24/2008 Hubei Eastern Gold Jade SHSE:600086 Apparel, Accessories and 14.91 5.14 319.83 8.26 Luxury Goods 6/17/2008 Shandong Wanjie High-Tech SHSE:600223 Real Estate Development Shandong Commercial Group 35.57 44.22 573.49 163.60 Corporation 6/5/2008 Henan Oriental Silver Star SHSE:600753 Diversified Real Estate 2.89 7.47 117.89 6.28 Investment Activities 6/4/2008 Nanning Chemical Industry SHSE:600301 Commodity Chemicals 9.32 19.99 39.59 27.87 6/3/2008 China CITIC Bank SEHK:998 Diversified Banks Banco Bilbao Vizcaya Argentaria, Spain, Diversified Banks 5.00 32977.69 4136.83 Corporation Ltd. 5/12/2008 Topchoice Medical Investment SHSE:600763 Healthcare Services 15.29 16.37 195.16 3.90 5/6/2008 Huda Technology & Education SHSE:600892 Electrical Components and Sichuan Pujin Medical Investment China, 2.86 5.54 13.82 21.94 Development Equipment Management 4/24/2008 Qinghai Sunshiny Mining SHSE:600381 Coal and Consumable Fuels 15.23 7.55 286.72 3.88 4/23/2008 Hefei Fengle Seed SZSE:000713 Agricultural Products Hefei Construction Investment China, 37.76 428.19 138.40 3/25/2008 Bank Of Communications SEHK:3328 Diversified Banks 6.12 62884.27 7625.36 3/4/2008 Shui On Land Limited SEHK:272 Real Estate Development 128.48 3.11 46.42 625.59 2/22/2008 Winsan (Fujian) Industrial SHSE:600767 Real Estate Development Shenzhen Rongke Investment China, 7.65 6.10 339.43 4.78 2/18/2008 Delong Holdings Limited SGX:B1N Steel Evraz Group S.A. Luxembourg, Steel 149.88 1.10 1144.45 17.82 1/17/2008 Chang'an Information Industry SHSE:600706 Pharmaceuticals 4.92 117.54 42.30 1/8/2008 Shanxi Guanlu SZSE:000831 Aluminum China Minmetals Corporation China, Diversified Metals and Mining 29.87 1773.67 387.14 12/13/2007 Topchoice Medical Investment SHSE:600763 Healthcare Services 4.32 20.09 270.66 11.48 12/11/2007 Canal Scientific And SHSE:600398 Apparel, Accessories and Jiangyin No. 3 Wool Textile China, Textiles 33.66 12.81 405.58 166.65 Technological Luxury Goods

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11/28/2007 Linktone NasdaqGM:LTO Wireless Telecommunication Media Nusantara Citra Tbk Indonesia, 23.18 25.00 80.16 51.01 N Services Broadcasting 11/16/2007 Shanghai Nine Dragon SHSE:900955 Apparel, Accessories and Zhejiang Jiulongshan International China, Hotels, 29.36 15.25 890.67 102.91 Luxury Goods Tourism Development Resorts and Cruise Lines 10/15/2007 Bright Dairy & Food Company SHSE:600597 Packaged Foods and Meats S.I. Food Products Holdings Shanghai Dairy Group 126.76 20.01 2078.94 1049.39

9/21/2007 Shanghai Nine Dragon SHSE:900955 Apparel, Accessories and Ocean Garden Holdings Resort Property International 23.43 20.34 859.88 107.72 Luxury Goods 9/7/2007 Huangshan Jinma SZSE:000980 Auto Parts and Equipment Youngor Group China, Apparel, 46.43 22.22 300.54 55.69 Accessories and Luxury Goods 8/21/2007 Yunnan Copper SZSE:000878 Metals and Mining Aluminum Corporation Of China China, Aluminum 988.03 49.00 9699.56 4916.27 7/30/2007 Enric Energy Equipment SEHK:3899 Industrial Machinery China International Marine China, Industrial 144.28 42.18 463.71 111.08 Holdings Limited Containers Group Machinery 7/16/2007 Shui On Land Limited SEHK:272 Real Estate Development 230.27 5.27 4211.69 623.68 6/28/2007 Yantai North Andre Juice SEHK:8259 Packaged Foods and Meats Chengdu President Enterprises China, Packaged 19.93 11.02 259.17 119.48 Food Foods and Meats 5/30/2007 Henan Pinggao Electrical SHSE:600312 Electrical Components and Jiangsu Rugao High Voltage China 17.80 1116.48 283.19 Equipment Electric Apparatus Ltd 5/17/2007 Nantong Jiangshan SHSE:600389 Diversified Chemicals Sinochem International Corp. China, Trading 65.19 28.00 346.37 296.41 Agrochemical & Chemicals Companies and Distributors 4/18/2007 Chongqing Huapont Pharm SZSE:002004 Pharmaceuticals Huipont Tourism China 13.00 360.02 42.00 4/12/2007 China Construction Bank SEHK:939 Diversified Banks 150.05 0.18 135136.5 18787.0 Corp. 8 6 4/2/2007 Luoyang Glass SHSE:600876 Building Products China National Building Material China, Construction Materials 24.99 441.57 159.68 Group Corporation 3/11/2007 Shandong Weigao Group SEHK:1066 Healthcare Supplies Medtronic United States, 105.88 7.50 1413.58 100.74 Medical Polymer Healthcare Equipment 2/13/2007 Guangdong Shaoneng Group SZSE:000601 Independent Power Shenzhen Energy Investment China, Independent 33.59 8.91 412.40 229.41 Producers and Energy Power Producers and Traders Energy Traders 2/7/2007 Nanchang Changli Iron & SHSE:600507 Auto Parts and Equipment Nanchang Steel China, Steel 46.55 404.53 401.27 Steel 1/31/2007 Chongqing Dima Industry SHSE:600565 Automobile Manufacturers 6.85 162.90 84.99 1/22/2007 Chongqing Huapont Pharm SZSE:002004 Pharmaceuticals Huipont Tourism China 12.38 5.00 242.57 36.78 1/22/2007 Shaanxi Broadcast & TV SHSE:600831 Cable and Satellite Shanghai Oriental Pearl China, Hotels, 16.07 6.83 427.16 38.15 Network Intermediary Resorts and Cruise Lines 1/19/2007 Huawen Media Investment SZSE:000793 Publishing Beijing Capital International China, Airport 19.90 1.75 2062.93 229.42 Group Corporation Airport Services 1/9/2007 Shanghai Kai Kai Industrial SHSE:900943 Apparel, Accessories and Shanghai Home Value Holding China 2.69 14.40 111.38 92.87 Luxury Goods

12/31/2006 Bank of China SEHK:3988 Diversified Banks 5.00 165345.2 17856.2 9 4

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12/29/2006 Founder Technology Group SHSE:600601 Computer Hardware Haier Group Company China, Industrial Conglomerates 10.91 520.54 915.04 12/28/2006 Qingdao Aucma SHSE:600336 Household Appliances 430.17 52.60 140.48 168.64 12/17/2006 Aeolus Tyre SHSE:600469 Tires and Rubber China Haohua Chemical Industrial China, Commodity Chemicals 39.22 195.72 588.42 12/5/2006 China Construction Bank SEHK:939 Diversified Banks 158.45 0.18 120568.9 16118.9 Corp. 2 3 12/4/2006 Sichuan Xichang Electric SHSE:600505 Electric Utilities 11.52 12.50 142.98 31.68 Power Company 11/20/2006 Anhui BBCA Biochemical SZSE:000930 Specialty Chemicals COFCO China, Food 126.94 20.74 261.18 403.28 Distributors 11/2/2006 Shanghai Electric Power SHSE:600021 Independent Power China Power International Hong Kong, Power 212.10 25.00 881.69 926.84 Company Producers and Energy Development Producers and Traders Energy Traders 10/9/2006 Guangzhou Development SHSE:600098 Independent Power China Yangtze Power China, Independent 136.71 11.19 1221.87 776.30 Industry Producers and Energy Power Producers and Traders Energy Traders 9/26/2006 Join-In SHSE:600745 Real Estate Development 0.84 9.96 34.77 0.44 8/31/2006 Sichuan Changjiang Packaging SHSE:600137 Apparel, Accessories and 57.11 52.21 2.06 Holding Luxury Goods 8/10/2006 Zhejiang Transfar SZSE:002010 Specialty Chemicals Transfar Group China, Specialty Chemicals 19.92 125.89 101.04 8/8/2006 Leshan Electric Power SHSE:600644 Electric Utilities Sichuan Electric Power Company China, Electric 11.16 14.56 145.14 58.47 Utilities 7/30/2006 Sichuan Xichang Electric SHSE:600505 Electric Utilities Sichun Water & Electricity China 9.86 14.66 126.55 31.68 Power Company Investment Management 7/25/2006 Huayi Electric SHSE:600290 Heavy Electrical Equipment Huayi Electric Apparatus Group China, Heavy Electrical Equipment 59.68 191.82 39.96 6/5/2006 China Garments SZSE:000902 Apparel, Accessories and Hempel-Hai Hong Hong Kong, 15.66 29.90 135.35 204.70 Luxury Goods Specialty Chemicals 5/25/2006 Hunan Panda Fireworks SHSE:600599 Leisure Products Guangzhou Panda International China 9.60 28.32 72.87 28.27 Investment 5/16/2006 Guangxi Wuzhou Zhongheng SHSE:600252 Pharmaceuticals Wuzhou Yuanyang River Bridge China 13.74 29.89 136.44 39.39 5/10/2006 Jiangsu Hongtu High SHSE:600122 Computer Storage and Changzhou Haikun Communication Equipment; Shanghai Daole 6.27 171.10 427.97 Technology Peripherals Investment; Shanghai Transcom Electronics; Nanjing Fengming Investment Consulting Service 4/30/2006 Suntek Technology SHSE:600728 IT Consulting and Other Xtera Communications United States, 3.99 26.81 39.88 24.19 Services Communications Equipment 4/12/2006 Sichuan Guangan AAA Public SHSE:600979 Electric Utilities Sichuan Putong Industrial China 5.95 104.94 32.50 4/6/2006 Shanghai Fenghwa Group SHSE:600615 Real Estate Development Coastal Realty Investment China, Other 8.33 21.13 83.57 14.18 Diversified Financial Services 4/5/2006 51job Inc. NasdaqGS:JOBS Human Resource and Recruit Japan, Publishing 109.85 15.00 505.68 73.65 Employment Services 4/1/2006 Baoji Department Store Group SZSE:000796 Department Stores Hainan Airlines Group Company China, Airlines 5.84 12.22 69.12 73.98 3/13/2006 Baoji Department Store Group SZSE:000796 Department Stores Hainan Airlines Group Company China, Airlines 6.07 10.05 66.44 73.98 3/13/2006 Zhejiang Haina Science and SZSE:000925 Semiconductors Shenzhen Keming Industrial China 19.78 46.17 13.75 Technology 3/7/2006 Baida Group SHSE:600865 Department Stores Xizi United Holding Corporation China, Industrial 38.92 26.00 223.01 162.18 51

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Machinery 2/22/2006 Butone Information SHSE:600455 Soft Drinks Xian Jingfa Group China 14.63 49.50 9.61 Corporation 1/21/2006 Topsun Science And SHSE:600771 Pharmaceuticals 5.08 119.19 68.05 Technology 1/20/2006 Hunan Panda Fireworks SHSE:600599 Leisure Products Guangzhou Panda International China 4.47 15.87 67.69 28.27 Investment

List of sponsor-backed transactions used in this study 2006-09 Announce Target Name Ticker Target Industry Buyer Name Buyer Country & Transactio % Then Then ment Date Industry n Value sough Mkt Revenue ($mm) t Cap ($mm) ($mm) 12/15/2009 Suntime International Vine SHSE:600084 Distillers and Vintners CITIC Guoan Group rp. China, Other Diversified 137.13 21.69 1123.22 66.63 Financial Services 12/3/2009 Qinhuangdao Bohai Physical SZSE:000889 Department Stores Zhongzhao Investment Management China, Office Services and 24.99 7.20 415.70 165.34 Distribution Holding mpany Supplies 11/3/2009 Rizhao Port SHSE:600017 Marine Ports and Shandong State-owned Assets China, 28.54 2.83 1436.99 331.39 Services Investment Holding . 10/23/2009 China Dongxiang mpany SEHK:3818 Apparel, Accessories and Orient Venture Capital II Inc. Canada, Asset 0.86 0.50 3465.48 568.17 Luxury Goods Management and Custody Banks 9/22/2009 Daqin Railway SHSE:601006 Railroads China Securities Depository & Clearing China, Consumer Finance 2.26 18126.46 3775.87 rporation 9/14/2009 Alibabam SEHK:1688 Internet Software and 15.56 1.14 13752.12 486.84 Services 8/11/2009 Henan Yinge Industrial SHSE:600069 Paper Products Guangcai Investment Group . China, Asset Management 29.74 5.45 589.72 29.43 Investment Holding and Custody Banks 7/31/2009 Ningxia Dayuan Chemical SHSE:600146 Commodity Chemicals 81.76 25.40 57.99 14.65 7/7/2009 Zhejiang nba Pharmaceutical SHSE:600572 Pharmaceuticals Chongqing nba Venture Capital . China, 1.12 386.19 16.49 6/11/2009 Chongqing Yukaifa SZSE:000514 Diversified Real Estate Sunline Group China, Asset Management 159.95 17.97 1196.66 57.43 Activities and Custody Banks 5/13/2009 China nstruction Bank rporation SEHK:939 Diversified Banks Temasek Holdings ; China Life Insurance Assets Management ; HOPU 729.00 5.66 14499.86 312.72 Jinghua (Beijing) Investment nsultancy ; BOC International Holdings , Asset Management Arm 5/12/2009 Hangzhou Tian-Mu-shan SHSE:600671 Pharmaceuticals Zhejiang Hengyi Investment China, 6.90 8.79 132.69 36.19 Pharmaceutical Enterprise Development 4/28/2009 Industrial and mmercial Bank of SEHK:1398 Diversified Banks 1900.00 1.17 19146.92 37734.42 China 3/31/2009 Kunming Pharmaceutical rp SHSE:600422 Pharmaceuticals Yunnan Industrial Investment Holdings China, 12.35 283.63 193.88 Group . 2/24/2009 Guangxi Wuzhou mmunications SHSE:600368 Highways and Railtracks Guangxi mmunications Investment China, Construction and 4.60 432.64 3.61 Group . Engineering 1/23/2009 Haitong Securities SHSE:600837 Investment Banking and 39.42 0.17 13783.80 118.75 Brokerage 1/14/2009 Bank of China SEHK:3988 Diversified Banks Hopu USD Master Fund I, LP.; HOPU Jinghua (Beijing) Investment 238.88 4.26 96356.47 26924.91 52

Ruilin Xu

nsultancy . 12/31/2008 Bank of China SEHK:3988 Diversified Banks 9.54 1.33 98185.60 26924.91 12/8/2008 The Inner Mongolia Time SZSE:000611 Electronic Equipment and Zhejiang Zonghe Investment . . China, 12.12 179.62 4.97 Technologies Instruments 12/3/2008 Hefei Rongshida Sanyo Electric SHSE:600983 Household Appliances Hefei State-Owned Assets Holding China, Consumer Finance 33.57 361.67 139.13 mpany . 11/28/2008 China nstruction Bank rporation SEHK:939 Diversified Banks Bank of America rporation United States, Other 748.68 8.38 12438.98 35136.59 Diversified Financial Services 11/7/2008 Sichuan Tianyi Science & SHSE:600378 Construction and Shenzhen Yintou Investment . China, 15.60 16.72 13.26 86.83 Technology Engineering 11/3/2008 Hangzhou Tian-Mu-shan SHSE:600671 Pharmaceuticals Shanghai Huaming Investment mpany . China, 5.26 9.85 66.60 37.84 Pharmaceutical Enterprise 10/28/2008 Hisense Kelon Electrical SZSE:000921 Household Appliances China Finance Asset Management China, 6.44 234.89 1227.65 Holdings mpany rporation 10/16/2008 Shanghai QiangSheng Holding SHSE:600662 Trucking Shanghai Jiushi mpany China, Asset Management 2.00 446.26 272.59 and Custody Banks 9/27/2008 Baotou Tomorrow Technology SHSE:600091 Commodity Chemicals Zhengyuan Investment . China, 14.85 1.00 148.46 72.25 9/8/2008 Zhonghong Real Estate SZSE:000979 Biotechnology Zhonghong Zhuoye Group . China, Real Estate 3.65 6.85 71.62 38.28 Operating mpanies 7/29/2008 Guangzhou Baiyunshan SZSE:000522 Pharmaceuticals Shanghai Chongyang Investment China, Asset Management 29.31 4.26 645.17 444.32 Pharmaceutical Management . and Custody Banks 6/25/2008 Southwest Securities SHSE:600369 Investment Banking and Chongqing Yufu Assets Management . China, Asset Management 139.62 41.30 Brokerage and Custody Banks 6/24/2008 Hubei Eastern Gold Jade SHSE:600086 Apparel, Accessories and 14.91 5.14 319.83 8.26 Luxury Goods 6/17/2008 Xiamen Eagle Group SHSE:600711 Computer and Electronics Beijing Dayou Fukuang Investment . China, 5.38 6.86 11.92 7.74 Retail 6/3/2008 China CITIC Bank rporation SEHK:998 Diversified Banks Ban Bilbao Vizcaya Argentaria, S.A. Spain, Diversified Banks 5.00 32977.69 4136.83 6/1/2008 WuXi PharmaTech (Cayman) Inc NYSE:WX Life Sciences Tools and Warburg Pincus LLC; Warburg Pincus Private Equity X, L.P. 63.00 5.37 1277.13 158.45 Services 4/26/2008 Simcere Pharmaceutical Group NYSE:SCR Pharmaceuticals TrustBridge Partners China, Asset Management 6.28 9.29 772.50 29.78 and Custody Banks 3/25/2008 Bank Of mmunications SEHK:3328 Diversified Banks 6.12 62884.27 7625.36 3/7/2008 Lanzhou Huanghe Enterprise SZSE:000929 Brewers Shenzhen Jinyalong Investment China, 9.29 329.11 111.97 3/4/2008 Shui On Land SEHK:272 Real Estate Development 128.48 3.11 46.42 625.59 3/3/2008 Guangdong Well Medicine SZSE:002016 Real Estate Development 33.00 19.27 17.36 Science & Technology 12/10/2007 HC International SEHK:8292 Publishing IDG Capital Partners; IDG Technology Venture Investment III 12.37 12.71 64.47 39.61 11/30/2007 Changsha Zoomlion Heavy SZSE:000157 Construction and Farm Machinery and Heavy Trucks 59.50 4777.41 985.82 Industry Science & Technology Development 11/22/2007 Keda Group SHSE:600986 Construction and Guangrao Jinrun Investment China, Other Diversified 14.09 19.00 535.04 59.66 Engineering Financial Services 9/28/2007 Bio-Treat Technology SGX:B22 Environmental and Dongguan Baosheng Environmental China, Asset Management 30.42 29.60 544.10 208.65 Facilities Services Investment and Custody Banks 9/26/2007 Xinhua Finance Media Limited NasdaqGM:X Advertising The Yucaipa Companies; Yucaipa Global Partnership Fund 25.72 6.21 596.26 68.50 SEL 7/16/2007 Shui On Land Limited SEHK:272 Real Estate Development 230.27 5.27 4211.69 623.68 6/19/2007 Xuanhua Construction SZSE:000923 Construction and Farm Hebei Province State-owned Assets Hold China 13.13 19.01 360.17 71.81 53

Ruilin Xu

Machinery Machinery and Heavy & Operation Trucks 4/12/2007 China Construction Bank Corp. SEHK:939 Diversified Banks 150.05 0.18 135136.5 18787.06 8 4/2/2007 Minth Group SEHK:425 Auto Parts and Tiger Global Management United States, Asset 41.58 6.02 797.52 135.76 Equipment Management and Custody Banks 3/24/2007 Zhuhai Zhongfu Enterprise SZSE:000659 Metal and Glass CVC Capital Partners Luxembourg, Asset 213.44 29.00 608.74 300.27 Containers Management and Custody Banks 1/26/2007 Chinasoft International SEHK:354 IT Consulting and Other Oriental Patron Securities Limited Hong Kong 4.53 2.64 183.84 45.48 Services 1/24/2007 Qingdao Aucma SHSE:600336 Household Appliances Citic Securities China, Investment Banking 10.66 8.10 187.27 158.15 and Brokerage 1/20/2007 Sichuan Jinyu Automobile City SZSE:000803 Real Estate Development 1.30 6.26 83.07 16.11 12/31/2006 Bank of China SEHK:3988 Diversified Banks 5.00 165345.2 17856.24 9 12/5/2006 China Construction Bank SEHK:939 Diversified Banks 158.45 0.18 120568.9 16118.93 Corporation 2 11/29/2006 AsiaInfo Holdings Nasdaq:ASIA Application Software CITIC Capital Private Equity Hong Kong, Asset Management and 18.81 255.49 93.68 Custody Banks 11/13/2006 Shenzhen China Bicycle SZSE:200017 Leisure Products Shenzhen Guocheng Energy Investment China, Asset Management 2.65 13.58 79.88 25.57 Development and Custody Banks 11/6/2006 Sina Corp. Nasdaq:SINA Internet Software and Citigroup CIB United States, Other 99.11 6.86 1495.72 208.40 Services Diversified Financial Services 9/21/2006 Huda Technology & Education SHSE:600892 Electrical Components Chengdu Yunjia Investment China 0.82 10.86 47.79 8.82 Development and Equipment 9/1/2006 Songliao Automobile SHSE:600715 Auto Parts and Equipment 29.89 58.08 2.14 7/27/2006 Beijing Centergate Technologies SZSE:000931 Real Estate Development Beijing Pengtai Investment; Seasource Holding Limited 26.41 40.01 440.08 62.15 7/20/2006 Shanghai AJ Corporation SHSE:600643 Diversified Real Estate 12.59 407.55 117.58 Activities 7/6/2006 Danhua Chemical Technology SHSE:600844 Commodity Chemicals 5.25 6.57 179.57 1.59 5/10/2006 Jiangsu Hongtu High Technology SHSE:600122 Computer Storage and Changzhou Haikun Communication Equipment; Shanghai Daole Investment; Shanghai 6.27 171.10 427.97 Peripherals Transcom Electronics; Nanjing Fengming Investment Consulting Service . 4/14/2006 Daqing Huake Company Limited SZSE:000985 Commodity Chemicals Daqing Gaoxin State-owned Assets Operation; Daqing Petrochemical Company; 73.03 135.55 92.72 Linyuan Refinery 3/21/2006 Shandong Juli SZSE:000880 Construction and Farm Weifang Investment Company China, Asset Management and Custody 20.46 93.90 0.11 Machinery and Heavy Banks Trucks 3/10/2006 Butone Information Corp. SHSE:600455 Soft Drinks Shanghai Haotai Investment China, Asset Management and Custody 13.23 51.29 9.61 Banks 2/22/2006 Butone Information Corp. SHSE:600455 Soft Drinks Xian Jingfa Group China 14.63 49.50 9.61 1/17/2006 Hangzhou Tian-Mu-shan SHSE:600671 Pharmaceuticals Hangzhou Modern United Investment China 14.04 23.67 56.76 29.56 Pharmaceutical Enterprise 12/10/2007 HC International SEHK:8292 Publishing IDG Capital Partners; IDG Technology Venture Investment III 12.37 12.71 64.47 39.61 11/30/2007 Changsha Zoomlion Heavy SZSE:000157 Construction and Farm Machinery and Heavy Trucks 59.50 4777.41 985.82 Industry Science & Technology Development 11/22/2007 Keda Group SHSE:600986 Construction and Guangrao Jinrun Investment China, Other Diversified 14.09 19.00 535.04 59.66 Engineering Financial Services 54

Ruilin Xu

9/28/2007 Bio-Treat Technology SGX:B22 Environmental and Dongguan Baosheng Environmental China, Asset Management 30.42 29.60 544.10 208.65 Facilities Services Investment and Custody Banks 9/26/2007 Xinhua Finance Media Limited Nasdaq:XSEL Advertising The Yucaipa Companies; Yucaipa Global Partnership Fund 25.72 6.21 596.26 68.50 7/16/2007 Shui On Land Limited SEHK:272 Real Estate Development 230.27 5.27 4211.69 623.68 6/19/2007 Xuanhua Construction SZSE:000923 Construction and Farm Hebei Province State-owned Assets Hold China 13.13 19.01 360.17 71.81 Machinery Machinery and Heavy & Operation Trucks 4/12/2007 China Construction Bank Corp. SEHK:939 Diversified Banks 150.05 0.18 135136.5 18787.06 8 4/2/2007 Minth Group SEHK:425 Auto Parts and Tiger Global Management United States, Asset 41.58 6.02 797.52 135.76 Equipment Management and Custody Banks 3/24/2007 Zhuhai Zhongfu Enterprise SZSE:000659 Metal and Glass CVC Capital Partners Luxembourg, Asset 213.44 29.00 608.74 300.27 Containers Management and Custody Banks 1/26/2007 Chinasoft International SEHK:354 IT Consulting and Other Oriental Patron Securities Limited Hong Kong 4.53 2.64 183.84 45.48 Services 1/24/2007 Qingdao Aucma SHSE:600336 Household Appliances Citic Securities China, Investment Banking 10.66 8.10 187.27 158.15 and Brokerage 1/20/2007 Sichuan Jinyu Automobile City SZSE:000803 Real Estate Development 1.30 6.26 83.07 16.11 12/31/2006 Bank of China SEHK:3988 Diversified Banks 5.00 165345.2 17856.24 9 12/5/2006 China Construction Bank SEHK:939 Diversified Banks 158.45 0.18 120568.9 16118.93 Corporation 2 11/29/2006 AsiaInfo Holdings NasdaqGS:AS Application Software CITIC Capital Private Equity Hong Kong, Asset 18.81 255.49 93.68 IA Management and Custody Banks 11/13/2006 Shenzhen China Bicycle SZSE:200017 Leisure Products Shenzhen Guocheng Energy Investment China, Asset Management 2.65 13.58 79.88 25.57 Development and Custody Banks 11/6/2006 Sina Corp. NasdaqGS:SI Internet Software and Citigroup CIB United States, Other 99.11 6.86 1495.72 208.40 NA Services Diversified Financial Services 9/21/2006 Huda Technology & Education SHSE:600892 Electrical Components Chengdu Yunjia Investment China 0.82 10.86 47.79 8.82 Development and Equipment 9/1/2006 Songliao Automobile SHSE:600715 Auto Parts and 29.89 58.08 2.14 Equipment 7/27/2006 Beijing Centergate Technologies SZSE:000931 Real Estate Development Beijing Pengtai Investment; Seasource Holding Limited 26.41 40.01 440.08 62.15 7/20/2006 Shanghai AJ Corporation SHSE:600643 Diversified Real Estate 12.59 407.55 117.58 Activities 7/6/2006 Danhua Chemical Technology SHSE:600844 Commodity Chemicals 5.25 6.57 179.57 1.59 5/10/2006 Jiangsu Hongtu High Technology SHSE:600122 Computer Storage and Changzhou Haikun Communication Equipment; Shanghai Daole Investment; Shanghai 6.27 171.10 427.97 Peripherals Transcom Electronics; Nanjing Fengming Investment Consulting Service . 4/14/2006 Daqing Huake Company Limited SZSE:000985 Commodity Chemicals Daqing Gaoxin State-owned Assets Operation; Daqing Petrochemical Company; 73.03 135.55 92.72 Linyuan Refinery 3/21/2006 Shandong Juli SZSE:000880 Construction and Farm Weifang Investment Company China, Asset Management 20.46 93.90 0.11 Machinery and Heavy and Custody Banks Trucks 3/10/2006 Butone Information Corp. SHSE:600455 Soft Drinks Shanghai Haotai Investment China, Asset Management 13.23 51.29 9.61 and Custody Banks 2/22/2006 Butone Information Corp. SHSE:600455 Soft Drinks Xian Jingfa Group China 14.63 49.50 9.61 1/17/2006 Hangzhou Tian-Mu-shan SHSE:600671 Pharmaceuticals Hangzhou Modern United Investment China 14.04 23.67 56.76 29.56 55

Ruilin Xu

Pharmaceutical Enterprise 12/10/2007 HC International SEHK:8292 Publishing IDG Capital Partners; IDG Technology Venture Investment III 12.37 12.71 64.47 39.61 11/30/2007 Changsha Zoomlion Heavy SZSE:000157 Construction and Farm 59.50 4777.41 985.82 Industry Science & Technology Machinery and Heavy Development Trucks 11/22/2007 Keda Group SHSE:600986 Construction and Guangrao Jinrun Investment China, Other Diversified 14.09 19.00 535.04 59.66 Engineering Financial Services