An analytical study on the mergers and acquisitions of Chinese real estate developers

Abstract

As the biggest emerging market, China is experiencing a boom of mergers and acquisitions (M&As, hereafter) in all types of business enterprise. The Chinese real estate industry is one of the most active industries involved in this M&As wave. After 30 years of fast growth the industry is experiencing structural change and adjustment, with M&As becoming one of most important strategies adopted by Chinese real estate developers to ensure their survival and competitiveness. However, few studies have addressed these significant M&As issues in the Chinese real estate industry. The primary aim of this research is to investigate the performance of Chinese real estate developers' M&As, and to identify the factors affecting the performance. To achieve these research aims, the research focuses on two specific issues: I. Performance evaluation of developers' M&As: Measuring the performance of developers' M&As is to investigate whether such M&As enhanced value or not for the developers involved. This study adopts event study to analyze the performance of developers' M&As firstly. To avoid the limitation of event studies and provide a comparison, therefor this study presents a hybrid data envelopment analysis (DEA) and Malmquist total factor productivity (TFP) indices method to evaluate the efficiency and productivity changes of developers' M&As. Regarding to the result of event studies, the long-term performances of acquirers are generally decreases on average after acquisitions. And, the results of the DEA method show that developers' M&As are associated with: Some technology progressive are achieved in short-term after M&As. All other efficiencies are decreased in long-term after M&As. However, there is no evidence that developers achieve any short or long term scale efficiency improvements after M&As. Through comparison analysis of these two methods, it illustrates that the DEA method proposed in this study is suitable to be used to measure the performance of M&As. II. Analysis of factors affecting the performance of M&As: The relationship between factors and M&As performance are identified by regression analysis. Some factors obey the general explanation of M&As theories. Other factors reflect the specific characteristics of the Chinese real estate industry. Key factors include the following: The long-term performance of related M&As are better than that of the diversified M&As; Growth acquirers obtained better performance than value acquirers; Acquirers can obtain better performance when taking over a target with a higher level of cash; Target's profitability as measured by the target's returns on equity and return on assets have a positive effect on the M&As long-term performance; and Acquirer's cash and growth opportunities are positively correlated with the long-term performance of the merged enterprise. This study concludes that M&As are an important strategy for developers to achieve growth, improve efficiency, and expand to new market sectors. Therefore, understanding the mechanism of M&A based in the real estate industry context and applying them carefully in the process of M&As deals from the decision-making, through deal execution to post-acquisition can improve the performance and mitigate the risk in future M&As deals for Chinese developers.