Although, Sovereign Wealth Funds (SWFs) have been around for a while, it was not until the last decade that their prominence was felt in the financial industry. Some experts estimate that, as of 2008, all SWFs manage close to US$3 trillion in assets. As sovereign acquirers – which include SWFs and other government controlled corporations – are pursuing overseas investments, there is a growing worry among the target economies about the threat these actions pose to their national security. In the recent decade, U.S. Congress found themselves at odds with state-controlled Dubai Ports World (U.A.E) and CNOOC (China) over some acquisition deals within U.S. Such events forced the U.S. Congress, in 2007, to take necessary legislative actions to reform their foreign investment framework to protect its national interest. Similar legislative actions were undertaken in many other countries to impose new restrictions on foreign investments. These recent developments are motivating academic researchers to take a closer look at this issue.
In the public lecture addressed by Professor Andrew Karolyi at the NUS Business School, he tried to address some of these concerns and shared his results based on his working paper titled “What is Different about Government-Controlled Acquisitions in Cross-Border Acquisitions”. Prof. Karolyi is the Alumni Chair in Asset Management at the Johnson School at Cornell University and he was a visiting professor at the Center for Asset Management Research and Investments (CAMRI) at NUS Business School in July 2010.
The study is the first of its kind to assess the motives and consequences of deals by sovereign acquirers. It examines 5,317 cross-border acquisition deals involving government-controlled acquirers, constituting US$619 billion of activity over an 18 year period between 1990 and 2008. This was benchmarked against approximately 150,000 corporate-led acquisitions worth US$10.1 trillion. It emerged from the study that the top sovereign acquirers were China (US$115b), France (US$94b) and Singapore (US$69b), and the top target economies were US (US$124b), UK (US$91b) and Hong Kong (US$66b). The study sought to answer the following four questions
- Are the country factors that drive cross-border acquisitions by government-controlled acquirers different from cross-border acquisitions by corporate acquirers? In other words, does deal activity led by government controlled acquirers emanate from some countries more than others and are they more likely to pursue targets in some countries more than others?
- Are the attributes of target firms of cross-border acquisitions by government-controlled acquirers different from cross-border acquisitions led by corporations?
- Are target firm’s market reactions to announcements of cross-border deals by government-controlled acquirers different to similar deals by corporate acquirers?
- Is the long-run financial performance of the target firm different for cross-border acquisitions by government-controlled acquirers compared to corporate acquirers?
Contrary to popular belief, the study found that the answers to all the above questions were in the negative. It found that while there is significant cross-country variation in the government-led acquisition activity, it is difficult to explain much of it. Also, it was hard to distinguish differences in target firm characteristics and market reactions to acquisition announcements at the deal level. SWF-led government deals do pursue different kinds of targets and the market reactions to their announcements are significantly lower. In the light of this study, there are important implications for recent policies adopted in the U.S. and other countries to restrain foreign acquisitions, in general, and by government entities, in particular.
The interest that the public has on this topic was well reflected by the meaningful discussion that followed the talk. The discussion topics ranged from questions on definition of state controlled entities, research methodology, case studies on individual countries, limitations of the study and possible avenues for further research. With the growing presence of GIC and Temasek Holdings in Asia, this was a very timely lecture that helped the Singapore public to understand the issues behind cross-border sovereign acquisitions. We look forward to more such informative lectures to be organized by CAMRI and the NUS Business School. | 
