Bottom Line

Dominance Debunked:

Prof. Andrew Karolyi finds little to fear in foreign government acquisitions

By Robert Preer

When a corporation owned by the government of one country buys a stake in an important company in another country, controversy often ensues.

Australian politicians protested when a Chinese governmentowned firm tried to acquire a big part of Rio Tinto, a British- Australian mining and natural resources company. In the United States, political opposition killed a Chinese deal for the American oil company Unocal Corp. Critics in Congress effectively blocked a transaction that would have had a company owned by the Dubai government managing U.S. ports.

But is national security indeed at stake when a foreign government tries to buy into a local business? Are investment forays by governments really attempts to seize another country’s resources or gain political advantage?

Andrew Karolyi, professor of finance and global business, has been seeking to answer these questions by investigating crossborder acquisitions by government-controlled corporations. With former graduate student Rose Liao, now an assistant professor at Rutgers, Karolyi has analyzed 20 years of data on over 4,000 such deals, both failed and successful, worth $434 billion. To gain perspective on the transactions, he has compared them with 123,000 private cross-border acquisitions completed in the same two decades worth $8.4 trillion.

His conclusion: Government-owned corporations behave about the same as private firms.

“We couldn’t find any important differences,” says Karolyi, an expert in global capital markets. “I believe that much of the angst and worry about the ulterior motives of these government-controlled corporations may be seriously misplaced.”

Government-controlled corporations have become major players on the world stage in recent years. Global trade imbalances have prompted countries with surpluses to establish the corporations, as well as sovereign wealth funds, to redeploy capital into the global marketplace, Karolyi explains.

Government-controlled corporations and private corporations tend to invest in the same countries and target the same kinds of firms, Karolyi found in his research.

Shareholders of companies being acquired also tend to react initially about the same, whether their acquirer is privately owned or government-owned. Stock prices moved in roughly the same manner for both categories of acquirer. “We don’t see anything different in terms of the deal flow at the country level. We don’t see any difference in the types of targets they go after, and it doesn’t look like the share price reactions are any different, whether it’s a government-controlled acquirer or a corporate acquirer,” Karolyi says.

And the long-run performance of firms acquired by government-owned entities is about the same as firms acquired by private firms, Karolyi found. Growth rates, ability to raise capital, and profitability were similar for both groups.

Some of Karolyi’s findings debunk widely held assumptions about the geography of foreign government investment. While there is much concern in the United States about China’s taking over American assets, the region with the largest investments in the United States is Western Europe, followed by the Middle East and then China.

“With all of the concern about China, it’s not even in the top two regions that most aggressively acquire assets in the U.S.,” Karolyi says.

The part of the world where China has invested most heavily is not the United States but other countries in Asia, Karolyi found.