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A real options perspective on sequential acquisitions in China

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Abstract

We examine how firms in an emerging market address their information disadvantage in takeovers. One strategy is to complete the acquisition sequentially rather than as a one-time deal. In contrast to firms in developed economies that enjoy relatively easy access to information, emerging-market firms face differential access to information on target firms, owing to institutional weaknesses and constraints in those markets. Sequential acquisitions are conceptualized as a real-option-based strategy, whereby the sequential acquirer resolves valuation uncertainty through information gathering and learning after making a toehold purchase. The value of a sequential acquisition strategy increases for firms that are at an information disadvantage. Statistical analysis, based on 272 completed acquisitions of Chinese listed firms between 1995 and 2003, shows that the sequential method is more likely to be chosen over a single-transaction mode when the acquirer is a private firm, or when the acquirer is diversifying into a new business area. Thus we offer a new way of viewing real option strategies in emerging economies, by treating sequential acquisitions as information and learning mechanisms as opposed to tools for hedging.

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Notes

  1. This is a simplifying assumption. Firms in developed markets may have different uncertainty profiles, given firm-specific know-how and routines (McGrath, 1997). In this paper, we focus on uncertainty caused by the differential access to external information because of firms' relationships with regulatory authorities or status in the socio-economic order.

  2. In the finance literature, toeholds are considered a profit-enhancing mechanism for the acquirer, as they can reduce the total cost of an acquisition if the acquirer succeeds in the final takeover, or produce a net capital gain for the acquirer if it loses the bidding war. In essence, this is not different from a real options perspective in that there is an upside potential and a downside limit.

  3. Results of these robustness tests were provided to the reviewers and are available upon request from the corresponding author.

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Acknowledgements

The first two authors contributed equally to the paper. We thank two anonymous reviewers and the Departmental Editor, Tarun Khanna, for helpful comments and suggestions. Thanks also go to seminar participants at the Chinese University of Hong Kong, University of Hong Kong, Peking University, Tsinghua University, and the Samsung Economic Research Institute China. We acknowledge financial support from the Natural Science Foundation of China (#70472023, #70532005, and #70772004), the Research Grants Council of Hong Kong (GRF #753608), and the Seed Funding Program at the University of Hong Kong (#200801159004).

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Authors and Affiliations

  1. School of Business, The University of Hong Kong, Pokfulam, Hong Kong

    Dean Xu

  2. Guanghua School of Management, Peking University, Beijing, China

    Changhui Zhou

  3. Carey Business School, Johns Hopkins University, Baltimore, MD, USA

    Phillip H Phan

Authors
  1. Dean Xu
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  2. Changhui Zhou
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  3. Phillip H Phan
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Corresponding author

Correspondence to Changhui Zhou.

Additional information

Accepted by Tarun Khanna, Consulting Editor, 15 December 2008. This paper has been with the authors for three revisions.

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Xu, D., Zhou, C. & Phan, P. A real options perspective on sequential acquisitions in China. J Int Bus Stud 41, 166–174 (2010). https://doi.org/10.1057/jibs.2009.16

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