Capabilities in M&A and Reorganization of Resources Available

Mergers and acquisitions are an important means to effectively and efficiently integrate resources available in capital markets. M&As may result in a synergy, economies of scale and reduction of cost per unit, helping companies obtain economic benefits of horizontal or vertical integration. Also, improvement in management and corporate governance may help eliminate inefficient management and enhance performance.

M&As and related financial advisory services are also long-practiced business activities of securities firms. Modern M&A services can be traced back to milestone integration accomplished by the John Morgan-led

Morgan Consortium in the American railroad industry and the iron and steel industry in late nineteenth and early twentieth centuries. What makes modern M&A services different from similar services of Morgan's time is that today's financial markets offer sufficient liquidity and a great variety of means for financing. Parties to M&A deals are no longer limited to companies. Private equity (PE) funds, hedge funds, asset management companies, and investment banks have started to play an increasingly important role in M&A services. In recent years, leveraged buyouts facilitated M&A deals, pushing transaction volumes to a new record high in the global market. Between January 2011 and the end of September 2011, the gross market value of global M&A transactions reached USD 1.685 trillion. Figure 2.6 details the distribution of M&A transactions (sorted by industrial sectors).

M&As relate to many aspects of society (economy, politics, law, community, etc.) and involve multiple stakeholders. In a bona fide acquisition, the parties normally not only bargain the transaction price based on business and financial performance and asset evaluation but also take into consideration regulatory and legal implications. A hostile takeover attempt may further complicate the process. Therefore, a securities firm is capable of playing an irreplaceable role in a successful transaction.

For securities firms, M&A-related services have been a business activity that requires tacit skills more than technical skills, and consequently benefits from private information marketplaces and connections. As the market evolves and the industry develops, securities firms no longer confine their roles to consultants and advisors. They are starting to invest in and assist the parties in the whole process. For example, a securities firm may provide

FIGURE 2.6 Global M&A Transactions Sorted by Industrial Sectors and Calculated by Market Value (USD in millions)

Source: Thomson Reuters.

bridge loans to the acquired party and may design complex structured financial products for the acquirer, helping it obtain sufficient funds for the acquisition.

Even investment banks themselves are becoming diverse. Some no longer play the conventional "good guy" role, choosing instead to work for hostile takeovers. For example, Morgan Stanley started in the 1970s by offering consulting services to hostile takeovers. Between the late 1970s and the 1980s, junk bonds with active promotion by the "Junk Bond King," Michael Milken from Drexel, became unprecedentedly important in M&As. Junk bonds remain controversial among professionals and academics regarding their economic and social consequences. However, there is no denying that the role junk bonds played in leveraged buyouts in the late 1980s has greatly changed corporate governance and the financial market in the United States.

Compared with the active American market, the Chinese capital market seems calm. Although major mergers between large enterprises do occur, the government usually does the matchmaking. The story of a listed company in financial distress getting acquired by some profit-making business for the purpose of backdoor listing is seen more frequently in newspapers. But consensus is found in almost every case, and one rarely hears of hostile takeovers. With the advance of market-oriented reforms, there is some territory still to be explored by Chinese securities firms in terms of M&A advisory services.

The main difference in market activeness is the fact that Chinese securities firms need more practice in their services and need to go further in business development. The underlying reasons are as follows:

- Unlike public companies in the U.S. capital market, where dispersed ownership is relatively common, most Chinese listed companies are under "one big boss," meaning one controlling shareholder holds a considerable number of shares. This makes M&As subject to the wishes of the controlling shareholder, rather than the need for allocation of resources in the market.

- Government is a controlling shareholder. This is a universal phenomenon in government-owned corporations. Political interests and social implications must be considered. This leads to a form of administrative intervention in resource integration that would best be left to the free market. To some extent, this makes it more difficult for securities firms to act.

- Chinese regulators retain tight control over the business. A great deal of financing and financial products that are available in the financial markets in developed countries are not yet available in the Chinese market.

Obviously, there are also cultural factors. Conservative Chinese culture has a deep influence on the Chinese people and public opinions. To some extent, this makes hostile takeovers unworkable, even though that kind of larger-than-life transaction may help improve management efficiency and corporate governance.