Cross-border acquisitions of state-owned enterprises

We examine the decision of private sector enterprises from developed countries to acquire state-owned enterprises (SOEs) abroad. Using a sample of US firms buying targets abroad between 1987 and 2009, we find that bidders of SOE fare worse than bidders of non-SOE both in terms of stock price and operating performance. We also find that the quality of the target country location – as captured by the Economic Freedom of the World (EFW) Index – greatly influences the choice of SOE targets. Interestingly, the quality ranking of the target country location on the EFW Index and the performance of the bidder of a SOE target are inversely related. Our findings imply that the characteristics of the location of the target firm affect bidders’ choice of targets in international mergers and acquisitions; otherwise, acquiring non-SOEs is more lucrative. Furthermore, either limiting conditions in the business environment force managers to work harder to generate more wealth, or in weak legal and business environments buying targets with ties to the government yields extra wealth. Our findings are highly relevant within the international business literature as they influence the choice of foreign market entry mode.