Impact of Sovereign Wealth Funds

Posted on Monday, 2 March 2009. Filed under: Commentary, Mergers |

There’s an excellent piece of research recently published on the impact of sovereign wealth funds on the companies (mainly in the West) in which they invest their money.  See a summary in the Financial Times HERE.  As an academic study, you can see the full report HERE.

Much of the report has to do with operational and finanical (including market) performance of companies in which the sovereign wealth funds have invested.  The report shows that target company performance improves after a fund has made its investment.  There are also significant corporate governance issues that are contrary to the conventional wisdom (especially the statements of many Western politicians):  apparently, the average investment of a sovereign wealth fund is 0.74% share ownership — clearly not a controlling interest! — with an investment of just over $46 million.  These are not what the popular press would have you believe.

Why is this of interest in M&A, as most of the investments are clearly not therefore for control of the companies in which they invest?  (And the study shows that in less than 0.5% of their investments are the sovereign wealth funds taking a 50% ownership position or greater.)  The interest lies in what impact these funds have on deals and where there is potential for an ultimate acquisition.

Anecdotally, it appears that M&A deals in certain areas with sovereign wealth funds behind them have caused problems:  the proposed purchase by DP World (controlled by the Dubai government) of P&O’s US business or when the Kuwait Investment Office in 1987 purchased 20% of British Petroleum (but was later forced to sell half it’s stake).  The Chinese oil company, CNOOC, ran into problems as well in 2005 when it tried to purchase the American oil company UNOCAL.

This study can therefore go a long way towards showing the supporting role that these funds can play — even if recognising that power could be exerted if they wished, albeit not in most cases through direct control because of a majority position.  Thus the above three examples should have been allowed, if you believe this study which is expertly documented.

Anything at this time to support the re-emergence of the M&A market is welcomed.  Just as basic funding and liquidity enables most companies to continue operating effectively (and the lack of liquidity being a major issue for many companies now), an effective M&A market is necessary for the health of the economy too, as it enables the strong to become stronger (up to the point where anti-monopoly issues would arise) and the weak to be taken over by the strong, and thus strengthened overall.  M&A done properly does result in 2 + 2 = 5.  These days, that can’t be bad.

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