The preferences of private equity investors in selecting target acquisitions: An international investigation

Abstract

This study investigates the characteristics and attributes that private equity investors prefer when selecting target acquisitions. These characteristics are examined against a matched sample of firms subject to corporate acquisitions via tender/merger offer during 2000–2009, across seven countries: Australia, Canada, the United Kingdom, the USA, France, Germany and Sweden. We show that firm-specific characteristics are more influential in target selection than external or institutional variables. In particular, private equity targets exhibit lower stock volatility and long-term growth prospects, are larger, and have greater abnormal operating income relative to tender/merger offer target firms. Further, private equity bidders exhibit ‘home bias’, implying that familiarity motivates target selection. Institutional factors remain largely insignificant across all tests.

Undervaluation and private equity takeovers

“…Overall, their findings indicate that venture capital activity in general has beneficial effects on the Australian economy in the form of higher employment and investments. Osborne et al (2012) find that Australian (along with firms in other developed countries, including the US) firm characteristics are influential factors in private equity acquisitions. Kend and Katselas (2013) do a survey of private equity partners and professionals and find that motivations for going private are not well understood in Australia.…”

Evidence of governance arbitrage by private equity sponsors

“…This argument suggests that one should find evidence that target firms had less effective governance, given their opportunities and risks, than other firms at the time of a private equity bid. The few prior studies in this area are typically focused on financial characteristics using discrete proxies that face endogeneity issues (Chapple et al ., ; Osborne et al ., ). A paper that is most similar in spirit to this paper is Clarkson et al .…”

Abnormal returns and asymmetric information surrounding strategic and financial acquisitions

“…Prior literature shows private equity bid target firms exhibit lower stock volatility and long‐term growth prospects, are larger, and exhibit greater abnormal operating income relative to other acquisition techniques. Prior studies also consider the determinants of private equity acquisitions relative to other takeover techniques at the domestic and international level (Myers and Majluf, 1984; Bargeron et al ., 2008; Achleitner et al ., 2009; Chapple et al ., 2010; Boone and Mulherin, 2011; Fidrmuc et al ., 2012; Osborne et al ., 2012). A report in the Australian Financial Review states that, ‘No single country plays a larger role in Australia's economy than the United States … it is by far the largest investor in Australia and unparalleled provider of the capital required to fuel our economy … the United States remains Australia's indispensable economic partner’ (Holden and Mondschein, 2017).…”