Why Do Private Acquirers Pay so Little Compared to Public Acquirers?

Abstract

We find that the announcement gain to target shareholders from acquisitions is significantly lower if a private firm instead of a public firm makes the acquisition. Non-operating firms like private equity funds make the majority of private bidder acquisitions. On average, target shareholders receive 55% more if a public firm instead of a private equity fund makes the acquisition. There is no evidence that the difference in premiums is driven by observable differences in targets. We find that target shareholder gains depend critically on the managerial ownership of the bidder. In particular, there is no difference in target shareholder gains between acquisitions made by public bidders with high managerial ownership and by private bidders. Such evidence suggests that the differences in managerial incentives between private and public firms have an important impact on target shareholder gains from acquisitions and managers of firms with diffuse ownership may pay too much for acquisitions.

The impact of the options backdating scandal on shareholders

“…On the one hand, consistent with the ''buyer opportunism'' argument, the typical premium offered by private acquirers (mean ¼ 11%) is notably low compared to the 1990-2005 average reported by Bargeron et al (2007). Nonetheless, only one of the five corresponding bids is contested, suggesting that the perception that the targeted companies are unfairly (under-) valued may not be widespread.…”

“…Premium Pre-scandal Price is equal to the percentage acquisition premium relative to the target firm stock price as of 20 trading days prior to the first firmspecific backdating news as defined in Table 4. 36 Bargeron et al (2007) report that, during the 1990-2005 period, the average control premium offered by public and private acquirers are, respectively, 31.47% and 22.2%. 37 We do believe that a more exhaustive analysis of how corporate scandals affect the dynamics of the market for corporate control is warranted and of interest to academics, investors, and regulators alike.…”

Corporate life cycle and M&A activity

“…Such bidders have higher growth potential, as captured by sales growth and market-to-book ratios, and lower leverage. These financial strengths offer them an advantage in the bargaining process as noted by Bargeron et al (2008).…”

“…Bargeron et al (2008) use the total percentage of the firm owned by the directors as a measure of the incentives faced by the managers. We follow their rationale and include this measure (DIROWN) to determine if aligning the interests of shareholders The table reports life cycle stage and the likelihood of takeovers.…”

Ownership structure and target returns

“…Third, we control for deal characteristics known to explain target returns (see e.g., Billett et al, 2004;Huang and Walkling, 1987;Schwert, 1996;Bargeron et al, 2008). Our base regressions include the percentage of equity consideration and dummy variables that are equal to one if the deal is hostile, there are multiple public bidders, there is a tender offer, the acquirer and target are in the same industry, and the bidder is a private firm.…”