ACQUIRER RETURNS WHEN BUYING PUBLIC VERSUS PRIVATE FIRMS

Abstract

The volume of acquisitions involving privately held targets has far surpassed that of publicly traded firms in recent years; yet, surprisingly little research has examined private target acquisitions. By analyzing the unique features of the market for private targets, we compare the potential for value creation and value capture in private and public target acquisitions. We argue that the corporate context of private targets does not provide the same opportunities for curbing agency costs and sharing intangible resources than the context of public targets, which reduces the value creation potential for the buyer. On the other hand, private targets have lower bargaining power vis-a-vis acquirers because of higher failures in the market for corporate control of private firms and liquidity discount, which increases the value creation potential for the buyer. The net value creation potential of acquiring private targets, therefore, depends on the relative importance of their agency costs, resource sharing opportunities, and bargaining power.