Abstract
Using a dataset of 1149 global private equity transactions, we find that cross-border buyouts are associated with significantly higher valuation multiples than domestic ones. We attribute this finding to informational disadvantages of foreign acquirers. Consistent with this idea, we find that the spread in valuation multiples narrows when the target operates in a country with high accounting standards, when it was publicly listed prior to the buyout, and when information production is facilitated due to large firm size. Further results suggest that local partnering in a syndicate serves as an effective remedy to avoid adverse pricing effects. The spread in valuation multiples is also less pronounced for large buyout funds, presumably because they draw on sufficient organizational resources to cope with cross-border-related transaction costs.
Highlights
Cross-border transactions have rapidly increased over the past decades and account for a significant share of foreign direct investment nowadays
Other than that we focus on mature companies acquired through an leveraged buyouts (LBOs), and that we study valuation multiples rather than time to exit, exit routes or deal returns, we depart from previous literature by unravelling the effects of information production in cross-border transactions including moderating factors on the macro and micro level
This paper provides first large-scale empirical evidence for adverse pricing effects in cross-border private equity buyouts
Summary
Cross-border transactions have rapidly increased over the past decades and account for a significant share of foreign direct investment nowadays. Despite its importance for the global mergers and acquisitions (M&A) market, there is little evidence on cross-border buyout activity. This is in contrast to crossborder M&A deals of non-PE bidders (e.g., Erel et al 2012; Goergen and Renneboog 2004; Moeller and Schlingemann 2005; Rossi and Volpin 2004). Extant literature associates these deals with positive announcement returns for target shareholders because acquirers hold worse information than sellers and suffer from adverse selection problems such as overbidding (Humphery-Jenner et al 2017). A priori, these problems should be amplified in the PE context given the opaque nature of targets, which are typically not listed on a stock exchange and do not have much disclosure requirements
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