Private Equity Acquisitions and Strategic Buyers: Information Discounts versus Synergies

Abstract

We characterize when private equity funds have a competitive advantage over strategic buyers in acquiring a target firm. Private equity funds are more inclined to cut loss-making projects, thereby gaining an information advantage for understanding value creation with the target's remaining assets. Strategic buyers more often integrate with the target to obtain synergy gains. Private equity funds are more likely to win takeover competitions when their information advantage is greater, their required return premium is smaller, and strategic buyers' synergy gains are smaller. Such takeovers by private equity funds can improve economic welfare.