Strategic Buyers Research Articles

The Effects of the Economic Downturn on Interdependent Buyer–Supplier Relationships

The management of strategic buyer–supplier relationships is a critical concern for sourcing managers. The selection of key suppliers and how relationships with these suppliers are managed and incentivized can dramatically affect the buying company's performance. While the extant literature focusing on industrial buyer–supplier relationships is significant, the severe economic downturn beginning in 2008 tested buyer–supplier relationships in unprecedented ways, yielding new insights. The research presented in this paper uses dyadic cases to investigate transformations within industrial relationships during the economic downturn. Propositions are formulated that focus on why and how firms responded to the downturn. Three primary types of relationships are identified. The results indicate variation in the ways buying companies managed their key supplier relationships during the downturn: some firms behaved more cooperatively and found ways to jointly confront the effects of the downturn, while others responded by behaving competitively to maximize their individual outcomes. The results further suggest that researchers need to revisit existing models of relationship development and dissolution to understand how these relationships evolve or devolve. The research also raises questions about the value of physical and human asset specificity, and social investments in curtailing opportunistic behavior in times of severe economic stress.

Purchasing Scarce Products Under Dynamic Pricing: An Experimental Investigation

Whereas theoretical studies on dynamic pricing typically assume that consumers are either fully strategic or fully myopic, systematic empirical investigations into how consumers behave under dynamic pricing contexts are relatively rare. Focusing on scarce products, we constructed and experimentally tested a two-stage model in which a firm sells a seasonal good under exogenous inventory constraints to a market of strategic buyers. In our experiment, subjects assigned the role of buyers made purchase decisions in response to prices set by an automated seller. We find that equilibrium predictions assuming fully strategic buyers largely accounted for aggregate behavior in the experiment, and the ex post optimal decisions for subjects were overwhelmingly consistent with equilibrium prescriptions. Moreover, subjects tended to become individually more strategic as the session progressed. However, there were also nuanced systematic patterns of deviations from equilibrium that had profit and pricing implications for the seller. First, a nonnegligible minority of subjects exhibited completely myopic buying behavior even with practice. Second, when the product was relatively more scarce, myopic buying had a stronger impact on demand at higher prices; the upshot is that the seller's season-profit-maximizing price could be considerably higher than what would be optimal with fully strategic buyers.

Strategic Buyers vs. Private Equity Buyers in an Investment Process

This paper compares the position of strategic buyers and private equity buyers in a typical investment process, from fundraising/sourcing of equity capital, through deal sourcing, due diligence, valuation and deal financing, deal negotiation and transaction execution, to value creation post-closing and exit/long-term plans. The paper evaluates advantages and disadvantages of the two different types of buyers within each of the phases of an investment process, and suggests that the financial discipline, flexibility, focus, and incentives structure of private equity firms often provide them with an edge over strategic buyers. Rather than being a rigorous academic study, the paper is intended to help M&A practitioners, whether on the strategic buyer or private equity side, with understanding their “opponent”.

The role of information technology in strategic buyer–supplier relationships

Information technology (IT) has long been acknowledged as an integral part of inter-organizational business exchange. The extant research, however, tends to emphasize the focal company perspective and focuses on operational issues, perceiving IT and business relationships as separable. Through a qualitative dyadic case study, our study defines how IT is positioned with regard to various elements of a strategic buyer–supplier relationship and the respective actors' operational and managerial behaviors. The study defines the role of IT regarding the structural, action, and management layers of a relationship and shows how IT can be a strong element around which relationship management activities are implemented to improve the consistency and performance of the relationship. The study prepares the ground for further qualitative and quantitative research to enhance a holistic understanding on IT in relation to the structures and processes in inter-organizational contexts of business relationships and networks.

Do Private Equity Returns Result from Wealth Transfers and Short-Termism? Evidence from a Comprehensive Sample of Large Buyouts

We test whether the well-documented high returns of private equity sponsors result from wealth transfers from other financial claimants and counterparties and from a focus on short-term profits at the expense of long-term value. Debt investors who finance buyouts, as well as buyers of private equity portfolio companies, represent the two potential sources of wealth transfers. However, we find that, on average, public companies benefit when they buy financial sponsors' portfolio companies, experiencing positive abnormal returns upon the announcement of the acquisition and long-run posttransaction abnormal returns indistinguishable from zero. We further find that large portfolio company payouts to private equity on average have no relation to future portfolio company distress, suggesting that debt investors are not suffering systematic wealth losses either. However, we find some evidence of wealth transfers from both strategic buyers and debt investors in some special situations. Finally, we find that portfolio companies invest no differently than a matched sample of public control firms, even when they are not profitable, an observation inconsistent with short-termism. This paper was accepted by Brad Barber, finance.

Developing social capital in buyer–supplier relationships: The contingent effect of relationship-specific adaptations

Strategic buyer–supplier relationships are increasingly viewed in both the scholarly and practitioner literatures as key drivers of sustainable competitive advantage. In particular, relationship specific adaptations – the extent to which exchange members make tangible or intangible adaptations for a partner – are acknowledged as one of the central issues. Such adaptations need to be examined in context, taking into consideration the social ties that connect a firm and its suppliers. Using the lens of social capital, we examine the contingent effect of buyer and supplier relationship adaptations, and structural and cognitive capital on the development of relational capital. A sample of 163 buyer–supplier relationships within UK manufacturing firms is used to test a series of three-way moderated regressions. The data indicate that the relationship between structural and cognitive forms of social capital and the level of relational capital is moderated by the extent of the relationship adaptations made by each firm and its supplier. Contrary to expectations, the relationship between cognitive capital and relational capital was significantly negative when high levels of buyer adaptations and supplier adaptations were present, indicating a substitution effect between cognitive capital and relationship adaptations. Structural capital was found to be most strongly related to relational capital when adaptations were reciprocated by both actors. However, unilateral adaptations by either actor resulted in significantly lower levels of relational capital as structural capital increased. Implications for theory and managers are discussed, relating to the impact of different combinations of relationship-specific adaptations on social capital components in a buyer–supplier relationship.

Theorizing through metaphorical transfer in OM/SCM research: Divorce as a metaphor for strategic buyer–supplier relationship dissolution

Operations Management and Supply Chain Management (OM/SCM), as a discipline, can benefit from proper theorizing to address persistent urgings for better and new theories. This paper hopes to inspire more theorizing engagements through the formal process of metaphorical transfer. Metaphorical transfer transforms casually-invoked metaphors in everyday language into theory-constitutive metaphors. This transformation process first mandates theorizing to ensure equivalence between the domain of the metaphor and that of a target phenomenon or research problem of interest. Second, theorizing during metaphorical transfer occurs when abstracted insights intended to govern both the metaphor and target phenomenon materialize. Finally, metaphorical transfer supports borrowing of theories from outside of OM/SCM for testing within OM/SCM by safeguarding against common mistakes. This paper demonstrates metaphorical transfer via the example of divorce and strategic buyer–supplier relationship dissolution and concludes by highlighting other metaphors that may be invoked for a number of exemplary supply chain relationship phenomena.

Equilibrium pricing with positive externalities

We study the problem of selling an item to strategic buyers in the presence of positive historical externalities, where the value of a product increases as more people buy and use it. This increase in the value of the product is the result of resolving bugs or security holes after more usage. We consider a continuum of buyers that are partitioned into types where each type has a valuation function based on the actions of other buyers. Given a fixed sequence of prices, or price trajectory, buyers choose a day on which to purchase the product, i.e. they have to decide whether to purchase the product early in the game or later after more people already own it. We model this strategic setting as a game, study existence and uniqueness of the equilibria, and design an FPTAS to compute an approximately revenue-maximizing pricing trajectory for the seller in two special cases: the symmetric settings in which there is just a single buyer type, and the linear settings that are characterized by an initial type-independent bias and a linear type-dependent influenceability coefficient.

Inefficient Results in the Market for Corporate Control: Highest Bidders, Highest-Value Users and Socially-Optimal Owners

Legal and economic scholarship on the market for corporate control has generally assumed that if the party willing to pay the highest price purchases the target company, the result will be efficient. This article shows that this invisible-hand assumption, which is generally correct in other markets, fails in the market for corporate control. In particular, whenever multiple strategic bidders compete to buy a target, the highest-bidder, the highest-value user, and the socially-optimal owner need not be, and often will not be, one and the same party. A strategic bidder will value the target at an amount equal to the present value of the incremental future profits that owning the target will produce. Bidders will thus bid up to this amount to purchase the target, with the bidder having the highest such valuation being the highest-value user of the target. But strategic bidders competing against each other to buy the target generally also already compete against each other in their product markets, and so when one strategic bidder acquires the target, others will usually incur significant costs because the winner can exploit the competitive advantage that ownership of the target confers in ways that will reduce the future profits of losing bidders (for example, by stealing market share from the losers or lowering prices in the product market and so compressing the losers’ profit margins). Transactions in the market for corporate control thus tend to produce significant negative externalities for losing strategic bidders. These externalities are merely pecuniary, however, because they are necessarily balanced by benefits received by the winning bidder or by customers in product markets, and so they are irrelevant to efficiency. Nevertheless, bidders will pay dollar-for-dollar to avoid suffering such externalities. A strategic bidder will thus increase its bid up to the sum of its valuation of the target plus the externality that it expects to suffer from losing the bidding contest. Thus, the highest bidder will be not the party with the greatest valuation of the target, but the party for whom the sum of its valuation of the target, plus the pecuniary externality it expects to suffer from losing the bidding contest, is greatest. The highest bidder will thus not necessarily be the highest-value user. Furthermore, when the successful bidder uses the target’s assets in its business, it generally creates benefits for customers in its product markets by, for example, reducing prices or improving the quality of goods. Thus, transactions in the market for corporate control also generally produce significant positive externalities. These are real benefits and not mere pecuniary ones, and they are thus relevant to an efficient allocation of the target. But since these benefits are captured by customers in the product markets and not by the successful bidder, bidders will not impound their value into their bids. The socially-optimal owner of the assets will thus be the bidder for whom its valuation of the target, plus the positive externalities captured by customers (net of negative externalities), is greatest. This party need not be either the highest-value user or the highest-bidder. When strategic buyers compete to buy a target company, therefore, the prices they offer will be distorted both upwards (because they impound negative pecuniary externalities bidders will suffer from losing the bidding contest) and downwards (because they do not impound positive real externalities to be captured by customers). Since there are multiple potential strategic buyers for the great majority of target companies, such distortions are common in the market for corporate control. Moreover, as constructed but plausible examples show, the distortions can often be very large relative to the market capitalization of the target. These results imply that the well-known empirical findings that strategic acquirers tend to overpay for targets can be explained on neo-classical grounds without necessarily resorting to agency theories or behavioral economics, classical auction theory, which assumes that bidders set their bids without regard to the identity of other bidders, does not apply to the market for corporate control, and inefficiencies caused by antitakeover devices and deal protection devices, while real, are less important than previously believed because distortions arising from such devices will usually be significantly smaller than the distortions identified in this article. The article concludes by considering and rejecting the possibility that a regulatory agency could correct the inefficiencies identified.

Designing intelligent agents to support long-term partnership in two echelon e-Supply Networks

Realizing the dynamic nature of information flow and the conflicting objectives of members play vital role in effective design of e-Supply Networks (e-SN). While there are some research in the SN literature proposing different dynamic and intelligent coordination mechanisms, the impact of the proper definition of data structure and long-term relationship in modeling both coordination and negotiation mechanisms have not been addressed deeply. In this paper, we propose three overlapping services including intelligent matching of partners, proposal generations, and long-term contract management. The process begins with the selection of qualified partners based on the similarity of users profiles in a multidimensional space defined by network attributes. Then, a coordination mechanism for long-term agreements is proposed such that the generated proposals in e-SN encourage buyers to reveal their demand in advance. The proposed mechanism introduces the importance of strategic buyers for suppliers in modeling and decision making process. To illustrate the model efficiency, a prototype system has been modeled and is compared to the traditional tendering mechanism. The validation results confirm the model efficiency in providing long-term decisions in a dynamic environment.

One size does not fit all: Selling firms to private equity versus strategic acquirers

This paper investigates the selling process of firms acquired by private equity versus strategic buyers. In a single regression setup we show that selling firms choose between formal auctions, controlled sales and private negotiations to fit their firm and deal characteristics including profitability, R&D, deal initiation and type of the eventual acquirer (private equity or strategic buyer). At the same time, a regression model determining the buyer type shows that private equity buyers pursue targets that have more tangible assets, lower market-to-book ratios and lower research and development expenses relative to targets bought by strategic buyers. To reflect possible interdependencies between these two choices and their impact on takeover premium, as a last step, we estimate a simultaneous model that includes the selling mechanism choice, buyer type and premium equations. Our results show that the primary decision within the whole selling process is the target firm's decision concerning whether to sell the firm in an auction, controlled sale or negotiation which then affects the buyer type. These two decisions seem to be optimal as then they do not impact premium.

Team Bidding by Private Equity Sponsors: Are the Antitrust Allegations Plausible?

The dozen largest private equity firms are accused of bid-rigging in the M&A market due to the practice of team bidding in groups known as clubs or consortia. Comparatively low offer premiums are unsurprising in low-synergy mergers and no conspiracy theory is needed to explain why financial buyers might pay lower offer premiums than strategic buyers, so Occam’s razor seems applicable here. In a multiple regression using a sample of 2,023 cash-only purchases of U.S. public companies during 1998-2011, including 85 by teams of private equity sponsors, team bidding is associated with a differential average offer premium of zero. The antitrust allegations are implausible because (1) the segments of the M&A market that are dominated by private equity firms are among the most competitive of all when competition is measured by the number of prospective buyers that sign confidentiality agreements or by whether a sale process culminates in an auction, (2) a selling company’s permission generally is required before prospective buyers can team up and (3) the differential average offer premium paid by teams of private equity sponsors is zero.

Exploding Offers

A buyer seeks to purchase an asset from a seller who has a finite time T in which to sell his asset. Either the buyer's offer is permanent and remains available until time T, or it is an exploding offer and remains in effect only at the instant it is made. Our goal is to determine when an exploding offer maximizes the buyer's probability of purchasing the asset (at the given offer price). We embed our analysis in a standard continuous time finite horizon search model with recall in which only one buyer is strategic and considers making an exploding offer. Our analysis and examples reveal that the strategic buyer's choice of offer duration is complex: almost anything can occur. We obtain an explicit characterization of the optimal choice when the offer distribution is uniform.

Do Private Equity Returns Result from Wealth Transfers and Short-Termism? Evidence from a Comprehensive Sample of Large Buyouts

We test whether the well-documented high returns of private equity sponsors result from wealth transfers from other financial claimants and counterparties and from a focus on short-term profits at the expense of long-term value. Debt investors who finance buyouts, as well as buyers of private equity portfolio companies, represent the two potential sources of wealth transfers. Yet, we find that on average, public companies benefit when they buy financial sponsors’ portfolio companies, experiencing positive abnormal returns upon the announcement of the acquisition and long-run post-transaction abnormal returns indistinguishable from zero. We further find that large portfolio company payouts to private equity on average have no relation to future portfolio company distress, suggesting that debt investors are not suffering systematic wealth losses, either. However, we find some evidence of wealth transfers from both strategic buyers and debt investors in some special situations. Finally, we find that portfolio companies invest no differently than a matched sample of public control firms, even when they are not profitable, an observation inconsistent with short-termism. * We thank Brad Barber, Adlai Fisher, Weili Ge, Rocky Higgins, Christ James, Paul Malatesta, Jon Karpoff, Jennifer Koski, Wayne Mikkelson, two anonymous referees, and participants at the 2010 Pacific Northwest Finance Conference, the 2012 Western Finance Association Conference, and at seminars at Arizona State University, Southern Methodist University, Texas A&M, U.C. Davis, and the University of Washington for helpful comments. C. Lamar Grant, Jared Stanfield, Robert Schonlau, and Wei Ming Lee provided excellent research assistance. A previous version of this paper was titled, “How do private equity sponsors create value? Evidence from a comprehensive sample of large buyouts.”

Private Sector Capital Strategies for Public Service Infrastructure

Global public service infrastructure faces the competing demands of age, capacity and economic headwinds. The aging infrastructure of Western economies needs upgrading – just as challenging economic conditions bring government spending and deficit measures to a head. And the inadequate infrastructure of emerging markets is in desperate need of expansion, putting a strain on available resources. For many strategic buyers and financial sponsors, the shortage of not only capital, but also capabilities and talent, makes public service infrastructure, and its entire supply chain, an interesting business opportunity that spans a wide spectrum of industry verticals. These represent significant growth markets with an attractive risk profile. Ultimately, participation in these plays might be as vendors, investors, business partners, or in the form of an M&A transaction. The fundamentals can be compelling for those who can bring to the table, the requisite capital, capabilities, or talent. This working paper addresses the key design elements of financial strategy & policy for public service infrastructure, including: sizing the need, types and sources of capital, capital structure, ownership structure, and operating model.

Bilateral Oligopoly with a Competitive Fringe

Bilateral Oligopoly with a Competitive Fringe

Managing Strategic Buyers

We consider the problem of a monopolist who must sell her inventory before some deadline, facing buyers with independent private values. The seller faces a basic trade-off between imperfect price discrimination and maintaining an effective reserve price. When there is only one unit and only a few buyers, the seller essentially posts unacceptable prices up to the very end, at which point prices collapse in a series of jumps to a “reserve price” exceeding marginal cost. When there are many buyers, the seller abandons this reserve price in order to more effectively screen buyers, with prices decreasing continuously over time.

Management Insights

Management Insights

Asset Sales and the Role of Buyers: Strategic Buyers versus Private Equity

We model bidding behavior and the interaction of private equity and strategic buyers in corporate asset sales. Private equity bidding and in turn seller gains, and type and time of exit, are determined by private equity's ability to enhance the asset's value. Our empirical results show excess returns to sellers are greater for sales to private equity than strategic buyers. Seller gains in private equity deals are related to subsequent increases in asset values and type and time of exit. Value increases during private equity ownership significantly exceed those of benchmark firms.

Do Private Equity Sponsors Sacrifice Long-Term Value for Short-Term Profit? Evidence from a Comprehensive Sample of Large Buyouts and Exit Outcomes

We test whether the well-documented high returns of private equity sponsors result from wealth transfers from other financial claimants and counterparties and from a focus on short-term profits at the expense of long-term value. Debt investors who finance buyouts, as well as buyers of private equity portfolio companies, represent the two potential sources of wealth transfers. Yet, we find that on average, public companies benefit when they buy financial sponsors’ portfolio companies, experiencing positive abnormal returns upon the announcement of the acquisition and long-run post-transaction abnormal returns indistinguishable from zero. We further find that large portfolio company payouts to private equity on average have no relation to future portfolio company distress, suggesting that debt investors are not suffering systematic wealth losses, either. However, we find some evidence of wealth transfers from both strategic buyers and debt investors in some special situations. Finally, we find that portfolio companies invest no differently than a matched sample of public control firms, even when they are not profitable, an observation inconsistent with short-termism.