Acquisitions of private-equity-backed private companies:Insights from acquirer’s choice of target and the implications on deal value through the subprime crisis
Objective: This study explores the characteristics of worldwide acquisitions of private-equity-backed (PE) private companies. It examines the impact of the subprime crisis, the acquirer’s choice of target, and the implications on deal value. Research Design & Methods: This study uses...
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Cracow University of Economics
2024-09-01
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| Series: | Entrepreneurial Business and Economics Review |
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| Online Access: | https://eber.uek.krakow.pl/eber/article/view/2169 |
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| author | Josephine Gemson |
| author_facet | Josephine Gemson |
| author_sort | Josephine Gemson |
| collection | DOAJ |
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Objective: This study explores the characteristics of worldwide acquisitions of private-equity-backed (PE) private companies. It examines the impact of the subprime crisis, the acquirer’s choice of target, and the implications on deal value.
Research Design & Methods: This study uses deal-level data on worldwide PE-backed private company acquisitions that were completed between 2000 and 2017. Research methods to test the hypotheses include data visualization, comparative analysis, and regression analysis.
Findings: Data visualization indicates that North America was the most popular region for PE-backed private company acquisitions, followed by Europe and Asia. Industry sectors such as the services sector, the technology sector, the manufacturing sector, and the healthcare, and biotechnology sectors were popular. Comparative analysis indicates that financial acquirers preferred targets with larger revenues, larger core profits and operational profitability. Regression analysis indicates that acquirer characteristics such as acquirer type and experience levels, and deal characteristics such as deal location and percentage of stake acquired influence deal size. However, target company information and performance supersede acquirer characteristics. The subprime crisis in 2008 was a minor deterrent in the acquisition activity for both financial buyers and strategic buyers resulting in larger value deals with targets with smaller revenues.
Implications & Recommendations: This study provides insights into the importance and relevance of signals in PE-backed private company acquisitions by examining the characteristics of such acquisitions, the acquirer preferences, and the determinants of deal value. Private companies are less visible and less transparent as compared to public companies, making them obscure and difficult to value. Therefore, strategic acquirers and financial acquirers rely on signals to assess the viability of the potential target, with PE backing serving as a notable certification. This study indicates that PE-backing influences deal value and acquirer’s preferences. Despite the 2008 financial crisis influencing acquisition activity, both sets of acquirers were able to leverage their experiences into their respective acquisitions. Higher total and relevant experience seemed to work favourably for acquirers, who profited from increased bargaining power.
Contribution & Value Added: Firstly, this study enriches and adds to the knowledge of the literature on acquisitions, particularly private company acquisitions and the role played by PE in the same. Next, this study adds to the literature on the subprime crisis and the impact of the crisis on acquisition activity. Further, this article provides insights into strategic decision-making by the two dominant acquirers- strategic acquirers, and financial acquirers- when they are limited by a target pool and the interpretation of signals by the target. Finally, the examination of PE-backed private company acquisitions adds to the study and practice of entrepreneurial finance by examining the role of PE as a signal to deal with quality to encourage acquisitions of privately held targets.
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| format | Article |
| id | doaj-art-74a4b9f787ce47ea8f28b3ec445b7fe7 |
| institution | DOAJ |
| issn | 2353-8821 |
| language | English |
| publishDate | 2024-09-01 |
| publisher | Cracow University of Economics |
| record_format | Article |
| series | Entrepreneurial Business and Economics Review |
| spelling | doaj-art-74a4b9f787ce47ea8f28b3ec445b7fe72025-08-20T03:05:45ZengCracow University of EconomicsEntrepreneurial Business and Economics Review2353-88212024-09-0112310.15678/EBER.2024.120301Acquisitions of private-equity-backed private companies:Insights from acquirer’s choice of target and the implications on deal value through the subprime crisisJosephine Gemson0https://orcid.org/0000-0001-5833-4204King's University College at Western University Objective: This study explores the characteristics of worldwide acquisitions of private-equity-backed (PE) private companies. It examines the impact of the subprime crisis, the acquirer’s choice of target, and the implications on deal value. Research Design & Methods: This study uses deal-level data on worldwide PE-backed private company acquisitions that were completed between 2000 and 2017. Research methods to test the hypotheses include data visualization, comparative analysis, and regression analysis. Findings: Data visualization indicates that North America was the most popular region for PE-backed private company acquisitions, followed by Europe and Asia. Industry sectors such as the services sector, the technology sector, the manufacturing sector, and the healthcare, and biotechnology sectors were popular. Comparative analysis indicates that financial acquirers preferred targets with larger revenues, larger core profits and operational profitability. Regression analysis indicates that acquirer characteristics such as acquirer type and experience levels, and deal characteristics such as deal location and percentage of stake acquired influence deal size. However, target company information and performance supersede acquirer characteristics. The subprime crisis in 2008 was a minor deterrent in the acquisition activity for both financial buyers and strategic buyers resulting in larger value deals with targets with smaller revenues. Implications & Recommendations: This study provides insights into the importance and relevance of signals in PE-backed private company acquisitions by examining the characteristics of such acquisitions, the acquirer preferences, and the determinants of deal value. Private companies are less visible and less transparent as compared to public companies, making them obscure and difficult to value. Therefore, strategic acquirers and financial acquirers rely on signals to assess the viability of the potential target, with PE backing serving as a notable certification. This study indicates that PE-backing influences deal value and acquirer’s preferences. Despite the 2008 financial crisis influencing acquisition activity, both sets of acquirers were able to leverage their experiences into their respective acquisitions. Higher total and relevant experience seemed to work favourably for acquirers, who profited from increased bargaining power. Contribution & Value Added: Firstly, this study enriches and adds to the knowledge of the literature on acquisitions, particularly private company acquisitions and the role played by PE in the same. Next, this study adds to the literature on the subprime crisis and the impact of the crisis on acquisition activity. Further, this article provides insights into strategic decision-making by the two dominant acquirers- strategic acquirers, and financial acquirers- when they are limited by a target pool and the interpretation of signals by the target. Finally, the examination of PE-backed private company acquisitions adds to the study and practice of entrepreneurial finance by examining the role of PE as a signal to deal with quality to encourage acquisitions of privately held targets. https://eber.uek.krakow.pl/eber/article/view/2169private company acquisitionsprivate equitydeal valuefinancial buyersstrategic buyers |
| spellingShingle | Josephine Gemson Acquisitions of private-equity-backed private companies:Insights from acquirer’s choice of target and the implications on deal value through the subprime crisis Entrepreneurial Business and Economics Review private company acquisitions private equity deal value financial buyers strategic buyers |
| title | Acquisitions of private-equity-backed private companies:Insights from acquirer’s choice of target and the implications on deal value through the subprime crisis |
| title_full | Acquisitions of private-equity-backed private companies:Insights from acquirer’s choice of target and the implications on deal value through the subprime crisis |
| title_fullStr | Acquisitions of private-equity-backed private companies:Insights from acquirer’s choice of target and the implications on deal value through the subprime crisis |
| title_full_unstemmed | Acquisitions of private-equity-backed private companies:Insights from acquirer’s choice of target and the implications on deal value through the subprime crisis |
| title_short | Acquisitions of private-equity-backed private companies:Insights from acquirer’s choice of target and the implications on deal value through the subprime crisis |
| title_sort | acquisitions of private equity backed private companies insights from acquirer s choice of target and the implications on deal value through the subprime crisis |
| topic | private company acquisitions private equity deal value financial buyers strategic buyers |
| url | https://eber.uek.krakow.pl/eber/article/view/2169 |
| work_keys_str_mv | AT josephinegemson acquisitionsofprivateequitybackedprivatecompaniesinsightsfromacquirerschoiceoftargetandtheimplicationsondealvaluethroughthesubprimecrisis |