Tangible Differences - Exploring Differences Between Public annd Private Targets

This working paper examines whether resources bought from public targets are different from those bought from private targets, and studies the impact of this on acquirer returns. The authors find that a bidder’s propensity in acquisitions involving public targets suggests that the latter provide stronger opportunities for buying intangible resources than private targets, but also that acquirers of public targets do not outperform those of private ones.

by Laurence Capron, Jung-Chin Shen
Last Updated: 23 Jul 2013

In the working paper, Acquiring Intangible Resources Through M&As: Exploring Differences Between Public and Private Targets, Professor Laurence Capron and Jung-Chin Shen of INSEAD’s Strategy and Management Department follow up several recent studies offering initial evidence that acquisitions of public and private targets are qualitatively different. Despite this evidence, the authors argue, our understanding of how acquirers deal with such differences remains incomplete. Previous merger and acquisition (M&A) research has tended to focus on the perspective of the buyer and to examine the acquisition of publicly traded companies. As a result, the authors posit that the seller perspective is not only under-theorized, but that privately held targets have been largely ignored.

Combining an event study with a survey of post-acquisition resource transfers on a sample of 101 horizontal mergers and acquisitions in European and American manufacturing industries between 1988 and 1992, the authors find that public and private targets are qualitatively different and assert that public targets represent a stronger mechanism for buying intangible resources than private targets. However, while suggesting that public targets provide stronger opportunities for value creation, acquirers of public targets are not found to outperform acquirers of private ones.

These results help to clarify the role of information asymmetry in the acquisition process and post-acquisition management, interactions between the equity market and the market for corporate control, as well as the gap between and process of value creation and value appropriation in M&As. More precisely, their findings concur with the emergent view that equity markets and the market for corporate control are not independent, as is often assumed.

The authors argue that the results of their study are consistent with the view that the choice of public or private targets appears to be driven by the extent to which alternative corporate development activities, such as IPO or strategic alliances, can mitigate the degree of asymmetric information in the market for corporate control. Their analysis emphasizes that information asymmetry characterizes post-acquisition resource redeployment as a moral hazard version of the agency problem within a merged firm. It also sheds light on the market for corporate control, complementing the received view on M&As as a market for trading intangible resources which are bundled and embedded in organizational capital, and otherwise non-marketable. The authors urge caution when interpreting research results from previous studies that have mainly focused on public merging firms, arguing that the acquisition of private (cf. public) targets exhibits differences and should thus be seen in an appropriate context.

INSEAD, 2003

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