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Articles & papers

Acquisitions of private vs. public firms: Private information, target selection, and acquirer returns

Laurence Capron and Jung-Chin Shen · 2007 · Strategic Management Journal, vol. 28, no. 9, pp. 891-911

Sourcing & targetsStrategy & readinessBuyers deciding where to search, and in which industries
Why it is on the shelf. Most of the shelf tells you that buying private targets tends to pay better than buying public ones. This paper asks the more useful question, which is when that holds, and gives an answer an owner can act on while building a target list.

The Institute's reading

The argument turns on what information does. A private target is opaque, which cuts both ways: it limits how broadly you can search and raises the risk of misjudging what you are buying, but it also creates room to exploit knowledge others do not have. A public target comes pre-valued by a market that has already done the information processing for every bidder, which removes both the risk and the edge.

The findings follow from that. Acquirers favor private targets in industries they already know, and turn to public targets when entering a new business domain or an industry heavy in intangible assets, precisely where their own judgment is weakest. Acquirers of private targets performed better on announcement than acquirers of public ones after controlling for selection. Most usefully, the fit itself paid: buyers of private firms did better than they would have done buying public, and buyers of public firms did better than they would have done buying private.

The practical translation for an owner is a rule about your own search. Your informational edge is your industry. Hunting privately inside it is where the advantage lives; hunting privately outside it means paying for opacity you have no way to see through, and that is the case for a visible, intermediated process instead.

Key propositions

  • Acquirers favor private targets in familiar industries and turn to public targets to enter new business domains or industries with high intangible assets.
  • Acquirers of private targets outperform acquirers of public targets on announcement, after controlling for endogeneity in target choice.
  • Returns depend on fit rather than on target type alone: each group performed better than it would have done with the other kind of target.

In practice

  • Search privately where you have real industry knowledge, and treat an unfamiliar sector as a reason to prefer a visible, intermediated process.
  • Where the target’s value sits mostly in intangibles you cannot assess, the private discount is compensation for risk rather than a bargain.

Where authorities disagree

This measures public acquirers buying private targets, so the buyer in the data is larger and better resourced than most readers of this site. The direction of the argument, that your edge is bounded by what you already understand, transfers cleanly; the announcement returns do not, because a private buyer has no announcement.

Acquisition Conciergeorientation · not legal, tax or valuation advice
Happy to dig into it. What would you like to pressure-test from Acquisitions of private vs. public firms: Private information, target selection, and acquirer returns: one of its propositions, how it applies to your situation, or where it disagrees with the rest of the shelf?