What Do Returns to Acquiring Firms Tell Us? Evidence from Firms That Make Many Acquisitions

The Institute's reading

Fuller, Netter and Stegemoller studied firms that acquired five or more targets in quick succession, a clever design: because the same buyer purchases different kinds of targets, differences in outcome can be attributed to the target and the deal rather than the buyer. The result is the paper’s legacy: bidder shareholders gain when buying a private firm or a subsidiary and lose when buying a public firm, with the authors attributing the difference to a liquidity discount, tax and control effects in the private market.

The Institute’s reading: this is the academic footing under a conviction that private-market practitioners hold from experience, that well-bought private companies are where acquisition returns actually live. The mechanism matters as much as the result: private sellers accept less because their asset is illiquid, sales are often triggered by life events rather than auctions, and fewer buyers compete. That is the buyer’s edge, and the seller’s warning: preparation and competition are how a private seller claws the discount back.

Key propositions

• Acquirers of private firms and subsidiaries earn positive announcement returns; acquirers of public firms do not, on average.
• The private-target advantage is consistent with a liquidity discount: illiquid assets sell for less, and the buyer keeps the difference.
• Larger private targets and stock consideration strengthened the effect in their sample.

In practice

• Buyers: the private market is structurally the right hunting ground; the edge is real and earned at purchase.
• Sellers: the discount is not destiny. Competition, preparation and patience are its antidotes, which is what a good process buys.

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