What characterizes targets acquired by private equity firms compared to strategic buyers, and how does this affect takeover premiums? Evidence from European transactions

Abstract

This master thesis investigates differences in target characteristics and takeover premiums in acquisitions performed by private equity firms and strategic buyers. We use a dataset of 67 takeovers of listed European companies where the target was acquired by a private equity firm, which we match with 67 comparable transactions performed by strategic buyers. The acquisitions in our sample were announced between 2008 and 2017. In contrast to previous research, we find that there seems to be few statistically significant differences in the characteristics of the targets acquired by the two types of buyers when we control for differences in timing, deal size and target industry. Additionally, we do not find any statistically significant difference in the takeover premiums the two types of buyers pay. This is contrary to most previous research, but in line with the work of Fidrmuc. et. al. (2012). We argue that these findings could be the result of higher competition for targets following an increasing amount of capital under private equity management. Previous research has shown that increased inflow of capital to private equity funds result in increased target valuations, which we argue is likely to have narrowed the gap in takeover premiums between the two buyer types as the private equity industry has matured. Lastly, we look at how target characteristics are related to takeover premiums. Our results show that the target’s margins and profitability are negatively related to takeover premiums, while R&D expenditures are positively related to takeover premiums. Therefore, both acquirers seem to be willing to pay a higher takeover premium for targets with a potential for higher cash flows in the future, than for targets that already are generating positive cash flow today.