Strategic and Financial Bidders in Takeover Auctions

Abstract

Using data on auctions of companies, we estimate valuations (maximum willingness to pay) of strategic and financial bidders from their bids. We find that a typical target is valued higher by strategic bidders. However, 22.4% of targets in our sample are valued higher by financial bidders. These are mature poorly-performing companies. We also find that (i) valuations of different strategic bidders are more dispersed, (ii) valuations of financial bidders are correlated with aggregate economic conditions. Our results suggest that different targets appeal to different types of bidders, rather than that strategic bidders always value targets more because of synergies.Keywords: mergers and acquisitions, strategic bidders, financial bidders, takeover auctions JEL Classification Numbers: D44, G32, G34 * Gorbenko is with London Business School. Malenko is with MIT Sloan School of Management. We are grateful to two anonymous referees, the anonymous Associate Editor, Jules van Binsbergen, Jonathan Cohn, Peter DeMarzo, Darrell Duffie, Campbell Harvey (the Editor), Han Hong, Dirk Jenter, Ron Kaniel, Arthur Korteweg, Ilan Kremer, John Lazarev, Nadya Malenko, Ian Martin, Gregor Matvos (WashU discussant), Michael Ostrovsky, Francisco Perez-Gonzalez, Matthew Rhodes-Kropf (WFA discussant), Ilya Strebulaev, Jessica Yang, Jeffrey Zwiebel, seminar participants at Boston University, Higher School of Economics, London Business School, London School of Economics, Norwegian School of Economics, University of Connecticut, University of Rochester, University of Utah, and participants at the 2010 Western Finance Association Meeting in Victoria and the 8th Annual Corporate Finance Conference at Washington University in St. Louis for helpful comments. 1Electronic copy available at: http://ssrn.com/abstract=1559481The market for corporate control is one of the largest corporate markets. In 2007 alone, the value of M&A transactions worldwide was a staggering $4.8 trillion. While some takeovers proceed as negotiations of a target with a single acquirer, many takeovers face competition among several bidders.1 The set of bidders is comprised of two groups: strategic and financial.Strategic bidders are usually companies in a related type of business, such as competitors, suppliers, or customers. They tend to look for targets that offer long-term operational synergies and integrate them into their own business. In contrast, financial bidders, typically private equity firms, look for undervalued targets with a potential to generate high cash flow, often after a reorganization. After the acquisition, a financial bidder treats the target as a part of its financial portfolio and sells it once exit opportunities become sufficiently appealing.Despite their recognized importance, 2 the differences between strategic and financial bidders remain largely unexplored. A common view is that strategic bidders are systematically willing to pay more than financial bidders. For example, as Mark E. Thompson and Michael J. O'Brien, practitioners in the privat...

National Culture and Takeover Contest Outcomes

“…Winning bidders are slightly larger, and hostile and financial bidders win contests less frequently, respectively. The latter finding is consistent with Gorbenko and Malenko (2014).…”

“…(3) bidders. Financial bidders are less likely to win contests, consistent with Gorbenko and Malenko (2014). 2 In column 2 of Table 4, we further include bidder-specific accounting controls for profitability (ROA), leverage, and size (ln(market cap)) of the bidder firm.…”

“…We control for whether hostility affects the likelihood of winning the bidding contest in our setting. Financial acquirers tend to offer lower premiums when acquiring (Gorbenko and Malenko, 2014), which leads to the expectation of a lower probability of winning the contest.…”

Borrow Cheap, Buy High? The Determinants of Leverage and Pricing in Buyouts

“…Ljungqvist, Richardson, and Wolfenzon (2007) find that buyout funds accelerate their investment flows when credit market conditions loosen, but do not address how the leverage and pricing of individual deals vary with credit market conditions. More recently, Gorbenko and Malenko (2012) present evidence that financial buyers bid more aggressively in auctions for firms when credit conditions are stronger. time-series variables measuring economy-wide debt market conditions should explain buyout leverage better than cross-sectional firm characteristics.…”

Motives and Consequences of White Knight Takeovers

“…Similarly, auctions generally involve private equity, and negotiated deals involve public acquirers. Gorbenko and Malenko (2014) suggest that strategic bidders and financial bidders are likely to target different types of companies for acquisition. They also suggest that, compared with financial bidders, strategic bidders more highly value firms.…”