Capital Allocation: Principles, Strategies, and Processes for Creating Long-Term Shareholder Value

CHAPTER 14

Private Deals

Despite all the compelling academic evidence suggesting that most acquisitions fail to achieve a return above the acquiring firm’s cost of capital, there is an entire category of acquisitions for which this is not true. Academic studies consistently demonstrate that firms acquiring non-public traded firms can generate attractive returns for their shareholders. In their paper in the Journal of Finance, Kathleen Fuller, Jeffrey Netter, and Mike Stegemoller address this distinction:

Using a sample of 3,135 takeovers, we find that bidders have significantly negative returns when buying public targets and significantly positive returns when buying private or subsidiary targets. … One explanation for the differing market ...