eThesis - Kauppakorkeakoulun sähköiset gradut

There is increasing evidence that acquiring a private company is an attractive option for maximizing shareholder wealth. This thesis aims to contribute to the existing literature by providing empirical evidence about private company M&A transactions from the acquiring company's management perspective. Consequently, the purpose of this thesis is to examine how an industrial acquirer, Company X, has divided its expected synergistic gains between the target shareholders and what are the factors that affect this division.

The data utilized in this study comes from internal databases of Company X. The sample includes 168 initiated acquisition processes, of which 133 were successful and 35 unsuccessful. The acquisition processes were initiated between 2006 and early 2013, while the acquisition targets were privately held, relatively small and located in 36 countries in total. The data was manually gathered for the purposes of this study from confidential documents including valuation materials, legal contracts, and reports to the executive management team of Company X containing the rationale of the deal and the basis for managerial decision making. By allowing access to these highly secret documents, Company X has provided a unique window into the complex price setting mechanisms behind the M&A transactions.

I find that most of the gains resulting from the transactions accrue to the acquirer, Company X. Moreover, on average, Company X has been able to acquire the targets in the sample with a discount relative to their estimated stand-alone value. The results suggest that target's size seems to be the dominant factor in determining the price level relative to the estimated stand-alone value; companies with the highest revenues and estimated total value are associated with lower discounts and the smallest companies with the largest discounts.

My analysis further reveals that the wealth effects to targets are comparable when there are multiple competing bidders trying to acquire the target and in situations when competition seems largely absent. Namely, when controlled for the size effects, auctions do not seem to provide higher returns for target shareholders than one-on-one negotiations. The evidence is consistent with the view that the choice of an auction or a negotiation in a particular takeover reflects a trade-off between competition and information costs (French and McCormick, 1984; Hansen, 2001). To an extent, the evidence is also consistent with the argument that it is not the actual observed competition that affects the price offered to the target shareholders, but rather the anticipated competition; it is the existence of potential competitors that drive Company X toward more competitive actions.