Benson Ziedonis (2010) - Corporate Venture Capital And The Returns To Acquiring Portfolio Companies

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This page is referenced under:

• VC Acquisitions Paper
• VC Acquisitions Lit Review

Reference

Benson, D. and Ziedonis, R.H. (2010), "Corporate venture capital and the returns to acquiring portfolio companies", Journal of Financial Economics, Vol. 98, No. 3, pp.478-499 (pdf)

@article{benson2010corporate,
  title={Corporate venture capital and the returns to acquiring portfolio companies},
  author={Benson, D. and Ziedonis, R.H.},
  journal={Journal of Financial Economics},
  volume={98},
  number={3},
  pages={478--499},
  year={2010},
  publisher={Elsevier},
  abstract={A prominent motive for corporate venture capital (CVC) is the identification of entrepreneurial-firm acquisition opportunities. Consistent with this view, we find that one of every five startups purchased by 61 top corporate investors from 1987 through 2003 is a venture portfolio company of its acquirer. Surprisingly, our analysis reveals that takeovers of portfolio companies destroy significant value for shareholders of acquisitive CVC investors, even though these same investors are “good acquirers” of other entrepreneurial firms. We explore numerous explanations for these puzzling findings, which seem rooted in managerial overconfidence or agency problems at the program level.},
  filename={Benson Ziedonis (2010) - Corporate Venture Capital And The Returns To Acquiring Portfolio Companies.pdf}
}

Abstract

A prominent motive for corporate venture capital (CVC) is the identification of entrepreneurial-firm acquisition opportunities. Consistent with this view, we find that one of every five startups purchased by 61 top corporate investors from 1987 through 2003 is a venture portfolio company of its acquirer. Surprisingly, our analysis reveals that takeovers of portfolio companies destroy significant value for shareholders of acquisitive CVC investors, even though these same investors are “good acquirers” of other entrepreneurial firms. We explore numerous explanations for these puzzling findings, which seem rooted in managerial overconfidence or agency problems at the program level.

Useful Refs

The following should be added to our lit review of acquisition announcement responses:

• Andrade, G., Mitchell, M., Stafford, E., 2001. New evidence and perspectives on mergers. Journal of Economic Perspectives, 15,

103–120.

• Schlingemann, F., Stulz, R., Walkling, R., 2002. Divestitures and the liquidity of the market for corporate assets. Journal of Financial Economics 64, 117–144.

Data

• Sources: SDC and VentureOne (with manual verification using the Wall Street Journal)
• Top 100 publicly traded US corps with direct VC investments from 1980-2003 (i.e. CVCs)
• Eliminated financial investors.
• Targets >= 12yrs old.
• 530 acqs by 61 corp investors. 89 were port-cos (note: only 6 listed in SDC as having a prior stake).
• Eliminated 41 due to simultaneous events: 489 (74 CVC and 415 other).
• Both private and public targets.

Definition of Sectors

Information technology acquirers are firms with primary lines of business in:

• software(SIC737)
• computer hardware(SIC357)
• semiconductors (SIC367)
• telecommunications(SIC481,484)
• communications equipment(SIC366)
• electronic instruments(SIC381,382)

Life Sciences is likewise defined as:

• bio-pharmaceuticals(SIC283)
• medical devices(SIC384)

Other Variables

• Ln assets: Log of book value of total assets (Compustat ITEM6)
• R&D intensity: Annual R&D spending (Compustat ITEM46) divided by # of employees (Compustat ITEM29)
• Tobin’s Q: Market value of assets over book value of assets (ITEM6-ITEM60-ITEM25*ITEM 199)/ITEM 6.
• Liquidity index in target sector: The value of all corporate control transactions exceeding $1million in the target sector in the quarter of the focal acquisition announcement divided by the total book value of assets for Compustat firms in the same two-digit SIC code. Following Schlingemann, Stulz, and Walkling(2002), higher indices indicate more competitive takeover markets.

Methodology

CAR2: [-1,0] 250 day estimation window, market model. (Similar results using CAR3 and 180 day estimation window claimed)

Results

• Univariate CAR2 for private targets: 0.67% (Note: entire sample is CVC backed)
• CVC (internal) return is -1.05% for private targets.

Non-CVC acquisitions (N=415) have the following period based mean CARs:

Pre-boom (1987–1998)   N=188 0.49%** 
Boom (1999–2000)       N=135 0.08% 
Post-boom (2001–2003)  N=92  0.52%*